wsj asia

WSJA(8/7) Heard In Australia: OZ Minerals May Be Set To Gain

(From THE WALL STREET JOURNAL ASIA)

Perth, Australia -- OZ MINERALS, created from the merger of copper-gold miner Oxiana

and zinc miner Zinifex, has suffered a shaky first five weeks in its new incarnation.

Since the deal took effect July 1, OZ has lost nearly 30% of its value.

A comparison with early March, when the 50/50 merger was unveiled, produces an even

bleaker picture. Then, the combined market value of Oxiana and Zinifex was 12 billion

Australian dollars, or about US$11 billion. Now OZ Minerals is worth less than half that

-- about A$5.4 billion -- as investors fret about tumbling base-metal prices and cost

pressures.

The slump has been so pronounced that OZ Chief Executive Andrew Michelmore said

recently he'll consider buying back the stock as an alternative to making

acquisitions.

OZ shares closed Wednesday at A$1.74, up 6.7%, amid a broad recovery in the Australian

stock market following a rout Tuesday -- in which OZ stock tumbled 13% -- caused by

commodity price falls. On July 1, OZ shares closed at A$2.47.

Despite the gloom, most Australian analysts say they believe a rebound is in store over

the next 12 months for the country's fourth-largest miner by market capitalization.

Of seven major stockbrokers surveyed by Dow Jones Newswires, six have "buy" or

"overweight" recommendations, with one "underweight" call. Most say

OZ will benefit from a combination of increased copper production and steadier zinc

prices.

An improvement in the latter is critical for OZ, the world's second-largest zinc

producer by mine output, after Canada-based Teck Cominco. Since the OZ merger was

announced, zinc prices have fallen by more than a third and are now below the cost at

which some miners can produce the metal. But some analysts say better prices aren't

far off.

"We think that zinc prices are close to bottoming," says UBS analyst Jo

Battershill, who on July 23 upgraded his call from "neutral" to "buy"

with a 12-month target of A$2.90 a share -- 67% above Wednesday's close. He sees

zinc averaging 95 U.S. cents a pound next year, from 79 U.S. cents currently.

Mr. Battershill notes that OZ will boost copper output significantly later this year

when its A$1.1 billion Prominent Hill mine in South Australia state comes on stream. The

start-up will provide a welcome boost as copper prices, down 10% since early March, have

held up much better than zinc. Once Prominent Hill kicks in, copper will account for

about half of OZ's revenue, the company forecasts. Zinc will supply most of the

rest, with gold, nickel, lead and silver contributing lesser amounts.

Tim Barker, who holds OZ shares for BT Funds Management in Sydney, is looking forward

to the expansion. The copper story has been "slightly diluted by the Zinifex

assets," he says, yet "we quite like the mix of commodities." Mr. Barker

says he doesn't see a lot more downside in zinc, given that supply may tighten as

some high-cost producers shut mines. Last month, Teck Cominco and Xstrata closed their

Lennard Shelf operation in Western Australia state, blaming poor zinc and lead prices.

Robert Patterson, who helps manage A$4 billion at Argo Investments, based in Adelaide,

Australia, holds OZ shares and likes the diversified nature of the group, which has five

mining operations in Australia and Asia, in addition to three development projects.

"It is now something of a minimajor, which puts it in the picture in terms of

possible corporate activity," he says.

But Mr. Patterson says "unease" surrounding the merger has lingered,

reflected by shareholders' rejection last month of an A$10.6 million termination

payment for former Oxiana Managing Director Owen Hegarty.

"It was one of those mergers that weren't wholeheartedly supported by the

respective shareholders," he says. "Some Oxiana people didn't want to take

on the zinc." But, he says, "we're still supportive of the new, larger

company."

Jim Copland, an analyst at Macquarie Bank, has an "outperform" rating on OZ

with a 12-month target of A$3.10. He says the market has "intensely focused" on

declining zinc prices and hasn't given the company enough value for its exposure to

other metals. "We like it because it has the diversity and is trading at a discount

to our valuation," Mr. Copland says.

Credit Suisse, in contrast, rates the stock "underperform," believing that

its copper and nickel expansions will be outweighed by rising cost pressures. OZ has

forecast a full-year contribution from Prominent Hill in calendar 2009, but there

"may be some small risk from the now accelerated ramp-up schedule," the broker

says.

Meanwhile, analysts are split over whether Oxiana will put acquisitions on hold and

instead put cash into a share buyback. "Although OZ Minerals remains armed with a

significant war chest of around A$1.2 billion, we believe the company is cognizant of the

share-price impact in overpaying for an investment," says Goldman Sachs JBWere.

"In our view, the company is more likely to return cash back to shareholders via a

special dividend or a share buyback at current levels."

J.P. Morgan, however, says the likelihood of a meaningful buyback is "50% at

best" as the company may keep reserves for an acquisition in the medium term.

Mr. Battershill of UBS says a buyback may look attractive to management at current

share prices, "but for a base-metal company looking to grow, I don't think

it's the right thing to do."

OZ's depressed stock price could invite unwelcome takeovers bids. Chinese

companies could target OZ, the company's head of business development, Peter Lester,

told reporters this week. "You would have to think, certainly at this share price,

that they would be," he said.



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(END) Dow Jones Newswires

August 06, 2008 17:30 ET (21:30 GMT)

Copyright (c) 2008 Dow Jones & Company, Inc.



Thursday 07 August 2008 07:30:00.000 AEST