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07/08/08
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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
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