Oxiana, Everybody’s Target

By Glenn Dyer | More Articles by Glenn Dyer

The huge takeover made by Rio Tinto for Alcan re-rated several takeover candidates among Australia's major miners, with the likes of Zinifex and Oxiana being top of the table in the eyes of many analysts, either merging or as separate targets.

Both are, like Iluka and others, also being buffeted by the strong Aussie dollar which is now trading around 87.70 USc.

At that level the damage to the likes of BHP Billiton and Rio is small: a small pinprick. As we have seen, the damage to Iluka is serious: a possible 45 per cent drop in earnings (see story below).

For mid-level miners like Zinifex and OXR, the impact will be less than ILU's and more than that experienced by BHP and Rio.

Normally worries about the impact of the stronger dollar would have been offset by examining what was happening to metal prices.

Copper, lead and zinc all rose in the first six months of this year, but copper is down on a year ago. And while lead is higher, zinc has now fallen and gold and silver are both lower. On top of this, the firmer Aussie dollar has further cut earnings.

So a high profile miner like OXR would normally be the subject of some ratings adjustments because of doubts about first half earnings (they are out on August 23). On top of this, several mining analysts have wondered if OXR has enough production over the next 18 months to justify its high rating and price.

Several weeks ago an analyst at Citigroup wondered if ZFX and OXR could be natural 'marriage' partners.

That got punters wondering about Oxiana and when the Rio Tinto $44 billion bid for Alcan arrived late last Thursday, investors cast around for other candidates and hit on OXR. The shares ran up around 20c and yesterday eased 12c to $3.85 on moderate volume.

That was after the company released a lineball second quarter production report that contained some promising news for the future (such as good results from drilling at theGolden Grove and Scuddles sites in WA and the Prominent Hill project in South Australia).

In the quarterly report, the company made it clear that it saw a busy future:

"During the quarter Oxiana signed a US$525 million syndicated bank facility designed to be available for Oxiana's development projects and general working capital and corporate purposes.

"ANZ Investment Bank was the lead arranger for the facility, with other participating banks being BNP Paribas, BOS International (Australia) Ltd, China Construction Bank Corporation, Commonwealth Bank of Australia, HVB Australia Pty Ltd, National Australia Bank Limited and The Royal Bank of Scotland plc.

"The syndication process was over-subscribed and strongly supported.

"Oxiana has a strong cash position and balance sheet, and robust cash flows are expected over the remainder of this year, increasing in 2008 following the Prominent Hill copper-gold operation coming into production in the second half.

"The establishment of this facility, combined with Oxiana's strong cash position, ensures Oxiana's pipeline of growth projects is fully financed and funds are available for additional corporate activity as required."

That's a declaration to the doubters that the company will be in a position to justify its valuation with production, sales and profits.

During the first half of the year it bought Agincourt Resources, which gave it increased gold and some uranium exposure.

It also said in the report that it's on track to meet its annual production and cost forecasts.

OXR said the Prominent Hill project in South Australia was on schedule for production in 2008, while there had also been exploration success at Sepon in Laos, Golden Grove in Western Australia and Prominent Hill, Oxiana said.

Copper production at Sepon was higher for the quarter at 16,271 tonnes, while evaluation had also started at the Pha Bing prospect following discovery of high grade copper mineralisation.

"Exploration around known resources and at greenfields prospects continues to deliver significant new copper mineralisation," the report said.

"Production and mining of gold in the area had also included 43.8 metres at 8.7g to the tonnes of Au and 23 metres at 15.9g/t Au."

The company said it had been "mainly a zinc production quarter at Golden Grove" with 36,675 tonnes of zinc produced.

"High grade zinc and copper mineralisation continues to be discovered beneath the Xantho and Scuddles deposits, with results including 65.3m at 7.4 per cent Cu and 29.4m at 19.5 per cent Zn."

Development of the Prominent Hill copper-gold project also remained on schedule and contracts have been awarded for the transport of Prominent Hill concentrates to Darwin for export.

"Mineralisation has shown continuity over more than one kilometre, with recent results including 86 metres at 1.7 per cent Cu, 23 metres at 2.5 per cent Cu, 23 metres at 1.9 per cent Cu and 47 metres at 3.2g/t Au."

Sepon Gold production was 25,791oz of gold in the quarter and exploration results from the Houay Yeng prospect included 43.8m at 8.7g/t gold (Au) and 23m at 15.9g/t Au.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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