Amid a record day on the ASX, shares in miners, Oxiana and Zinifex, jumped sharply yesterday on suggestions the pair could be planning a merger to ward off unwanted attention from international rivals.
BHP and Rio also hit new highs as the market closed at a record high, largely on the back of an excellent performance by resource stocks.
That was driven by analyst upgrades for the outlook for commodity prices, and speculation about possible corporate activity.
Higher copper, gold and oil prices overnight will keep the market burbling along today. But investors will eye the Aussie dollar which topped the 86 USc mark again last night.
At the close yesterday here, theASX200 index was up 49.5 points to 6400.6, while the All Ordinaries rose 46.5 points to 6429.5
At the close, BHP Billiton was up $1.29 or 3.44 per cent to $38.83 and Rio Tinto, up $1.35 or 1.32 per cent to $103.40.
But what stood out were the rises by Zinifex and Oxiana.
Broking analysts named Xstrata and Teck Cominco as possible suitors, even though Canadian Teck has just launched a big bid for AUR Resources and Xstrata has been looking at nickel and coal companies.
The marketwas full of talk about a possible deal between copper-gold miner Oxiana and zinc miner, Zinifex after it was suggested by analysts at investment bank, Citigroup.
It was a second mega deal suggested by Citigroup which last month had speculated that BHP Billiton could be eyeing Rio Tinto, a suggestion that played a big part in boosting the Rio share price towards $100.
Of course no bid has eventuated and none is expected, the suggestion from Citigroup pie in the sky speculation and nothing more.
But in the hot, rumour-driven market, especially in resources, any story is a good story these days.
So, Zinifex (ZFX) shares surged to a record high of $21.60 yesterday before closing $1.10 or 5.4 per cent higher at $21.32, while Oxiana added 11 cents or 3 per cent to $3.85.
Citigroup said in a note to clients that a merger would create a group with a combined enterprise value of about $11 billion and fill the void left in the market by MIM Holdings and WMC Resources: WMC fell to BHP Billiton; MIM fell to Xstrata in an absurdly cheap deal signed off by a complacent board.
Xstrata ate MIM in 2003 and BHP Billiton acquired WMC Resources in 2005.
"From a comparative perspective, a combined entity would have a similar profile to WMC Resources prior to the BHP takeover, and with the addition of a bulk commodity business would have a similar profile to Teck Cominco," Citigroup said in a note to clients.
"With Zinifex still to appoint a new CEO, this could be the opportunity for Oxiana to show their wares.
Citigroup said a merged entity would have a cash position of $4.4 billion by the end of fiscal year 2008, with minimal debt, following the spin-off of Zinifex's smelter business in a merger with Umicore of Belgium.
Here's what Citigroup said:
"Combined company appeal – Both OXR and ZFX have the potential to fill the void left by the disappearance of MIM and WMR. However, combining the two fills the void in one step.
"The combined enterprise value of the companies is ~$11bn and with a potential EBITDA of $2bn in FY09e, the current EV equates to an EV/EBITDA multiple of ~5.5x.
"Impressive commodity output – Merging the two companies would result in production of ~750kt Zinc, ~200kt Copper, 375koz Gold, 80kt Lead and 10Moz of Silver by FY10.
"This would make the company comparable to the old WMR and only a coal business away from being a Teck Cominco.
"More impressive earnings potential – EBITDA would be ~$2bn in FY09e with NPAT of ~$1.3bn. However, once our long-term prices kick in, prospective NPAT drops to ~$500m.
"Combined cash mountain – Post the smelter spin-out, the cash position of a merged entity would be ~$4.4bn by the end of FY08, with minimal debt.
"Opportunistic Owen (Hegarty) OXR's CEO: With ZFX still to appoint a new CEO, this could be the opportunity for OXR to show its wares. A beauty parade potentially awaits.
"Interestingly, Xstrata doubled in size with the $4.9bn takeover of MIM in 2003.Merging ZFX/OXR would essentially result in a similar size company, with enough cash to keep on growing through further deals.
"However, mine life still missing – The key risk would be the same risk currently experienced by both companies – the shortage of long mine-life assets. However, a cash balance of $4.4bn could go a long way to solving that problem.
"Competition likely – Given the temptations of a highly leveraged business and bank full of cash, OXR will not be the only company interested in ZFX post smelter spin out."
And investment bank, CSFB has looked at OXR and upgraded it, along with a string of other mining stocks because of upgraded to gold, zinc, lead and silver price forecasts and the US dollar exchange rate.
It said that "with a diversified commodity base spanning through the regions of Laos, Indonesia and Australia, the new commodities forecasts produce a sound earnings boost for OXR over the next two years.
But it also pointed to OXR's shortage of mining capacity.
"In our view, Oxiana's FY09 earnings are not sustainable based on internal projects announced to date.
"Over half of the company's two-year forward earnings are projected to come from projects that are yet to be commissioned. The associated execution risk with achieving guided production levels is considerable.
"We have upgraded our target price for OXR from A$3.50 to A$4.00 as a result of this earnings upgrade. Although CY09 earnings may appear to support a higher target price based on 10x EPS, we consider this level of earnings unsustainable."
It could be a good idea, or
