Oxiana Agrees to Buy Zinifex for A$6.2 Billion

Oxiana Agrees to Buy Zinifex for A$6.2 Billion

March 3 (Bloomberg) -- Oxiana Ltd. agreed to buy Zinifex Ltd. for A$6.2 billion ($5.8 billion) in stock to form the world's second-largest producer of zinc as metal prices climb for a seventh year.

The offer values Zinifex shares at A$12.68 each, 14 percent more than the last closing price. Andrew Michelmore, Zinifex's chief executive officer, will run the combination, the two Melbourne-based companies said today in a statement.

Oxiana, the third-best performer in the past month on the Bloomberg Asia Pacific Mining Index, will more than double sales, boost zinc output fivefold and gain lead and silver projects in Australia and Canada. Zinifex brings A$2.2 billion of cash to fund new projects and acquisitions.

``They have a good cash flow and a strong balance sheet,'' Tim Barker, who helps manage and advise on more than $54 billion of assets at BT Financial Group, said by phone from Sydney. ``That puts them in a good position that they can buy assets.''

Oxiana, which is trading at 19 times estimated earnings, fell 7 cents, or 1.8 percent, to A$3.90 on the Australian Stock Exchange at the 4:10 p.m. Sydney time close. Zinifex, which trades at 11 times earnings, rose A$1.02, or 9.2 percent, to A$12.15.

`Robust Outlook'

``The diversification gives them a more robust outlook,'' Tim Schroeder, who helps manage A$1.9 billion at Pengana Capital, and holds both stocks, said by phone from Melbourne. ``It's quite opportunistic: a company trading at a premium that's quite expensive, taking out a company that isn't.''

The takeover is a ``merger of equals'' with each company holding 50 percent, Oxiana and Zinifex said today. Only Zinifex shareholders will vote on the scheme of arrangement, with a vote expected in May or June.

Commodities are in their seventh year of gains, driving takeovers in the mining industry. Rio Tinto Group rejected a sweetened $149 billion takeover offer from BHP Billiton Ltd. on Feb. 6, saying the proposed acquisition, which would be the industry's biggest, ``significantly'' undervalues the company.

Oxiana, being advised by Morgan Stanley and Gryphon Partners, agreed to pay 3.1931 of its shares for each Zinifex stock. Zinifex is being advised by UBS AG and Lazard Carnegie Wylie.

`Makes Sense'

The combined Oxiana and Zinifex, would have had A$2.8 billion in revenue and net profit of A$918 million in 2007, the companies said in a presentation to the exchange. The combination will have A$2.5 billion in cash, with Zinifex contributing A$2.2 billion after selling its stake in smelting unit Nyrstar NV. The price of zinc, used to galvanize steel, has tripled in the past five years because of surging demand in China for autos and appliances.

``The tie-up makes sense and it will give them a very strong balance sheet to potentially do further acquisitions down the track,'' Don Williams, who helps manage $1.3 billion at Platypus Asset Management, said in a Bloomberg Television interview. ``It's more of the same in the mining sector, more consolidation.''

Zinifex is spending A$852 million buying Australian nickel mining company Allegiance Mining NL. Allegiance owns the Avebury nickel mine in Tasmania which has a $3.7 billion supply agreement with China's Jinchuan Group Ltd.

Zinifex was the world's third-largest zinc producer in 2006, according to a table compiled last year by Teck Cominco Ltd. of Vancouver. Xstrata Plc was first followed by Teck. The deal values Zinifex at 5.6 times earnings before interest, tax, depreciation and amortization. BHP's bid values Rio at 11 times.

``It is cheaper for companies to go out and buy other companies than it is to develop their own projects,'' Tom Elliot, who helps manage $138 billion at MM&E Capital Ltd., said in an interview with Bloomberg Television. ``Both these companies are now in play. I expect there would be other people looking at Zinifex, and I also expect groups to be looking at Oxiana.''

`Firm Believers'

Oxiana owns the Sepon gold and copper mine in Laos, the Golden Grove zinc, copper and gold mine in Western Australia state and is spending A$1.1 billion developing its Prominent Hill copper and gold project in South Australia state.

``We are both firm believers in strong growth continuing for the minerals we produce,'' Michelmore, 55, said in a teleconference from Melbourne today. `There is no hesitation in saying `let's put the two companies together.'''

Oxiana Chairman Barry Cusack will retain his position in the combined company, of which Oxiana and Zinifex shareholders will own 50 percent each. Oxiana's Chief Executive Officer Owen Hegarty, 59, who made his company the fastest-growing of Australia's 10- largest mining companies, will become a director.

Choosing between himself and Michelmore for the lead role in the new company was an ``easy decision,'' Hegarty said during a teleconference. ``He's the right person.''

Russian Billionaire

Zinifex named Michelmore as its leader in November and he started in the job on Feb. 1. Two months before his appointment he had stepped down as chief executive of En+, the holding company for the energy, power and aluminum assets of Russian billionaire Oleg Deripaska. He previously ran nickel miner WMC Resources Ltd. for more than two years before selling the company to BHP for A$9.2 billion in 2005.

Adding Zinifex would give Oxiana control of two operating zinc mines, Century in Queensland and Rosebery in Tasmania. The Century operation will produce metal until 2016, based on current reserves, Michelmore said today. An exploration program is underway to extend the life of the mine, which Hegarty said was one of the world's best.

Zinifex is also studying development of its Dugald River zinc and lead project. The project will boost the company's output of zinc concentrate by about a third from 2011, Zinifex said Nov. 13.

Zinc prices have dropped 21 percent in the past year. Zinc in London has risen 19 percent this year after power shortages in China reduced output in the world's largest producer.

Prices may have ``bottomed'' and there was ``considerable upside'' to futures prices as delays were expected for the start up of new mines, Michelmore said last week. Deutsche Bank AG last week cut its forecast 2008 market surplus for zinc by 85 percent on expected production losses in China.

BLOOMBERG