AGO 0.00% 4.5¢ atlas iron limited

ago make merger list

  1. 426 Posts.

    A merger made in heaven

    Tim Boreham | March 05, 2008

    Oxiana (OXR) $3.53
    Zinifex (ZFX) $10.88
    EMINENTLY sensible despite its flaws and maybe even a fait accompli. That's the mining intelligentsia's consensus view of Oxiana and Zinifex's proposed tie-up, which hurtles our sixth and ninth biggest miners to No 5 status.

    One broker goes so far as to describe Zinifoxiana (our working title) as a merger made in heaven. For Oxiana, there's the benefit of accessing Zinifex's wads of cash for its gold and copper developments, Zinifex executes its long-awaited breakout from the zinc game.

    But more on that later. Yesterday's game was nutting out which mid-sized miner would become the next takeover target, the idea being that such events come in twos and threes.

    If the merger happens and Broken Hill-based metal stalwarts Perilya and CBH also conjoin as expected, a chasm will emerge between the biggies (BHP/Rio, Fortescue, Zinifoxiana, Newcrest) and the rest. Not that "the rest" have ignored the merger siren call, with no fewer than 28 mergers (or proposed mergers) taking place over the past 18 months.

    Who's next? According to Foster Stockbroking, most of the bids have involved companies of a similar size and with a similar resource base.

    Foster's hit list includes Centennial Coal (CEY, $4.44), Whitehaven (WHC, $3.46), Macarthur Coal (MCC, $12.01) and Aquila Resources (AQA, $8.95).

    Iron ore juniors Atlas Iron (AGO, $2.02) and Gindalbie Metals (GBG, 74.5c) also make the list, as well as the Twiggy Forrest-controlled Fortescue Metals (FMG, $7.63).

    In copper, the firm sees Congo and northern Zambian producer Anvil Mining (AVM, $14.25) as vulnerable, along with the underperforming Aditya Birla (ABY, $2.27).

    Nickel targets are the WA producers Sally Malay (SMY, $5.20), Mincor Resources (MCR, $$3.20), Minara Resources (MRE, $6.46) and Western Areas (WSA, $6.39).

    Foster's out-of-Africa candidates are Platinum Australia (PLA, $2.92) and uranium miner Paladin (PDN, $6.12).

    In short, any mid-cap miner not nailed down is listed as a takeover candidate, but in reality, they're not all going to be recipients of a furtive phone call.

    Criterion's long-time policy is not to invest in a stock in the mere hope of a takeover. But a few of these usual suspects look like speculative buys for valuation or other reasons.

    We'll start with Platinum Australia, which has begun open-pit mining at its Smokey Hills project in South Africa. Prices for platinum, gold's exotic (and more useful) cousin, are at record highs because of supply constraints in South Africa, which accounts for 80 per cent of global supply.

    For a copper hit, we'll take Aditya Birla, which has been beset by production woes at its Nifty Sulphide mine in WA. Aditya's share price has been crunched and looks good value if it can restore output to normal levels.

    In nickel, we like Western Areas for the expansion potential at its Flying Fox, but its valuation suggests a hold more than anything. Sally Malay's results were dragged down by a $17 million hedging loss, but otherwise look reasonable.

    Despite Fortescue's 12 per cent share retraction from its December record highs, we still can't come at the $21 billion valuation until the ore (preferably lots of it) is safely in the hopper.

    We also consider Anvil too expensive, despite its bonanza $US117 million profit result (up 43 per cent). There's some doubt about the security of its Congonese tenements.

    As for coal, we'll put the sector on hold. The price outlook is excellent, but this has been factored into share valuations.

    Coming back to Oxiana/Zinifex, both miners' share prices retreated about 10 per cent yesterday after Monday's frisson of post-merger excitement.

    Feelings are mixed. Some believe Oxiana holders get more out of the "merger of equals" than Zinifex, given that Zinifex earns more and trades on a lower earnings multiple than the well-spruiked Oxiana.

    Then again, Oxiana fans -- who are missing out on a merger premium after hearing Owen Hegarty bang on about how Xstrata would buy the company -- may be less than enamoured hooking up with low-growth Zinifex.

    If Zinifex holders are unhappy, at least they're the ones who get to vote on the deal (The Ox is bidding 3.1931 of its own shares for every one Zinifex share).

    To paraphrase George Orwell: some mergers of equals are created more equal than others. The bottom line is that any imbalances tend to be quickly forgotten after the eggs are mixed up into an omelette.

    Criterion rates Oxiana a hold and Zinifex a long-term buy. We prefer Zinifex as the entry vehicle because it's trading on a lower earnings multiple than Oxiana.

    The target company stands to benefit from any unexpected third-party intervention. Any merger can take unexpected twists and turns as Symbion Health's board would attest.

    Slater & Gordon (SGH) $1.45

    LAWYERS are a misunderstood lot. They're so kind and cuddly yet they remain the butt of so many cruel jibes (lawyers don't find them at all funny while clients think the joke's on them).

    Another misperception is that their fortunes depend on paper shuffling from transactional work. When the deals stop flowing, the likes of Mallesons and Freehills have plenty to fear.

    However, economic vicissitudes may work in favour of Slater & Gordon. As the strugglers' advocate of choice, Slater's work is skewed towards personal injury work such as workers' compo.

    According to Slater chief Andrew Grech, this business is quarantined from economic cycles. In commercial litigation, Slater's second main stream, there's been an uptick in inquiries about insolvency and similar issues. "That's a very good talisman of what will come down the litigation pipeline in six to 12 months' time," Grech says.

    Throw in the potential of acting for aggrieved shareholders and Slater's scope to thrive in adversity looks very wide indeed.

    To date, Slater & Gordon has enjoyed a smooth transition to public status. The firm (or should we say company) unveiled a half-year result of $6.9 million (up 56 per cent) and expects to exceed its full-year prospectus forecast of $11.3 million.

    Slaters, which listed at $1 a pop in May last year, has seen solid organic growth in its home base of Victoria, which accounts for 43 per cent of fee revenue. To expand its turf, the firm has acquired six smaller firms as far afield as Bunbury and Brisbane.

    Criterion maintains a buy on Slaters for its brand name, its rarity value as a listed legal firm and its ability to thrive in times of misery.

    Liquidity is tight, but improving. For better or for worse, the founders of some of the acquired firms who accepted scrip as payment come out of escrow in September.

    [email protected]
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