Australia | Jan 30 2007
By Greg Peel
We few, we happy few, we band of brothers; for he who stands with me today shall be my brother.
This quote came from a source within Oxiana (OXR), apparently uttered by the chairman before the company announced a takeover bid for Agincourt Resources (AGC). The board did not, however, need to bring out the Welsh long bowmen, as Agincourt fell without a fight and recommended shareholders accept forthwith, unless the Spanish suddenly materialise, or something like that.
Those analysts covering Agincourt – there are only three in the FNArena database – generally feel it’s a pretty good bid. Advisor Aspect Huntley believes it will succeed, but won’t rule out another player stepping on to the field (our Spaniards). At 0.65:1 Oxiana scrip, the bid equated to $1.92 at the time, but the adverse effect on the Oxiana share price yesterday and today, driven mostly by lower metal prices and a Sepon production downgrade, sees the value slip to $1.78 this morning.
The problem for Agincourt shareholders is that Oxiana is purely a metal price-driven beast, and spot movements hold far greater sway than any organic or acquisitive growth prospects. Thus it may yet be a lottery as to what price the bid represents when the decision has to be made.
From Oxiana’s point of view, most, but not all, brokers think the takeover is a good move. But before we examine the analysts’ thoughts, Oxiana did release its quarterly production report yesterday.
December quarter production was agreed by all to be solid, and either as or better than expected. The spanner in the works, however, is the Sepon Gold project, for which 2007-08 production has been downgraded from 155kozpa to 100kozpa. This has had a significant effect on analysts’ NPV valuations.
Offsetting Sepon, nevertheless, was good news from Golden Grove, where production expectations were lifted for zinc and copper which, in most cases, appeased analysts, depending on what their previous forecasts had been.
A general adjustment of earnings forecasts and valuation has led to a fall in the average target price in the FNArena database from $3.21 to $3.03. This doesn’t seem mind-blowing, but it is interesting to note that the spread of targets is from $2.40 to $3.67 – or 42% of the average.
On the downside we have JP Morgan. The analysts have long held the view, when it comes to highly metal price-leveraged stocks like Oxiana, that market valuations are implying that current spot prices will be held for five years and this is ridiculous. On that basis, Oxiana looks very expensive to JP Morgan (Underweight). A similar view is held by Merrill Lynch (Neutral), although in this case the analysts merely point out that Oxiana’s multiples look fully priced compared to its heavyweight counterparts BHP Billiton (BHP) and Rio Tinto (RIO).
On the upside we have SB Citigroup. The analysts noted this morning that “despite a lower NPV, the strong earnings and low PEs mean that our Buy recommendation has been maintained”, and that “the bid for AGC continues to demonstrate that OXR is a growth-focussed company, ensuring that it trades above any NPV valuation”.
Within the FNArena database B/H/S ratio of 2/6/2, GSJB Were (Outperform) is the other fan, largely because it is backing a copper price rebound. This is in contrast to Credit Suisse (Underperform), which holds its rating for exactly the opposite reason.
Short term price movements aside, analysts took the Agincourt acquisition attempt to be a sensible one for the most part.
The jewel in the crown of Agincourt is the Martabe gold project in Indonesia, which won’t be producing until 2009. Analysts tend to agree (a) this project was always going to be a bit much for little Agincourt to handle and (b) Oxiana will do well to acquire its potential.
Deutsche Bank called it “a very good move” and Macquarie said “makes sense to us”. Citi, of course, is most pleased, while JP Morgan suggests the acquisition “would fit with OXR’s strategy”.
ABN Amro suggested that “while the Agincourt assets may provide some upside, we believe that the market will take time to come to terms with the potential value”. UBS can’t make the deal accretive unless it raises its long term gold price to US$500/oz, Merrill Lynch suggested it’s “not enough to offset Sepon” and Credit Suisse bluntly made the point that “Oxiana’s share price is captive to views on commodity prices…the Agincourt acquisition will not change this.”
So we remain with a highly leveraged (to metal prices) midweight diversified with all sorts of organic and acquisitive growth potential, but naked to the day-to-day vagaries of a volatile spot market. Enter at your own risk.