17 May 2007

Hot stock - Oxiana

What's new? The deal-hungry market has turned its attention to the resource sector, which is hardly surprising, considering finance remains easy to obtain and resource stocks are cheap.

This has lead to a renewed focus on the large diversified miners such as Oxiana. It is not without risk but Oxiana has one of the best growth profiles around for a large resource company. This growth potential can be attributed to the company's ambitious management team. Under the direction of Owen Hegarty, managing director and chief executive, Oxiana has come a long way. Before 2005 the company produced only gold but it has added copper and zinc to its production.

A diversified production base and higher commodity prices have seen strong gains in the stock price. Oxiana has a current market capitalisation of about $5.3 billion. Hegarty aims to increase the company's market value to between $10 and $15 billion over the next three years. This is ambitious but the company is off to a good start - it is the fastest growing of Australia's top 10 miners. To keep the momentum going, management will continue to develop existing operations while pursuing acquisition opportunities. In the current takeover and merger frenzy, however, there is the possibility Oxiana could itself become a target.

The outlook Given our bullish views on resources, Oxiana's outlook appears strong. In the short term, the company's production profile is unspectacular, however a number of projects under development provide significant long-term potential. The company recently completed the acquisition of former West Australian gold miner Agincourt Resources. Catching management's eye was Agincourt's Martabe Project in Indonesia. The undeveloped site is quite a catch, containing 5.5 million ounces of gold and 57 million ounces of silver.

The Agincourt acquisition also added uranium exposure to Oxiana's burgeoning portfolio of resource assets, although some time away from production. Other developments in the pipeline include expansion of the Golden Grove base and precious metals project in WA, the Prominent Hill gold copper project in SA and expansion of operations in Laos.

All projects currently under development should be operational within a few years and Oxiana is targeting annual production levels of 500,000 tonnes of base metals (copper and zinc) and 500,000 ounces of gold and silver by 2010. Production remains unhedged, providing full exposure to commodity prices.

Price Aggressive expansion, combined with a timely increase in commodity prices, has seen Oxiana's share price rise significantly since 2005. However, short-term production and commodity price concerns saw it stagnate for much of the past year. More recently renewed investor enthusiasm has seen the stock rise from the March low of $2.60 to about $3.40.

Worth buying? Oxiana represents an attractive investment opportunity. Production should rise significantly in the coming years and the company's resource base will likely sustain such levels. It has long-term potential.

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