Yesterday it was Fairfax Media, Woolworths and JB Hi-Fi who were subjected to some rumourtrage from short sellers and other speculators.

Today there’s another story, one which has far better credentials than yesterday’s furphies. In the wake of BHP Billiton calling off its shotgun marriage to Rio Tinto, the Big Australian is looking at a deal with OZ Minerals, which this week surprised with a package of cuts and deferments to try and conserve cash.

In its statement Tuesday, OZ Minerals deferred $495 million of project expenditure, cut annual zinc production from its key Century mine in Queensland by 20,000 tonnes and highlighted a $185 million cut in operating costs for 2009.

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The statement surprised as it came less than a week after it said it would be conducting a review and impairment tests on all assets and looking at spending at the end of December. The impairment tests will continue, but the headline grabbing stuff about cuts was shoved out this week as the share price hovered around 50c-60c.

Now there are suggestion that one, perhaps two bids have been made, involving cash and perhaps shares. Both are friendly: not hostile. They will set up a bit of competitive tension and inject some stability into the weak share price, which has dropped from a high of $4.01 to around 55 cents this morning on the ASX. Details could be made public as early as tomorrow.

BHP may be sniffing around in the wake of the collapse of its bid for Rio. Comments by CEO Marius Kloppers that BHP could be interested in smaller corporate plays after dropping the Rio bid, are seen as a sign the company is interested. One asset could be in BHP’s sights: the $1.15 billion Prominent Hill project of Oz Minerals (it’s an old Oxiana project) which is all but complete.

“In terms of other opportunities, it is important to note that the strong balance sheet and cash flow I’ve discussed already will allow us to take advantage of these opportunities as they arise, and as others falter in this climate,” Mr Kloppers told today’s AGM in Melbourne.

If BHP goes for a deal, it will be the second South Australian mining asset the company has grabbed from a company run by Michelmore: Olympic Dam was the jewel in WMC Resource’s portfolio and the reason why BHP bid and offered more than Xstrata. Its believed the likes of Xstrata, Anglo American or Teck from Canada are not involved at this stage.

A deal to buy Prominent Hill would be preferable for BHP as it doesn’t want the Century Mine in Queensland, nor the Tasmanian mining assets, including the just acquired Avebury nickel project Gold Grove. The offshore assets in Laos and Indonesia wouldn’t interest BHP — they’re either too small or in metals it’s already big in such as copper, gold and lead.

At the current price of around 53 cents, Oz Minerals is valued at $1.7 billion, but the offer price would have to be a lot higher. When the deal to merge Oxiana and Zinifex was proposed in May this year the two companies had a combined market cap of around $12 billion.

The question is whether OZ Minerals is faltering, or is just mirroring weakness in the broader resources sector. The share price now is at a level where in normal times, it would cop a competitive bidding situation.

OZ Minerals has suffered a big cost overrun on Prominent Hill, but such is the still unfolding potential, that the mine is profitable at even these low levels. But it is a tradeable asset. BHP has the huge Olympic Dam mine and project nearby and buying Prominent Hill would give it far more scale and improved cash flow for Olympic Dam. Prominent Hill also has an estimated 40 year life, which makes it attractive. Its operations could be combined with those at Olympic Dam.

A price of around $A1.5 to $A1.8 billion is being rumoured: that would also help Oz Minerals maximise its cash resources to enable it to become an acquirer as the minerals downturn deepens.

The complication is how does Oz Minerals play these two friendly bids and also weigh BHP’s interest.

Long term Oxiana boss Owen Hegarty (who copped a margin call on part of his Oz holding this week) is supposed to leave the board next year under the cost-cutting program announced this week. Andrew Michelmore, the former WMC Resources boss, is now CEO of OZ Minerals.

Corporate interest in Oz Minerals will have another benefit; it will put a rocket under the share price and squeeze those who have been shorting the stock.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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