Morgan Stanley, the US bank and takeover adviser, has surprised by emerging as a substantial shareholder in struggling OZ Minerals.

Some of its extensive buying since August seems to have been trading on behalf of hedge fund clients (there’s a prime brokerage agreement included in the 159-page filing with the ASX), but the upshot is Morgan Stanley has its foot on more than 171 million OZ Minerals shares or almost 5.5%.

Morgan Stanley’s Australian arm was mopping up shares in small parcels as late as November 21, according to the statement. (The filing therefore seems to be a bit late as it has to be made within three days of going over the 5% level). That level was breached a while ago and the filing yesterday was the first for Morgan Stanley.

It has been responsible for much of the activity in OZ shares and obviously didn’t care about the falling share price in the past week or so, it was buying around 50 and 55 cents.

The filing is in two parts: the first is through the London and US offices of Morgan Stanley and represents hedge fund activity, but there’s a separate set of dealings, all purchases by Morgan Stanley Australia from July onwards of this. There seems to have been three separate streams of activity in OZ Minerals shares by the London, US and Australian arms of the bank, all starting around July 24-26.

There’s also a strong suggestion Morgan Stanley is not only working on behalf of hedge funds, but has been accumulating a stake for one of two groups talking to OZ Minerals about a possible deal. The identity of its client isn’t known, but Crikey reported last week that BHP Billiton had had a chat to the company and had its eye on the Prominent Hill copper gold project in South Australia which is now coming on stream. It is close to BHP’s Olympic Dam mine.

Morgan Stanley has been the only buyer of OZ Minerals stock: its shareholding notice Monday afternoon was the first from a substantial shareholder since July when Merrill Lynch submitted a statement to the ASX.

Morgan Stanley recently advised BG group in its successful takeover of Queensland Gas Co, which was second prize after missing out on Origin Energy.

Complicating matters has been a dispute over the refinancing of around $653 million in loans, with a couple of banks trying to force new terms and conditions on OZ Minerals. It responded by asking for its shares to be suspended late last week to allow talks with the banks to be wrapped up. It surprised yesterday by asking for the suspension to be continued until December 29 to match an extension from the banks. This will enable the now more difficult negotiations to be sorted out

There’s talk that BOS Australia (part of the just bailed out RBS group of the UK) and Societe Generale want new deals, or want the OZ Minerals loans taken off their hands.

But the real fly in the ointment is understood to be the ANZ Bank (which is also agent for Royal Bank Of Scotland or RBS). It is believed to have decided to cut its exposure to resource and mining stocks and OZ Minerals renegotiations are the first evidence of the change. The ANZ advanced a $US140 million loan for nine months to help finance the Prominent mine project. The other $US420 million came from a group of six banks.

It used the OZ Minerals refinance approach to insist on changes to its caveats, so as to “withdraw” from the banking syndicate. (It will adopt the same process in future rollovers to “legally” reduce risk its exposure to resources and development projects). That last minute, unannounced and entirely unexpected move threw the entire extension into jeopardy and that saw OZ ask for the trading halt last Friday, and then the extension yesterday.

The other six banks in the other syndicate are happy to consolidate the two loans involved and once that is done, the talks with the two companies interested in some sort of alignment, will continue.

OZ Minerals has around $A800 million in cash in reserves: its Century zinc and Avebury nickel projects are losing money and cash, so will either have to be cut back, or run lean and mean. That’s why the company revealed $680 million in project deferments, spending and cost cuts and other savings last week. It was to show the banks that it had a business plan to hunker down.

In a statement to the ASX OZ said it would try to renew the facility by the end of the month.

“The company will use its best endeavours to achieve the refinancing by December 29, but given the continuing volatility in commodity markets and state of global credit markets believes there is a risk it may have to exercise the option to extend until January 31, 2009,” OZ Minerals said.

“The company requires time to continue negotiations with counter-parties to the refinancing and believes that these negotiations might be jeopardised if they took place during a period of potentially extreme share price volatility.”

OZ Minerals stock traded at 55 cents before the suspension, compared with a high of $3.10.

Peter Fray

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