OZ a yellow brick road for Glencore

Forever a bridesmaid and never a bride is not something shareholders in OZ Minerals have had to contemplate. Not long after the copper and gold miner was formed via a merger in 2008, it was left exposed by the financial crisis, which paved the way for China Minmetals to seek control. But it was blocked from buying the entire company.

And now rumours have surfaced that the newly merged Glencore and Xstrata have decided OZ Minerals could be its first deal since they married last year. But for shareholders of the Swiss-based group, any purchase of OZ Minerals could have the hallmarks of a pea and thimble trick.

Locally, Glencore Xstrata is mired in difficulties. As a large producer of steaming coal, it is doing it tough, given that close to a third of all steaming coal shipped globally is losing money. Like its competitors, it is slashing costs and cutting marginal operations. It has sliced its local coal sector workforce by 11 per cent over the past year as it lifted productivity by 21 per cent in a bid to revive margins. Clearly, with little immediate prospect of a weaker Australian dollar to give it breathing space, it has little choice.

So, buying a new asset would help to deflect attention from its coal sector woes locally, especially given the challenges to its base metals mines in Australia.

For the new federal government, any bid for OZ Minerals would add to the lengthening list of foreign takeovers needing government approval - with deals such as ADM's bid for GrainCorp, Yancoal's bid to take its local arm private and China's State Grid's bid for power transmission assets in Victoria, NSW and South Australia all in Treasurer Joe Hockey's in tray.

OZ Minerals insists there has been no contact between it and Glencore Xstrata and no bid is on the table. Speculation linking Glencore with OZ Minerals surfaced in London at the weekend. With OZ Minerals shares trading at long-term lows - bouncing recently from below $4 to close on Monday at $4.43 - stalker talk makes sense.

And the timing of any move is compelling, given that OZ Minerals has tumbled into the red at a time of low metal prices, which has put its shares under pressure.

The weekend speculation - that Glencore Xstrata has a 10 per cent stake - is not evident in the volumes of shares traded in recent months, and OZ Minerals was quick on Monday to deny any talks had been held between the two.

Glencore claims to be the largest copper trader globally, and the third-largest copper miner, producing 1.2 million tonnes in 2010, which it says will grow to 1.7 million tonnes in 2015, a touch larger than BHP Billiton.

In Australia it already produces copper at Mount Isa, Ernest Henry, Mount Margaret and Cobar mines. At recent investor presentations, Glencore made it clear it sees continuing growth in copper demand thanks to China's industrialisation, while signalling optimism over the outlook for the metal's price. This is despite its recent weakness but is hardly a surprise given its position in the copper market.

Yet the echoes of Xstrata stalking MIM a decade ago ring loud and clear, given that MIM's then chief executive, Vince Gauci, argued that the Xstrata bid severely undervalued his company. And he was right since, in many ways, the MIM buy was a company maker for Xstrata, which was still effectively in start-up phase under founding chief executive Mick Davies.

When China's Minmetals bid for OZ Minerals in 2009, it was a well-timed move when the local group was under financial pressure. But the bidder was blocked on national security grounds from gaining control of the Prominent Hill mine in South Australia, which is in the Woomera Prohibited Area.

In the event, Minmetals bought most of the rest of OZ Minerals' assets for $US1.35 billion, with a further $US217 million raised from the sale of a project in Indonesia, which helped put the remaining operations onto an even keel.

That refusal to see control of the Prominent Hill mine go offshore was puzzling, given that it is about 150 kilometres from the Woomera range, used to test guided missiles and electronic warfare systems.

With the Coalition in charge, any future bid for OZ Minerals would test whether this is still a "poison pill" for a foreign bidder.

Despite its stumbles, OZ Minerals has growth prospects, such as at the Carrapateena project, on the other side of BHP Billiton's large Olympic Dam prospect from Prominent Hill, along with assets such as its 20 per cent stake in Sandfire Resources. Bought for $200 million, that stake is worth much more as Sandfire ramps up production at its DeGrussa mine in WA, where it has just posted its maiden profit.

One of Xstrata's long-term advisers was Deutsche Bank, which it used during the bid for MIM a decade ago. After the Glencore-Xstrata merger, just which banks have the inside running at the group is still not clear.

And with London speculating on Glencore Xstrata moving on OZ Minerals, perhaps of greater note is the possibility of former Xstrata head Mick Davis making an early move on OZ Minerals as he gets his new mining venture, X2 Resources, off the ground with the backing of trader Noble, Canberra willing.

Brian Robins is a senior BusinessDay reporter.