Zinc producer Zinifex has flagged an expansive acquisition program by putting Tasmanian nickel miner Allegiance Mining in its sites with a two tier offer that could be worth well over $700 million.

Zinifex Ltd, through its subsidiary Zinifex Australia Ltd, has announced an off-market all cash takeover offer for Allegiance. The offer is for 90 cents for each Allegiance share, to be increased to one dollar per share, if Zinifex obtains an interest of 30 per cent or more, or if the Allegiance board recommends the offer.

Speaking via a teleconference Zinifex Australia CEO-elect Andrew Michelmore said the offer was “compelling to all shareholders”, adding that at 90 cents, the offer represented a 27 per cent premium on Allegiance’s Friday closing price.

A price of $1 per share would represent a 41 per cent premium. He said the Allegiance Avebury mine represented “an attractive entry into nickel”.

Allegiance’s major project is the Avebury Nickel Project, located on Tasmania’s west coast. The fully funded project is set to deliver its first production in the first quarter of 2008 and when in full production is expected to process up to 900,000 tonnes of ore annually, producing 8,500 tonnes of nickel concentrates.

The project has been designed for expansion to 1.5 million tonnes of ore annually. Allegiance’s has an off-take agreement for all production with its major shareholder, Chinese nickel producer Jinchuan Limited.

Allegiance Mining chairman Tony Howland-Rose was unavailable for comment today. Here’s what he told investorTV about Allegiance’s prospects at the Mining 2007 conference in Brisbane earlier this year:

“This unique nickel deposit on the west coast of Tasmania looks as if it’s going to prove out to be much bigger in time than it is now, and that’s surprising to all I guess, that we’ll produce one of the world’s best concentrates available on the market anywhere. Better than 22 per cent nickel and completely, just nickel, nothing else but nickel.”

By 1pm Australian Eastern Standard Time the market had responded to the interest in Allegiance, with shares trading at 98 cents, hitting highs of $1.02, up 38 per cent on Friday’s closing price of 71c.

Late this afternoon the Alleginace board released a statement, advising shareholders to take no action on the offer. It called the unsolicited Zinifex offer “opportunistic and designed to take advantage of the company following the recent successful drawdown of the project finance facilities and with production scheduled to commence at the company’s Avebury nickel project which is expected in the first quarter of 2008”.