Can OZ Minerals Boost Its Potential?

This story features OZ MINERALS LIMITED, and other companies. For more info SHARE ANALYSIS: OZL

-Can Prominent Hill be extended?
-Questions over move to SA
-Carrapateena needs partnering
 

By Eva Brocklehurst

The new CEO of OZ Minerals ((OZL)) has announced a strategic review to be completed by April, with an intent to revamp the company’s potential. In the first stage of the strategic review the corporate head office will move to Adelaide from Melbourne to reduce overheads and locate closer to the company’s main copper operation, Prominent Hill in South Australia. 

The review is expected to cover the Prominent Hill mine plan, development options on the Carrapateena asset and the company’s shareholdings in Sandfire Resources ((SFR)) and Toro Energy ((TOE)). The relocation to Adelaide is part of an agreement with the South Australian government, which will provide $10m in funding for hydro metallurgical research that could improve the flow sheet at Carrapateena. The data room on that project remains open and the company continues to look for potential partners, disclosing the fact that additional parties had come to the process late in 2014.

The company beat guidance and most broker estimates in the December quarter, upgrading its earnings outlook and reporting a cash balance of $219m. Cash costs came in better than forecast, while concentrate sales exceeded production. Tonnes milled also beat estimates. While the sustainability of this performance is uncertain, brokers are reasonably confident that 2015 will continue where 2014 left off, with mining now ahead of plan and updated guidance to come in April with the review.

Acknowledging the sector is out of favour at present, JP Morgan continues to find value in the stock on a short-term view and maintains an Overweight recommendation. Moreover, the broker believes base metals have more positive fundamentals than the bulk commodities, suggesting the current downturn may be partly driven by sentiment and relatively shortlived.

Credit Suisse expects a significant reduction in corporate experience with the shift from Melbourne but accepts that as a materially smaller company with one producing asset, much of the experience does not need to be retained. Still, there are features of the decision to relocate which make no sense to the broker. These are the redundancy and relocation costs, which will exceed the South Australian government’s incentive payment, and the limits on Prominent Hill’s productive life, suggesting the asset is not key to the future of the company. Moreover, the low cash balance, a commitment to paying dividends and high capex requirements for Carrapateena mean the company will only have a minority position if that project proceeds to development.

Still, the broker gives the company the benefit of the doubt in terms of what the review may offer and retains an Outperform rating. Credit Suisse considers shareholder value creation rests with the cash that is being generated and how it is allocated. In this regard, the new CEO, Andrew Cole, could bring renewed operational oversight and introduce additional productivity gains. Deutsche Bank concurs that the loss of key technical and executive staff is of concern but envisages potential for lower material movements with the review, and possible extensions to mine life if the mining contract can be re-negotiated.

UBS is cautious and envisages most attention will be paid in the review to the underground plans against the open pit at Prominent Hill. The broker recalls the existing strategy did not provide any medium-term growth options and, with the company’s significant cash balance having almost disappeared, future growth aspirations may have to be scaled back. UBS retains a Neutral rating based on Prominent Hill’s short open pit mine life, a marginal underground development as well as minimal exploration success. The broker also struggles to find an investment case for Carrapateena.

Key to the stock is the Australian currency’s trajectory, the copper price and the copper production run rate. The declining Australian dollar reduces US dollar operating costs while supporting the AUD copper price. A rising AUD gold price helps by-product credits. As the ASX’s biggest pure-play copper producer, Morgan Stanley believes the stock offers the best leverage on the basis of better copper pricing expected in 2015-16. The broker is not sure the review will change the production outlook significantly but expects the company will likely attempt to maximise cash flow with more effective pit development, such as reducing near-term strip ratios, minimising ore stockpiling and renegotiating contractor terms.

In terms of the ratings, OZ Minerals continues to enjoy a much more favourable outlook compared with mid last year. At that stage there were several Sell ratings on the FNArena database. Come 2015 there are fewer Hold ratings as well – just one (UBS) – with seven Buy ratings. The consensus target is $5.16, suggesting 38% upside to the last share price. Targets range from $4.20 to $6.60. The dividend yield is 5.2% on 2014 forecasts and 3.8% on 2015.
 

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