How Big Is Oz Minerals’ Upside?

This story features OZ MINERALS LIMITED. For more info SHARE ANALYSIS: OZL

By Chris Shaw

Oz Minerals ((OZL)) has delivered a solid March quarter production report, most analysts seeing the numbers as slightly better than expected with respect to both costs and output.

Increased treatment of ore and higher grades meant copper output of 31,900 tonnes and gold production of 41,600 ounces was 18% and 85% better respectively than UBS had forecast. Both were also better than GSJB Were had anticipated, driven by a change in the ore mix from copper/gold to the inclusion of some gold-only ore.

Thanks to the higher production, UBS notes cash costs of US$0.57 per pound were 37% lower than had been expected. Management has revised cost guidance for the full year a little lower, with US$0.80-$0.90 likely, down from US$0.85-$0.95 previously.

Full year gold production guidance has also been increased, management now indicating output of 110,000-120,000 ounces of gold, up from 80,000-90,000 ounces previously.

Factoring in the new guidance and the actual production numbers for the March quarter has seen brokers revise earnings per share (EPS) estimates marginally, UBS lifting its numbers for 2010 by around 1%. GSJB Were has gone a little further and increased its estimates through to 2012, while JP Morgan has lifted its EPS forecasts by a more substantial 5-10% through to 2012.

This appears to be something of a catch up move by the broker as JP Morgan's revised EPS forecasts stand at 10.7c this year and 9c in 2011, which compares to UBS at 12c and 13c respectively and Deutsche Bank at 10c and 14c. Consensus EPS forecasts for Oz Minerals according to the FNArena database stand at 10.6c and 12.3c.

The changes to earnings estimates mean an increase in price targets, the FNArena database showing an average target for Oz Minerals now of $1.39, up from $1.36 prior to the production report. This is largely explained by UBS lifting its target by 20c to $1.30, while GSJB Were increased its target by 10c to $1.60.

The difference between these targets underlines the split in the market's views on Oz Minerals, the FNArena database showing the company is rated as Buy seven times and Hold three times.

The attraction for GSJB Were, which rates Oz Minerals as a Buy, is the company provides good leverage to copper and this is the broker's preferred base metal. As well, the strong balance sheet suggests growth opportunities going forward.

There is also potential for exploration to deliver some valuation upside as GSJB Were notes the company has commenced testing work on prospects around its flagship Prominent Hill operations. As well, in March Oz Minerals announced an initial inferred resource of 8.1 million tonnes at 2.3 grams per tonne gold at the Okvau project in Cambodia. This equates to 605,000 ounces of contained gold.

RBS Australia is similarly positive, seeing the stock as cheap at current levels given it is trading on a 3.3 times EV/EBITDA (Enterprise Value to Earnings Before Interest, Tax, Depreciation and Amortisation) multiple for FY11 and at a 15% discount to the broker's estimate of net present value.

As well, RBS suggests the quality, pure play base metal stocks such as Oz Minerals could benefit from the strong current pricing environment by attracting a premium to net present value, which implies further upside from current levels.

Not everyone is bullish however, UBS suggesting recent share price appreciation has eroded the value on offer in Oz Minerals. Given this, UBS retains its Hold rating. This is matched by Deutsche Bank, which takes the view the better than expected production result needs to be viewed in context.

While treated gold grade was higher, Deutsche notes this was largely due to the mining of a high grade zone outside the current reserve, while mined copper grade continued to decline in the quarter. As well, concentrator throughput remains 10% above design levels, which suggests limited further upside from here.

This means even though production was better than expected, there was only a 1% increase in Deutsche's valuation to $1.19 per share.

In terms of upside for Oz Minerals, there is also the issue of the $1 billion in cash on balance sheet the company has to invest, as this suggests potential for merger and acquisition activity going forward. UBS suggests a share buyback after the half year result is a possibility, a move it sees as providing support to the share price while still allowing for growth in the cash balance.

Shares in Oz Minerals are trading slightly weaker today and as at 11.55am the stock was down 2.5c or about 2% to $1.24. This compares to a range over the past year of $0.60 to $1.325 and implies around 10% upside to the average price target.

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