Australia | Jan 24 2008
By Chris Shaw
Despite gold trading at close to US$900 per ounce gold shares have not been able to avoid the equity market fallout of recent weeks, with Oxiana ((OXR)) a prime example as the stock fell from around $3.80 earlier this month to below $2.80 before its latest bounce to around $3.00.
Of course the company is more than just a gold play with copper and zinc operations as well, but this diversification hasn’t helped of late as JP Morgan notes the December quarter production report showed weaker than expected zinc production and prices, which will impact on earnings.
ABN Amro adds in with the fact operating costs were higher than it had expected and the result is cuts to earnings forecasts among the brokers who cover the stock. These cuts range from 13-23% for the 2007 year and are of similar magnitude in coming years, with issues at Golden Grove cited as the main contributor to the reductions given the core Sepon operations continue to perform in line with expectations.
In EPS terms broker estimates now call for 2007 EPS (earnings per share) of around 20-21c or about half that of 2006, while 2008 estimates have a wider range with ABN Amro at 16.6c, UBS forecasting 24c and Macquarie at 19c. By way of comparison Thomson One Analytics shows median EPS estimates of 23c for both 2007 and 2008.
For most brokers the cuts are not enough to change views on the stock as earnings in 2007 and 2008 are not the main story. The real attraction of the shares according to Merrill Lynch is the expected ramp up in production from 2009, which it expects will result in a re-rating of the stock from the second half of this year.
Earnings estimates support such an outlook as Macquarie is forecasting EPS to jump to around 42c in 2009, ABN Amro expects 36c and Thomson One shows a median forecast of 39c.
The other point made by Citi is the valuation equation on the stock has improved a lot given the recent share price weakness, especially when the expected production increases are factored in and a longer-term view on the company’s prospects is taken. As a result Citi retains its Hold rating, while Macquarie is the only broker to make a change on the back of the production report.
The broker has upgraded the shares to Outperform from Neutral on a combination of valuation and outlook grounds, as it too is attracted to the production growth profile in coming years while it notes the stock is currently at a two-year low in net present value terms.
Overall the FNArena database shows Oxiana rated as buy four times, Hold five times and Sell or Underperform once, with an average price target of $3.64, down from $3.94 prior to the production report. Thomson One shows a median price target of $3.72.
Shares in Oxiana today are slightly higher in line with a stronger overall market and as at 9.50am were up 6c at $2.96.
