Australia | Jul 21 2006
By Chris Shaw
Despite recent volatility commodity prices have remained stronger than analysts have expected, which is positive for the earnings outlook for the resources sector. What isn’t so positive though is the increase in costs that has accompanied the higher metal prices, with yesterday’s quarterly production report from Oxiana (OXR) highlighting the impact higher costs are having on earnings.
The company reported production numbers for the quarter from its three major operations, Sepon Gold, Sepon Copper and Golden Grove Zinc, slightly below market expectations, though UBS notes management has maintained its full year production guidance for each project.
Whether this guidance can be achieved is another matter, as both ABN Amro and GSJB Were are forecasting Sepon gold production of 164,000 ounces for the full year against management’s forecast of 170,000 ounces.
But this minor discrepancy in production numbers has not driven down earnings estimates as much as the impact of higher costs. Following the production report UBS has lifted its operating costs at the Sepon Copper project to US60c/lb from US$55c/lb previously, Credit Suisse noting the cost result was a disappointing outcome given the operation is a high grade one.
UBS also notes Golden Grove’s cash costs were higher than the market had expected, meaning downgrades to consensus earnings forecasts are likely. The broker reacted by lowering its FY06 profit forecast by 6% to $511m, while it is forecasting earnings in FY07 of $518m and in FY08 of $448m. This equates to earnings per share of 37c, 28c and 33c. The broker has maintained its Buy 2 rating and share price target of $4.20.
The rest of the market followed, with Credit Suisse cutting its profit forecast for FY06 by 5.8% to $452m, though it lifted its estimates for FY07 by 0.2% to $414m and for FY08 by 2.2% to $389m, which translates to earnings per share of 31c, 28c and 27c respectively. The broker rates the stock as Neutral with a $3.65 price target.
While also retaining its Neutral rating despite cutting earnings, Merrill Lynch notes there is some upside risk to earnings if commodity prices remain firm. It estimates profits in FY06 could rise by 6% and in FY07 by 84% based on current spot prices, though it too has lowered its earnings for FY06-FY08 by 5% each year to $510m, $304m and $168m.
GSJB Were was also disappointed by the cost increases, particularly the increase in depreciation charges at Sepon gold to US$150/oz, which was almost double the broker’s forecast of US$85/oz. Despite this it continues to suggest the stock deserves an Outperform rating given it is exposed to the right metals (gold, copper and zinc) and to China, has upside production potential from new projects and expansions and is leveraged to spot prices thanks to a lack of hedging.
Credit Suisse is not so sure, pointing out company’s growth objectives and the subsequent capital requirements of these projects, means long-term holders of the stock need to believe metal prices will remain strong over the longer-term.
The FN Arena database shows the company is rated as Neutral by six brokers and equity researchers, compared to three Buy ratings and one Underperform recommendation. The average share price target is $3.40.
Thomson One Analytics shows a median price target on the stock of $3.65, while median earnings per share forecasts stand at 35c in FY06, 27c in FY07 and 25c in FY08. This equates to median earnings forecasts of $484m, $374m and $310m.
Reflecting a weaker gold price overnight, Oxiana shares at 1pm were trading down 9c at $3.19.