Inflation Drives Declines at OZ Minerals

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Analysts have labelled downgrades issued by OZ Minerals unsurprising in the wake of similar declines for peers, as the mid-cap mining sector continues to feel the pressure of the inflationary environment.

-Full year production guidance downgrades issued by OZ Minerals, while expected costs increase
-Australian assets Carrapateena and Prominent Hill weighing on group performance amid inflation pressures
-Copper market slows despite global market remaining tight

By Danielle Austin

Updating the market on its full year outlook, OZ Minerals ((OZL)) announced a material downgrade to its production and cost guidance. A softer than anticipated start to the year has seen the company reduce its expected copper output by -10,000 tonnes to a total 127,000 tonnes, while increasing costs 17% to US$1.70/lb.

The mining company has suffered low volumes, labour absenteeism and weather impacts in the first half, as costs also increase in the current inflationary environment. Performance at Australian assets Carrapateena and Prominent Hill has been attributed to the guidance downgrade, with similar pressures weighing on performance industry wide.

Carrapateena in particular has dragged on company performance, with conveyor belt issues on the materials handling system compounding pressures. OZ Minerals issued a -12% reduction to Carapateena’s expected production to 55-61,000 tonnes from a previous 62-72,000 tonnes, but has otherwise retained guidance for the project through to 2025. For Prominent Hill, OZ Minerals issued a downgrade to production guidance of -2.5% to 55-62,000 ounces from 55-65,000 ounces.

Inflationary impacts were also a key driver of the update, with the company citing 8% of the total 17% cost increase to inflation, attributing the lift to increased costs of labour, transport, fuel, explosives and ground support. Analysts did note that OZ Minerals’ South Australian assets operate under a fixed price energy contract, which has limited potential further downside to inflationary issues.

Market cools on copper after two-year bull market

After a strong two-year performance, the copper bull market appears to have slowed in the last quarter with the metal declining -18% and now selling at US$3.80/lb. Analysts noted a tight market will likely support recovery in copper price moving forward, which could drive upgrades to the company’s outlook.

Five of FNArena’s database brokers have updated on OZ Minerals following the company’s market update, and collectively hold one Buy (or equivalent) rating, three Holds, and one Sell. These brokers have an average target price of $21.82.

Macquarie has reduced its own production forecast to the bottom end of OZ Minerals’ guidance, while remaining above the top end of costs guidance, but does note retained gold production guidance is a positive. Revisions drive an -8% decline to Macquarie’s 2022 earnings per share forecast, and further -2-7% declines between 2023 and 2025. In the longer term, the broker notes copper pricing could drive upgrades with a spot price scenario delivering 6% and 33% earnings upside in 2023 and 2024. Macquarie is Neutral rated with a target price of $20.00.

Describing the update as unsurprising and in line with peers, Ord Minnett warns expectations of a second half recovery are likely optimistic in the current tight labour market. While the broker acknowledges the slowing of the copper market, it remains unconcerned by the decline given inventory levels remain low. Ord Minnett lowers its copper price forecast -9%, driving a -46% reduction to anticipated earnings alongside guidance downgrades. Ord Minnett analysts find the stock expensive compared to peers, and retain a Lighten rating and a target price of $18.10.

Noting that while remediation efforts are taking place, Credit Suisse anticipates achieving the lower end of guidance range will be more likely for OZ Minerals. While already at the bottom end of production guidance range for Prominent Hill at 55,000 tonnes, Credit Suisse has now also lowered its expectations for Carrapateena to the bottom end of the company’s guidance range at 57,000 tonnes. The broker also lifted its all in sustaining cost forecasts for 2022 and 2023, reflecting not only an expectation that inflationary pressures will not ease in the near- to medium-term, but also that lower gold prices will impact in the next year. Credit Suisse retains a Neutral rating, downgrading its target price to $20.00.

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