Oz Minerals Doesn’t Disappoint

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

By Chris Shaw

Headline production numbers from Oz Minerals ((OZL)) for the December quarter did not disappoint, the company producing 36,400 tonnes of copper from its flagship Prominent Hill project during the quarter at costs unit costs lower than most in the market had expected.

Citi notes production was well above its forecast for the period of 31,400 tonnes, thanks primarily to better mill throughput, something the company has delivered three months faster than it had expected. As RBS Australia points out, the throughput result means the project continues to operate at better than nameplate capacity, as evidenced by full year production coming in at 96,000 tonnes in 2009 against previous guidance from management of between 85,000-90,000 tonnes.

The higher throughput and better silver and gold grades meant costs were lower than RBS Australia had forecast. Unit costs of US73c per pound were well below it and Citi’s forecasts of US80c per pound. To reflect this, earnings per share (EPS) forecasts have been lifted by both brokers, Citi increasing its numbers by 29.8% in 2009 and by 24.1% in 2010.

Citi’s EPS numbers are now 5.1c and 8.9c respectively for 2009 and 2010, while more modest increases by RBS Australia sees its EPS forecasts at 2.8c and 8.2c respectively. Credit Suisse is higher at 5.4c and 9.3c, while consensus estimates according to the FNArena database stand at 6.9c for 2009 and 9.7c for 2010.

What impacts on numbers are estimates of copper and gold prices and exchange rates, as Macquarie notes for example, its EPS forecasts of 9.8c for 2010 is based on copper and gold expectations of US$3.25 per pound, US$1,150 per ounce and an Aussie dollar/US dollar rate of US90c. Factoring in current spot prices would see its 2010 earnings increase by around 2%, while in 2011 its forecasts would fall 17% thanks primarily to a currency impact.

Looking forward Oz Minerals also has growth options, Citi pointing to the $1 billion in cash on its balance sheet as evidence of this given this will allow the company to make acquisitions if the right deals present themselves. As well, the company has a $20 million exploration budget for 2010, so any success here could be a positive catalyst in Citi’s view.

On the flip side though, Citi points out having the cash on hand and not deployed, along with a strong Australian dollar through the second part of 2009 in particular, has made the stock a relative underperformer. While value is improving, Citi doesn’t see enough yet to move from its Sell rating, supported by the fact the share price is above its target of $1.10.

Credit Suisse also rates the stock as Underperform as its copper price forecasts are below both the current spot price and market consensus. With a target price of $1.21 based on its copper price estimates CS sees little scope for the stock to outperform in coming months given the share price is relatively close to this target price at present.

RBS Australia in contrast has a $1.48 target price and Buy rating on Oz Minerals, reflecting copper being its preferred base metal exposure and the fact the stock is trading below its estimate of net present value, which is around $1.34. Macquarie is similarly positive on the stock as it too is bullish on copper, though its price target stands at $1.25.

The average price target according to the FNArena database is $1.28, while the database shows Oz Minerals scores four Buys, four Holds and two Sells. Shares in Oz Minerals today are slightly higher despite a weak overall market and as at 12.00pm the stock was up 1c at $1.165. This compares to a range over the past year of $0.40 to $1.325.

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