OZ Minerals Worries Brokers

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

-Unexpectedly low grades impact
-Confidence hinges on new plan
-Worries over mine life options
-Potential losses if low grades continue
 

By Eva Brocklehurst?

OZ Minerals ((OZL)) has again lowered 2013 production guidance, substantially. Lower copper grades from the Malu open pit in the September quarter are to blame. The downgrade to guidance surprised many and the market doesn't like surprises. It appears OZ Minerals was not anticipating such low grades – which underperformed the company's modelling by 30-50% – from the eastern periphery of the ore body. Moreover, a portion of the ore came from inferred resources and unclassified material, not reserves.

Morgan Stanley is standing by the company and believes the new guidance is achievable, although dependent on on timing and grade. The broker expects mining conditions will get better in 2014, although the upcoming mine plan review will be very important. The company intends to source copper ore from Malu and Ankata in the fourth quarter and continue mining the lower grade eastern periphery of Malu, and the review should include an updated Malu underground resource. The broker is also encouraged by some higher grade intersections and believes this area as a potential source for significant additional mine life at Prominent Hill.

Morgan Stanley expects flat grades quarter on quarter, with mill feed augmented by gold-only ore, and expects, if mining moves out of the periphery and into the main ore body before the end of the year, that there is upside potential. Goldman Sachs is more negative, observing that while some improvement was made in open pit unit costs, a record month of productivity was required to achieve this. Such results are likely to be difficult to maintain as the fleet gets smaller and the pit gets deeper.

Deutsche Bank was expecting a slightly better quarter compared with the June quarter but now, with the short term outlook uncertain and low grade ore still being mined, it's a matter of waiting to see what the mine plan offers. The average strip ratio is 9.6:1 and below 2013 guidance of 10-11:1. Deutsche Bank believes material movements achieved in the September quarter are likely to be nearing the site's capacity. As such, this rate should be maintained in Q413 for an average 10.3:1 strip ratio for 2013 but, given an additional 5.6mt of waste is now in the strip ratio and around 1mt of stockpiles are supplementing mill feed in the year to date, the mine plan could be as much as 16mt below company expectations at the start of the year. This material will therefore be pushed into the first half of 2014. Stockpiles of copper-rich ore have been exhausted and gold-rich stockpiled ore will be needed to keep the mill running at capacity.

The outlook hinges on the new resource/reserve statement and the updated mine plan that will be delivered in December. A new reserve for Prominent Hill is targeted for December 2013, followed closely by an updated mine plan including 2014 guidance. The new plan will consider the magnitude of delay to the 2013 mine schedule and implications for 2014 and beyond. As well as potential variations to the strip ratio, Deutsche Bank suspects the company may want to maximize mining of low-grade ore in 2013 to ensure higher grades can be achieved through the remaining mine life.

Ore milled included inferred resources, along with unclassified material, and JP Morgan remains concerned about how much of the reserve is affected by this issue. The current reserve is based off a copper assumption of US$3/pound and an exchange rate of US80c. Hence, the potential for a lower reserve and/or impairment charge will make investors stay cautious.

So, what's in the guidance figures? September copper and gold output was 17,390 tonnes and 28,000 ounces respectively. Cash costs surprised on the upside at US$2.06/lb. For 2013 production guidance is lowered 15% to 70-75,000t from 82-88,000t. Gold guidance was unchanged at 120-130,000 ozs. Cost guidance has increased 15% to US$1.90-2.05/lb at a US$1300/oz gold price and US93c Australian dollar rate. On the positive side, open pit mining costs are down to $5.50/t from $5.99/t in the June quarter because of higher material movement.

The stock is trading below JP Morgan's base valuation and there is a 10% discount included in the price target ($4.10) to account for operational risk. The broker does not believe the marginal investor will buy the stock until the outcomes of the revised reserve statement and 2014 production guidance are released.

It's a trail of woes in UBS' opinion and the broker has decided to downgrade to Sell from Neutral. With the exception of some capital management, the strategy the company set off with in 2009 has not delivered. The options for maintaining the business beyond the current 6-7 year life are limited and growth is reliant on exploration success. The broker sees the impact of the lower grade as loss making in 2014 and 2015. In line with reduced guidance, forecasts are reduced and the 2013 cash cost estimate lifted to US$1.91/lb. UBS assumes a knock-on effect into 2014 that lowers production forecasts by 15% to 92,000t for the year. Forecast earnings for 2014 and 2015 now show an average loss of over $50m per annum, making a revitalised strategy essential.

CIMB is optimistic that, once mining returns to 100% reserves, which have a much higher level of geological certainty, grades and production will increase materially, thereby reducing unit costs. Nevertheless, lower mined and milled ore grades are likely to persist into the final quarter of 2013 and early 2014 and the broker has lowered production and 2013 and 2014 earnings forecasts. Given it appears that this source of material will account for a portion of mill feed in the December quarter of 2013, CIMB was not surprised that OZ Minerals decided to be very conservative and cut guidance aggressively but notes the company does not believe the lower grades will have any material impact on the longer-term mine plan.

On the FNArena database OZ Minerals has two Buy, three Hold and three Sell ratings. Prior to UBS' downgrade the weight of Buy/Sell was evenly balanced with the majority taking a Hold stance. The consensus price target at $4.37 compares to $4.80 before the announcement, and suggests 9.5% upside to the last share price. Price targets range from $3.50 to $5.75.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms