OZ Minerals Looking A Better Proposition

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

-Improvements likely sustained
-Carrapateena critical to long term
-Carrapateena deal may lift rating
 

By Eva Brocklehurst

Further improvement in the September quarter has allayed some fears and prompted ratings upgrades for OZ Minerals ((OZL)) from several brokers. The copper-gold producer appears more flexible and able to generate more cash in the near term, although the burn continues.

To JP Morgan the stock is a leveraged play on an improving Australian dollar copper price and, given few compelling themes in the mining sector at the moment, the sell-off in the USD copper price provides an attractive entry point. Moreover, unit costs are expected to rise in 2015 as material movements drop and haul distances increase, yet the company's 2014 performance has proven better than originally guided. This provides confidence that some of the productivity improvements are likely to be sustained and leads the broker to lower medium-term cost forecasts.

Production at Prominent Hill in the quarter was 26,300 tonnes, surpassing guidance of 25,000t through record throughput and high or better grades. Credit Suisse observes additional gold-only ore boosted production and buy-product credits, despite a lower average gold price. The broker suspects unchanged 2014 guidance – 85-90,000t of copper and 130-140,000 ounces of gold – is beatable, as is cash cost guidance, unchanged at US$1.10-1.20/lb.

The key is open pit mining rates which have been improved and should deliver more tonnage for a relatively small increase in costs. With low interest rates, Credit Suisse finds merit in getting the most risky tonnage from the bottom of the pit and onto the balance sheet, ready to be converted to cash. The savings appear to exceed the implied funding cost of the interest that might be earned on the cash, while the operation is materially de-risked.

OZ Minerals has confirmed that interested parties are still undertaking due diligence on the Carrapateena project. Carrapateena is critical to the long-term viability of the company in broker views, as OZ Minerals does not have the balance sheet capacity to develop the project. UBS notes the share price has hit its downside valuation while open pit production has improved and peak stripping is now behind the company. Moreover, the Malu underground is ramping up and capex will begin to trend down. The rating is upgraded, but just to Neutral from Sell, as UBS still questions the economics of the underground at Prominent Hill while uncertainty over Carrapateena also limits the rating.

Macquarie observes OZ Minerals is yet to commit to a full feasibility study of Carrapateena but has signalled a number of parties are interested in partnering in the development. Macquarie upgrades to Neutral from Underperform, believing the stock is well placed to beat 2014 production guidance on both copper and gold, with only 23,000t copper and 28,000 ozs gold needed to deliver a result at the top end of guidance.

CIMB considers divestment of a stake in Carrapateena is the potential game changer for OZ Minerals. The asset is globally competitive on capital but the broker highlights the company's statement that it is not a desperate seller, nor working to a fixed timeline. Hence, while the development is long-dated and the market appears reluctant to pay for it, the broker believes a deal may drive a material re-rating and remains on the cards in the near term. Until such a deal eventuates the market remains focused on Prominent Hill and an updated mine plan, which should provide better visibility in CIMB's opinion.

Cash flow continues to bother Deutsche Bank and, while the outlook improves for the fourth quarter this year, the 2015 outlook will depend on the updated mine plan. The current mine plan does not generate cash until 2016. Deutsche Bank questions the current life-of-mine strategy, which consumes cash by building significant run-of-mine stockpiles. A mining rate that is more closely matched to the milling capacity would appear more sensible, although the broker acknowledges the mining contract may limit flexibility. Anyway, a new mine plan is due in January and the broker retains a Hold rating.

When FNArena last reviewed the stock in July there were three Sell ratings on the database. There are now none. Instead, there are four Buy and four Hold ratings. The consensus target price is $4.82, which suggests 18.3% upside to the last share price and compares with $4.71 ahead of the report. Targets range from $3.80 (UBS) to $6.00 (CIMB).

See previous, Cash Outlook Fades For OZ Minerals on July 16 2014.
 

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