OZ Minerals Potential All Priced In?

This story features OZ MINERALS LIMITED, and other companies. For more info SHARE ANALYSIS: OZL

By Chris Shaw

Sentiment towards Oz Minerals ((OZL)) has turned more positive since its deal with Minmetals left the group cashed up. The company’s Prominent Hill asset is performing well. However, in the view of Morgan Stanley analysts, the run the stock has enjoyed in recent weeks could prompt some underperformance leading into the upcoming interim profit result.

Given the extent of the restructuring the company has gone through as part of the deal with Minmetals, company management has not offered any guidance for the interim result, leading the broker to suggest the range of broker forecasts could be much wider than is usually the case and this means uncertainty with respect to the actual result.

There is also cause for uncertainty from the scope of any significant items to be included in the result as on Morgan Stanley’s numbers these could negatively impact earnings by as much as $407 million after tax given the asset sales the company has made as part of the restructuring process.

To reflect the shares’ potential underperformance leading into the result, scheduled for August 27th, Morgan Stanley has downgraded its rating on the stock to Equal Weight from Overweight previously. The change factors in what has been solid operational performance, the broker noting copper production from Prominent Hill in the June quarter was slightly better than expected and gold output was in line. Morgan Stanley has an In-Line sector rating for Nonferrous Metals and Mining stocks.

Bank of America Merrill Lynch is another with a Hold rating on the stock, the broker agreeing with Morgan Stanley the upcoming result is likely to be a messy one given the asset sales and other happenings in the past few months. It too sees Prominent Hill as performing to expectations but struggles to find great value in the stock, even after lifting its price target to $1.10 from $0.95 previously. 

Acording to RBS Australia there remains scope for additional upside in the shares as the concept of an underground operation at Prominent Hill continues to move from a concept to reality, with any go-ahead meaning additional resources and mine life and a corresponding increase in valuation. The broker already has a $1.16 price target on the stock, up from $1.09, so any increase to this would provide additional support to its Buy rating.

But Citi counters while the outlook for copper equities in Australia remains positive, the stock is expensive given it continues to trade above net present value, which the broker estimates to be $0.78. In comparison, others in the sector such as Equinox ((EQN)) offer better relative value in the broker’s view.

Even 10% increases to its earnings forecasts in 2010 and 2011 on the back of lower cost assumptions are not enough to move UBS from its Hold rating, the broker arguing the good news is already priced into the stock at current levels. Credit Suisse agrees and retains its Underweight recommendation, which allows for some upside risk to production guidance from any accelerated ramp-up in output at Prominent Hill.

Overall, the FNArena database shows the stock is rated as Buy four times, Hold four times and Sell twice, with an average price target of $1.03, up from $0.99 prior to the production result. Morgan Stanley is not included in the FNArena universe but has a target of $1.05, down from $1.09 previously.

The target is based on consensus earnings per share (EPS) forecasts of 1.6c this year and 7.5c in FY10, though the range of forecasts is evidenced by the fact RBS Australia is expecting a just positive EPS result this year and a little better than 10c in FY10, while Credit Suisse is even more aggressive this year with its EPS forecast of a little more than 4c.

Shares in Oz Minerals today are slightly stronger in early trading and as at 10.55am the stock was 1c higher at $1.025, which compares to a trading range over the past year of $0.40 to $2.17.

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