Australia | Oct 24 2012
– OZ Minerals quarterly production better than expected
– Plans to extend mine life at Prominent Hill
– Valuation and growth remain issues
By Chris Shaw
The quarterly production report from OZ Minerals ((OZL)) has generated a range of broker responses, as the stock has been both upgraded and downgraded post the update, which in general was better than had been forecast and included the maintenance of full year production guidance.
For the period OZ Minerals produced 26,000 tonnes of copper and 35,000 ounces of gold at Prominent Hill, a performance 12% and 18% better respectively than JP Morgan had forecast. The beat was due primarily to improved throughput.
Factoring in the result, JP Morgan's revised earnings estimates generated an increase in price target to $9.20 from $8.80. With OZ Minerals indicating a 1-3 year extension at Prominent Hill, which would ease concerns of a production void until the start-up of the Carrapateena project, JP Morgan has upgraded to a Neutral rating from Underweight.
Citi has gone the other way, downgrading OZ Minerals to Neutral from Buy despite the fact quarterly production exceeded the broker's forecasts. The issue for Citi is twofold – the stock is trading in line with the broker's revised valuation and price target of $8.50, up from $8.00, while there are a lack of potential positive catalysts to help drive the share price in the medium-term.
As Citi notes, further news on Carrapateena is unlikely until next year, while the group's M&A strategy remains a work in progress at present. This is hampering the potential for additional capital management initiatives, so removing another potential share price catalyst.
BA Merrill Lynch has also downgraded OZ Minerals, moving to an Underperform rating from Neutral previously. The broker has cut earnings forecasts for 2013 to reflect higher cost assumptions, which account for revised strip ratios and higher mining costs in general.
Given changes to its numbers BA-ML is now at the bottom of the consensus forecast range for earnings for OZ Minerals for 2013, the broker seeing downside risk to consensus numbers given the risk production next year falls a little short of expectations.
Deutsche Bank has made a similar move to BA-ML in downgrading OZ Minerals to Sell from Hold. While Carrapateena drilling results have added a depth extension the broker continues to see a number of challenges for the project, while there are also challenges at Malu Deeps as the company looks to extend mine life at Prominent Hill.
The change in rating by Deutsche is valuation based, as while the broker's price target as been increased 3% to $7.20 this is still well below the current share price of more than $8.00.
Following the ratings changes for OZ Minerals, the FNArena database shows the stock is now rated as Buy twice, Hold three times and Sell three times. The consensus price target according to the database is $8.25.
Macquarie maintains a Buy on OZ Minerals, encouraged by the potential for mine life at Prominent Hill to be increased to development at Malu Deeps. At the same time RBS Australia retains a Hold rating, concerned by ongoing cost issues at Prominent Hill and the long-dated nature of Carrapateena.
Growth remains an issue for UBS, this given the Prominent Hill project currently only has a remaining mine life of seven years. This implies a continued move down in net present value assuming no material exploration success or the acquisition of a growth asset, which is enough for UBS to retain a Sell rating on the stock.
Shares in OZ Minerals today are higher in a down market and as at 12.10pm the stock was 3.5c higher at $8.485. This compares to a range over the past 12 months of $6.00 to $12.20, the current share price implying downside of almost 3% relative to the consensus price target in the FNArena database.
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