Australia | Aug 22 2008
By Chris Shaw
In timing its acquisition of Zinifex at essentially the peak of zinc prices in the current cycle, Oz Minerals ((OZL)) has managed to destroy a significant amount of shareholder value, an outcome confirmed by its disappointing profit result yesterday.
Despite this, most brokers remain positive on the stock, seeing valuation upside when commodity prices do improve and the company begins to deliver on the acquisition and organic growth prospects it has. But as ABN Amro cautions, investors should not expect a quick turnaround.
Given the merger is still impacting on the company’s accounts, the result was messy. But as Citi notes, the underlying earnings result for the half of $71 million pre significant items was low, given it was well below market forecasts that ranged from around $130 million to more than $150 million.
Taking out one-off items and the result still disappointed, meaning significant cuts to earnings estimates post the result. For example, Citi cut its 2008 forecast by 34% to $260 million, while Deutsche Bank expects stronger second half earnings of $101 million, the full year result will be around just $180 million.
This demonstrates how the current “messy” state of the company’s books makes accurate forecasts difficult. For what it’s worth, consensus earnings per share forecasts for the company, according to the FNArena database, are 6.6c this year and 25.5c in 2009.
In profit terms, Citi is forecasting $1.03 billion in 2009, though to highlight the impact of changes in metal prices on earnings, the broker notes on current spot metal prices, profit next year would be just $430 million, rising to $635 million in 2010.
It also means most of the brokers to review the result are more or less giving the company a free pass this time and concentrating on what the future may hold. Here the outlook remains promising in most views, as the FNArena database shows the company is rated as Buy five times and Hold just once on the back of the strong earnings growth expected.
According to Citi, the reason for optimism with respect to coming years is the fact cash flows remain strong, and this provides the company with a number of options. On the broker’s numbers, and based on its metal price forecasts, the company should generate free cash flows of $3.2 billion over the next five years, while at current spot prices it estimates free cash flows of $2.0 billion.
It expects this will keep management on the hunt for acquisition opportunities among the mid-cap nickel and copper stocks in particular. This expectation is strengthened by the fact management has recently toned down share buyback rhetoric. Even if no suitable acquisitions can be found, the accretive potential of any buyback suggests upside for shareholders longer-term, in the broker’s view.
Valuation upside is also apparent to ABN Amro, as on its numbers the market is presently pricing in no value for the company’s zinc assets. This is somewhat understandable given margins at the key Century mine continue to come under pressure. But as the broker points out, as much as 25% of global zinc output is at present uneconomic and China has swung from being a net exporter to a net importer, which means it shouldn’t be too long before prices begin to turn around.
Another issue for the share price, in the broker’s view, is the fact development risk remains at the Prominent Hill operation. Once this comes online in the December quarter this year, it should be a positive for sentiment at least, the broker feels. Longer-term it suggests new projects such as Dugald River, which is scheduled to come online in 2011, offer upside from higher production volumes.
Deutsche Bank agrees short-term upside is limited, but it is forecasting an improvement in zinc prices in the second half of 2009 after a a further period of weakness over the next 9-12 months. To reflect its view, the broker has trimmed its price target to $2.30 from $2.60, while Citi has dropped its target to $2.90 from $3.60 and JP Morgan to $2.30 from $2.50. The average price target according to the FNArena database is now $2.64 compared to $3.19 prior to the result.
Today, shares in Oz Minerals are higher on the back of a stronger overall market, and as at 1.30pm, the stock as up 11c or 6.5% at $1.795. This compares to a trading range over the past year of $1.63 to $2.17.