Production on target
1Q production (27.5kt copper and 30.1koz gold) comfortably fits within Oz Mineral's (OZL) full year guidance. Higher than expected C1 costs (US$ 97c/lb) are expected to average down to meet guidance (US$ 75-85c) as open pit mining concludes. Critical to watch is the ramp up of underground production towards 4Mtpa in 2019 (vs 2.7Mtpa currently) requiring additional ore working stopes, paste-filling capability and additional haulage capacity.
Solid progress at Carra, but uncertainty with Avanco
Oz Minerals has a lot on its plate in 2018, as we detail in the OZL Research Note (Morgans clients can login to view). We think that strong execution at Carrapateena is required to retain the market's faith that OZL can interrogate its full card of development options without a stumble. Pleasingly, construction progress remains on schedule, with development rates above budget (a key timing risk).
Elsewhere we think the market is going to take time to be convinced on Avanco (if acquired) given market unfamiliarity. Momentum investors may also be averse to the reduction in potential for short term returns of surplus capital. We see the strategic sense of OZL, acquiring a self-funding exploration option into premier copper province. We just think that the market may not fully appreciate it until its attention again turns to growth/upside, as opposed to short term cashflows, which is invariably triggered by stronger global growth and copper prices.
Carrapateena investment to reap returns – too hard to ignore
We think that recent share price weakness in Oz Minerals can be explained by:
- an interim peak in US$ cash margins;
- a cautious response to the Avanco acquisition; and
- a forecast peak in capital outlays at Carrapateena (approx. A$500m in CY18) and its attendant execution risks.
OZL's balance sheet and cashflows can ably support its growth ambitions but the latter two issues will take time for the market to gain comfort with.
Ultimately, we are backers of OZL's ability to commission Carrapateena on schedule and on budget, and to execute its broader growth agenda without over-stretching itself. This also supports our upgraded recommendation for exposure to OZL's compelling long term copper cashflows. We have lifted our copper price assumptions slightly in CY18-19, and have lowered the risk weighting ascribed to Carrapateena post receipt of final ML and environmental approvals.
We upgrade our recommendation to Add (from Hold) with an upgraded share price target.
Morgans clients can login to view our detailed report and share price target for Oz Minerals (OZL). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
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