Points of comfort
Production: We lift our CY18 copper production forecast after OZ Minerals (OZL) guided to the upper end of guidance (100-110kt), although our cost assumptions were already at the guided low-end of the range. This and the lower AUD helps to offset weaker 2H copper prices.
Carrapateena: Guidance for first Carra concentrate production from Q4 2019 is slightly ahead of our expectations and confirmation that capex remains on budget is also a key point of comfort. OZL's ability to execute this project is key to our investment case.
Points of concern
OZL's 5% lift in guided LOM all-in sustaining costs at Carrapateena relative to the Feasibility Study estimates was the negative surprise from the 3Q update. This has had a 20cps adverse impact to our risked valuation. It currently remains unclear if there are further risks regarding these estimates due to industry cost pressures versus project specifics as the mine plan and construction schedule becomes finalised.
Mid-November site visit a major catalyst
OZ Minerals remains extremely active on its development pipeline, and we think that several areas aren't fully understood, and certainly not valued by the market. OZL hosts Buy and Sell side analysts at its SA operations on November 14-15. We think that key technical and commercial updates will serve to provide market comfort in key areas including;
- Carra progress and execution risk;
- Carra expansion optionality;
- further Prominent Hill optimisation;
- clarification on optimisation of the Brazilian business; and
- context around the West Musgrave project among others.
We note that OZL's previous site visits and strategic updates have yielded critical detail and subsequent market comfort.
Macro-economic concerns and a stronger US dollar (softer copper) have worked against OZL, pushing it to a significant discount to NPV. Our house view is that these issues will prove to be temporary and that now is the perfect time to be accumulating exposure. In the medium term, we think that OZL will be rewarded for its counter-cyclical growth strategy as Carrapateena is de-risked ahead of first cash flows from 2020. Our NPV grows into $12 per share range as the project is de-risked.
Effectively we are backing OZL's management to build a compelling, copper-focused business without stretching its capabilities or balance sheet. We think it's a compelling buying opportunity on macro inspired weakness.
We retain our Add recommendation.
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