OZ Minerals: Sharp correction looks overdone
About the author:
- Author name:
- By Tom Sartor
- Job title:
- Senior Analyst
- Date posted:
- 31 May 2019, 9:00 AM
- Sectors Covered:
- Resources, Metals
Sharp correction looks overdone
OZ Minerals (OZL) has corrected by nearly 20% from its early April peak. This looks far too dramatic given that A$ copper prices have only fallen 6% (approximately 80% of OZL revenue) and A$ gold prices have actually risen by 5% (approximately 20% of revenue). Assuming constant costs into the June quarter, we calculate that A$ cash margins have only eroded by 4-5% into the A$2.80 per pound range, which still supports 40-45% EBITDA margins in CY19.
A$ buffers changes to our earnings and valuation
We mark-to-market our CY19-21 copper prices lower, our CY19 gold assumption higher and our CY19-20 AUD assumptions sharply lower relative to the previous forecasts at 74 USc for CY20. Our earnings forecasts improve by 6% in CY19-20, but are 12% lower in FY21. We have also adjusted our DCF based valuation and share price target (Morgans clients can login to view).
Sentiment clearly in charge...again
We think that marginal investors use OZL as a proxy for the outlook for both the copper market and global growth given its status as the largest and most liquid ASX-listed pure copper play. We think this explains why at times over the last 3 years the stock has traded both strongly overbought (up to a 30% premium to valuation) and strongly oversold territory (up to a 30% discount) as investors position for scenarios ranging from reflation (Trump election, China stimulus) to recessionary risk (Trade implications).
Our house assumption is that US-China trade negotiations reach a pragmatic outcome, and hence we think current negative sentiment is overdone.
Investment view: +20% discount to valuation is a Buy trigger
With OZ Minerals (OZL) now trading at a +20% discount to valuation, a level at which it has received strong fundamental buying support over the last 3-4 years. Hence we think the current share price offers a key buy trigger. Our projected valuation also shows OZL still offers +40% upside to a valuation above $13 per share when taking a 2-year view.
Confirmation of both the ramp-up schedule and budget for Carapateena through the balance of CY19 remains our focus and the stock's key driver. Weaker than expected global growth is a key risk.
We upgrade our recommendation from Hold to Add.
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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