OZ Minerals: Drifting into the buy zone

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
19 August 2021, 1:00 PM
Sectors Covered:
Junior (Emerging) Resources, Bulk Materials

  • The larger dividend was the only real surprise among 1H21 financials.
  • Approval of the Prominent Hill shaft/expansion (PHOX) similarly didn’t surprise, but project economics do underwhelm at face value. We expect the market to recognise upside in Resources/ Reserves (mine life) to be unlocked over time.
  • Valuation adjusts to (login to view target price) target maintains a 5% premium for OZL’s quality/ scarcity value.
  • We upgrade to an Add, particularly as the cooling of macro sentiment or a subdued response to the PHOX update may crystallise an opportunity at lower prices.

1H21 result snapshot

Typically solid overall. Revenue was pre released ($986m), but EBITDA was 4% ahead of our forecasts ($561m) and underlying NPAT 9% ahead ($269m) helped by lower-than-expected finance and depreciation. Total 1H dividends of 16cps fully franked was 2cps ahead of our expectations.

Unchanged CY21 guidance (aside from PHOX related capex) adds comfort.

Key takeaways

Approval of the Prominent Hill expansion (PHOX) doesn’t surprise but its economics underwhelm. OZL will spend $600m over 3 years to expand UG production to +6Mtpa, lowering opex by 20%.

Expanded copper (53ktpa, +10ktpa) and gold production (101ktpa, +8tkpa) to 2036 (from 2030) is supported by upgraded Reserves. OZL calculates a project NPV of A$147m (9% IRR, 10 year payback, 6.5% d.r) on a conservative copper deck, rising to A$434m on bullish copper.

It’s clear that OZL rates PHOX’s value potential to be unlocked over time. We value the additional 67Mt of Resources outside the PHOX mine plan at $464m (unrisked, 1:1 conversion) in terms of mine life extension.

Mineralisation beyond/ beneath current Resources will also become better defined over time and near mine targets at Walawuru/Papa are relatively shallow, supplementary trucking opportunities with potential to fill latent mill capacity.

Balance sheet: Cash $134m, no debt, forecast ~$150m p.a FCF in CY21-23. We forecast OZL to draw on its revolver facility as expansion activity ramps up materially at both Prominent Hill and Carrapateena over CY22-24. We agree that OZL can self-fund its brownfields expansions, but we think WMP would require alternate funding (sell-down?). We do note capex risks are escalating overall.

16cps sustainable: OZL looks capable of sustaining its 8cps ordinary dividend (taking a 3 year view on earnings) while only modest specials look possible, funded from surplus cash net of escalating capital requirements.

Forecast and valuation update

Minor earnings changes largely re application of 1H21 actuals.

DCF-based valuation adjusts slightly to (login to view target price) after application of lower-than-expected PHOX metrics, offset by an incremental de-risking of the Carrapateena expansion and a reduction in our WACC assumption.

Investment view: Watch for buy opportunities on macro weakness

Much of OZL’s longer dated valuation upside (PHOX ramp-up 2025, Carrapateena block cave ramp-up 2024-29) already looks baked into the share price.

We think the premium over peers reflects OZL’s: 1) sizable Cu reserves; 2) strong cash margins; 3) balance sheet; 4) lower risk growth options; and 5) execution track record.

We think a scarcity of comparable high quality pure copper plays justifies a 5% premium in deriving our price target. We upgrade to an Add, particularly as the cooling of macro sentiment or a subdued response to the PHOX update may crystallise an opportunity at lower prices.

Price catalysts

Copper price moves above/below our forecasts. 

Development study updates at WMP (Q3) and Carajas (Q3 and Q4).

Risks 

Production disruption from two key assets, commodity price and FX volatility.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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