OZ Minerals: Stability through the cycle

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
28 July 2021, 10:00 AM
Sectors Covered:
Junior (Emerging) Resources, Bulk Materials

  • The 2Q was another robust quarter with OZL’s operating cost resilience a feature.
  • Higher gold production (lower C1) was offset by higher Carra capex to see AISC guidance held flat.
  • We think likely board approval for the Prom Hill expansion in Q3 is a momentum catalyst, despite being baked into valuations.
  • Our valuation uplift largely reflects stronger copper price assumptions.
  • We maintain a 5% premium to derive our target to reflect the scarcity of high quality copper pure plays. Hold, but watch for opportunities on weakness.

Event

2Q production report and minor guidance adjustments. 

Material upgrades to our copper price assumptions.

Analysis

2Q was broadly in line with our expectations with OZL’s unaudited 1H revenue of $986m also in line (Morgans: $995m).

Above budget gold grades from Prom Hill stockpiles again drove up group guidance (up 7% to 205-225koz), and lower C1 guidance (down US10c to 65- 75c/lb); however, this tailwind could easily reverse in future periods with the variability in grade of historic gold stocks (10-15 years old) impossible to forecast.

Operating cost containment is notable as OZL manages consumables supply where steel, explosives, fuel and general freight all see pressure. We also infer that a reset of contractor arrangements and terms is yielding improved productivity. 

Higher Carra capex, leading to unchanged AISC guidance, had scope to concern. We see the merits in OZL prioritising vertical development at Carra to set up the site infrastructure required (levels, haulage, confidence in cave formation) to accelerate development of the block cave. Higher capex looks a timing issue and therefore temporary.

Strong Prom Hill ore delivery (pushing 4.6Mtpa rate in 2Q) builds our confidence that the shaft/ expansion (UG to 6Mtpa from 2025) will be approved in 3Q. Compelling Prom Hill margins/ economics combined with OZL trading near fair value suggest the expansion is baked into the market. Nonetheless we think approval would be a catalyst for momentum investors. 

Cash now $134m, no debt, forecast $200-400m FCF in CY21-21. OZL now looks capable of both accelerating brownfields growth options while surprising on current dividend expectations. 1H21 results are due 18 August

Forecast and valuation update

~6-21% upgrade to CY21-22 EBITDA based predominantly on higher copper price forecasts (+7-14%) and smaller volume and cost adjustments.

DCF-based valuation revises to $23.37ps (from $20.00) due to the above, and higher Prom Hill underground run-rates ahead of expansion combined with lower long term costs.

Investment view: Copper favourite but maintain Hold for now

On page 4 we highlight OZL’s outperformance vs global peers. We think this reflects OZL’s: 1) sizable reserves; 2) strong cash margins; 3) balance sheet; 4) brownfield/ growth options (lower risk); and 5) execution track record.

We think a scarcity of comparable high-quality pure copper plays justifies a 5% premium in deriving our target price of (login to view). We’d prefer to buy on volatility, with opportunities having regularly presented through the cycle.

Price catalysts

Copper price strength above our forecasts.

Upcoming growth project milestones at Prom Hill (expansion decision Q3), WMP (study update, Q3) and Carajas (study updates 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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