OZ Minerals: An eye to 2H West Musgrave FID

About the author:

Author name:

By Tom Sartor

Job title:

Senior Analyst

Date posted:

26 April 2022, 10:00 AM

Sectors Covered:

Junior (Emerging) Resources, Bulk Materials

• CY22 guidance maintained despite lingering disruption/ challenges.
• Rising execution risks (timing, capex escalation) appear to be tempering the premium the market had previously built into OZ Minerals' (ASX:OZL) growth projects, and where WMP approval in the 2H may actually prolong that trend.
• Valuation adjusts to (login to view) while our price target (login to view) maintains a 5% premium for OZL’s quality versus peers.
• Maintain Hold but note macro-inspired volatility has a history of uncovering buying opportunities.

1Q Production snapshot

1Q production sits ~13% below, and costs 20% above, the run-rates required to meet OZL’s FY22 guidance mid-point. COVID absenteeism and extreme weather (limited Prom Hill access or 12 days) saw 370k (~2.7%) of annual ore production lost.

OZL had budgeted for a slower 1H but expects a return to normal production/ feed grades in the 2Q and retains guidance. Ongoing risks (COVID, supply-chain) are likely to see expectations trend toward the low end in our view (Visible Alpha FY22 copper currently at the guidance mid-point).

Analysis

Prom Hill 2H catalyst: In the 2H OZL will determine the LOM capacity of the Prom Hill hoisting shaft (evaluating 6.5Mtpa vs 6.0Mtpa) offering incremental upside given the minimal capital increment ($2m). We currently model 6.25Mtpa.

Heavier capex schedule versus peers: OZL has committed ~$1.6bn to the Carra Block cave (4 yrs only) and $600m to PHOX (3 yrs). The 2020 PFS flagged pre-production capex of ~$1.1bn at WMP (ex-power) and Carajas hub studies are ongoing.

Carra capex has crept up with the market although PHOX pricing is largely locked in. OZL looks capable of self-funding the spending programs at Prom and Carra, whereas WMP would require an additional debt funding piece.

Growth premium to erode in the current climate? Given OZL’s growth projects account for ~25% of our estimate of OZL’s asset value, we think the risk of capital escalation and/or delays places downside risks on project returns/ valuations while industry pressure unfolds.

For this reason, we think that OZL may struggle to re-attain its 2021 P/NPV ‘growth’ premium (was 10-20%) in the early construction phase of West Musgrave development, if indeed the project is approved in the 2H.

West Musgrave FID: OZL expects prevailing input uncertainties (logistics, contractor/labour certainty, cost estimates) to have settled enough to be able to make a 2H investment decision as scheduled.

We think that OZL will proceed with the project, noting Carra was a difficult decision in August 2017 (for valuation and more technical execution reasons) and that OZL has long branded itself as ‘pro-growth’. We think the share price imputes ~55-60% of our unrisked WMP NPV.

Forecast and valuation update

Our trimmed FY22 volumes now sit 3-4% below the mid-point of guidance, while upgrades to our copper and gold price assumptions drive net 4-5% EBITDA upgrades and lift in our DCF based valuation to (login to view).

Our target applies a 5% premium to reflect OZL’s premium sector status (reserves, margins, balance sheet, growth, management).

Investment view

OZL traded on a 1.1-1.2x Price to NPV multiple through 2021 (see page 4) which we noted had ‘baked in’ much of OZL’s longer dated growth/valuation upside earlier than normal when accounting for development risk (PHOX ramp-up 2025, Carra BC 2024-29, WMP 2024).

Elevated execution/capex risks take some shine off those growth options and we see incremental risk to their valuations in the absence of higher commodities prices.

Maintain Hold, but note macro-inspired volatility has a history of uncovering attractive buying opportunities.

Price catalysts

Directional copper price moves above/below our forecasts, West Musgrave FID (2H22), Hub studies (2H22).

Risks

Production disruption at key assets, cost inflation, commodity/ FX volatility

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