onwards and upwards, page-6

I
s OZ defying gravity?
By Tim Treadgold

PORTFOLIO POINT: The miner’s share price is ahead of even the most optimistic forecasts, but better value lies elsewhere.
The Lazurus-like recovery of OZ Minerals – from the brink of collapse to one of the market’s most actively traded stocks – is great sport but it’s not convincing. Unless you believe the commodities boom is back with us then it’s time to check for warning bells.

On paper it all looks good. OZ Minerals’ stock price jumped about 46% over the past month and is trading today (Monday, May 4) at about 80¢. It is outperforming its peers, stock exchange indices and broker forecasts.
Much of the interest in OZ stems from the imminent conclusion of its six-month long fight for survival, which involves the sale of most of its assets and re-emergence as a business owning one mine producing copper and gold, plus a handy pot of cash.

Assuming the rescue of OZ is completed as planned by June 30, it will own one outstanding asset (the Prominent Hill mine in South Australia) and have up to $800 million in cash.

The question is whether that combination supports the value of about $2.4 billion placed on the stock by its 80¢ share price; or, more specifically, is Prominent Hill worth $1.6 billion?

It’s a brave investor who takes those numbers at face value. Here’s why:
The future price of copper, which has risen sharply over the past two months thanks to China’s buying of hard commodities to offset its exposure to US dollars.
n The future price of gold, which has struggled to reclaim the $US1000 an ounce mark achieved twice, briefly, over the past 12 months.

The future value of the Australian dollar which, if it continues to rise, will erode profits earned at Prominent Hill.
OZ may not be an appealing takeover target once it is reduced to cash and a single medium-sized copper and gold mine.
The management team in charge when OZ almost crashed is still in place.

In terms of sensible investing, there are many better resource stocks than OZ, a company that attracted a cult-like following because it took on the appearance of a mini-BHP Billiton and had a charismatic chief executive in Owen Hegarty.

Melbourne investors were particularly strong supporters of OZ because it grew out of two home-town companies, Zinifex and Oxiana.
But, the reality of OZ from the day it was created is that it was built on a collection of second-class assets that had always struggled in tough times, or on assets discarded by the bigger miners because they were rated as second-class.

Quite simply, OZ was a B-class miner, and remains so. Even Prominent Hill, the mine seen as the saviour, was offloaded by BHP Billiton because it had better copper assets elsewhere, including the truly world-class Olympic Dam.

If BHP Billiton is interested in re-acquiring Prominent Hill, which is one of the rumours in the market, it would be going against the company’s own policy of only investing in premium assets – unless, of course, it can get a bargain, which now seems unlikely given the upward run in the OZ share price.

Brokers who follow OZ are mystified by its performance. The latest survey of broker tips by FNArena has four recommending OZ as a Buy and six saying Hold. None rate it a Sell.

But most of those views would have been formed during early-to-mid-April, when OZ was trading between 55¢ and 65¢. The low end of the brokers’ target range was 50¢. The high was 75¢ and the consensus average was 64¢.
At 80¢, OZ is already comfortably above even the most optimistic view of the stock, and alarmingly higher than the most pessimistic view. It reeks of risk.
April’s 45.8% rise compares with a 3.6% rise in the
Published in Eureka Report on May 4


ASX’s Metals and Mining index, a 2% rise by BHP Billiton, an 11% rise by another once-troubled, but now emerging copper producer, Equinox, and a corresponding 11.8% rise in the copper price from $US1.86 to $US2.08 a pound.
Among the brokers, JP Morgan regards OZ as a company that has achieved a “reasonable” outcome from the sale of assets to China Minmetals and retention of Prominent Hill. The new-look OZ will be a “pure Australian copper play” with gold as a by-product, filling a gap in the Australian market.

Most other brokers agree. Macquarie and UBS like the strong balance sheet after completion of the asset sales. Citi is more cautious and wants to see the expected 10-year life of Prominent Hill extended, which is possible given recent good exploration results close to the mine.
The key in looking at OZ today as an investment is to forget what has happened over the past year: a cocktail of bad-timing and bad-luck – with a touch of bad management for buying second-class mining assets and doing business with impatient banks.

A question guaranteed to come from shareholders when they come to vote on the asset sales, is whether the price of the assets – such as the Martabe gold operations – being sold is fair.
Underlying the question is the recent rise in the price of copper and zinc. When OZ announced the original China Minmetals deal (which was a full cash takeover bid at 82.5¢) on February 16 the copper price was about $US1.55 a pound and zinc was US48¢ a pound.

Since then copper has risen to $US2.08 and zinc to US67. But, offsetting those rises of 34% and 39% respectively has been a 12% rise in the value of the Australian dollar against the US dollar. This effectively reduces the commodity price rise to 19% for copper and 24% for zinc.
Still, rising commodity prices might be a reason to question whether OZ management is doing the right thing in persisting with the asset sales to China.

Alternatively, the rising value of the Australian dollar represents a reason why the deal is probably the best available – and why future profits from Prominent Hill might be hard to earn.

It’s the complete picture that needs to be considered when assessing OZ, starting with the reasons for the crisis, moving on to the frantic rescue efforts and now trying to get a clear picture of a mid-tier copper/gold miner with a single mine (of the sort dubbed by former BHP Billiton boss, Chip Goodyear, as a one-trick pony), cash in the bank and a very stretched valuation of $2.4 billion (80¢ a share).

Those issues need to be addressed before asking two final, but critical questions:
Is the management team at the wheel when the company hit the wall, and still there today, the team you believe can get it right next time.

Aren’t there better and less risky mining stocks? u
PS: The answer to the final question is yes, starting with BHP Billiton and moving on to Newcrest and Equinox.