assessment of the qtly report, page-4

Oz Minerals Ex-Growth?

BY CHRIS SHAW - 20/10/2011

September quarter production from Oz Minerals ((OZL)) was mixed, with copper output largely as expected but gold production generally disappointing the market.

Copper output for the period was around 27,000 tonnes at a cash cost of US71.8c per pound, which compared to June quarter numbers of 28,000 tonnes at US56.1c per pound. UBS notes copper full year guidance is unchanged at output of 100,000-110,000 tonnes at a cash cost of less than US70c per pound.

On the gold side lower grades impacted, production for the period of 36,000 ounces falling well short of the Deutsche Bank forecast of 47,000 ounces. As these lower grades should continue in future periods management has lowered gold production guidance for 2011 to 150,000-160,000 ounces. As Credit Suisse notes, this compares to previous guidance for production of 185,000-205,000 ounces for the full year.

The cut in gold production is in part to maintain copper output, as Credit Suisse points out copper production has three-to-four times the revenue of gold-only ore. Factoring in lower gold output means cuts to earnings estimates across the market.

While Credit Suisse has lowered its earnings forecasts by 4-19% through 2013, RBS Australia's numbers have fallen by 11-16%, Macquarie's estimates have come down by 5-12% and UBS's by a more substantial 26-27% through 2012.

Consensus earnings per share (EPS) forecasts for Oz Minerals according to the FNArena database now stand at 95.2c in 2011 and 111.2c in 2012. Changes to earnings estimates have impacted on price targets, the consensus target for Oz Minerals falling to $13.17 from $13.73 previously.

There were some positives with respect to exploration during the period, Macquarie noting drilling at the Carrapateena project had commenced five months earlier than scheduled. Management plans to upgrade the inferred resource at the project through a drilling program, Macquarie currently valuing the project at around $1.58 per share.

Drilling success at Carrapateena will be very important in the view of UBS, as the broker argues Oz Minerals is currently ex-growth. This reflects the view mine life at the core Prominent Hill project is limited and there are technical challenges at Carrapateena even assuming exploration boosts the project's resource.

According to UBS, future growth for Oz Minerals will need to come either from exploration or via value adding M&A activity, which can be difficult to predict. This is enough for UBS to downgrade Oz Minerals to a Neutral rating from Buy previously.

Credit Suisse has similarly downgraded its rating on valuation grounds, but others in the market continue to see upside potential for Oz Minerals. Deutsche Bank is one, rating the stock as a Buy from both a valuation perspective and for the potential to add value via exploration success or an acquisition.

Macquarie agrees, expecting Oz Minerals will continue to generate strong near-term cash flows, which will support both additional capital management initiatives and the potential for acquisitions. Assuming an acquisition, RBS expects Oz Minerals would be re-rated, as such a deal would remove a key stock overhang. This underpins RBS's Buy rating on the stock.

Overall, the FNArena database shows Oz Minerals is rated as Buy five times and Hold three times. The consensus price target implies upside of around 19% relative to the current share price. Shares in Oz Minerals today are weaker and as at 12.10pm the stock was down 65c at $10.96 in an overall weaker share market.