Company overview Real-time quote OZL.AX , 1.185, +0.025, +2.160%) delivered a solid June quarter production result for copper, with output of 28,200 tonnes broadly in line with market estimates. The surprise came in gold production, which at 49,200 ounces was well above most expectations thanks to higher gold only ore production, better grades and better recoveries.
Post the June quarter production report, management has revised full year production guidance, with expected copper output unchanged at 100-110,000 tonnes but gold increased to 140-150,000 ounces from 110-120,000 ounces previously.
This reflects the plant at Prominent Hill continuing to operate at above nameplate capacity, by about 15%, though as Citi notes any further improvements in milling rates from this level will be a challenge.
The higher gold production has seen Oz Minerals lower cash cost guidance to US70-80c per pound from US80-90c per pound previously, which translates into higher earnings expectations. As an example, Citi has lifted its profit forecast for 2010 by 7% and now expects earnings per share (EPS) of 10.9c this year, 10.7c in 2011 and 9.8c in 2012.
Deutsche Bank is forecasting EPS over the same periods of 12c, 14c and 20c, while Credit Suisse has adjusted its forecasts to 11c, 12.6c and 14c following the quarterly report and changes to its commodity price estimates. Consensus EPS forecasts according to the FNArena database stand at 11.2c for 2010 and 12.5c for 2011.
The key for Oz Minerals however is not quarterly operational performance but growth options going forward, which is where analysts appear to have divided views. According to Deutsche Bank, the Prominent Hill operation is a Tier 2 copper asset given expected cash costs and a relatively short mine life based on current reserves, though there is exploration potential in the region.
Citi's earnings estimates through to 2012 also suggest Oz Minerals is essentially ex-growth for the next couple of years, so how the company addresses this will be a key to share price performance. The recent acquisition of a 19% stake in Sandfire Resources ((SFR)) appears a sensible move in Citi's view, though as Deutsche Bank notes that company's resource at the DeGrussa project is presently not large enough to push the project returns above the Oz Minerals hurdle rate.
This should change as exploration success is likely to push the project into the one million tonne copper resource range. Based on forecast production from the project Deutsche estimates a move to 100% ownership of Sandfire would add around 50% to the production profile of Oz Minerals.
Growth options can also come from the cash holdings of Oz Minerals, which RBS Australia estimates at around 41c per share at present. This means there are funds available to invest in new projects, while RBS also sees increased scope for dividends to be reinstated this year and for a share buyback to be announced before year's end if suitable purchases cannot be found.
UBS generally agrees with the RBS assessment, pointing out around 43% of its valuation for Oz Minerals reflects cash and investments such as the Sandfire stake. UBS also sees the move to underground operations at Prominent Hill as a minor event in the development of Oz Minerals, so it takes the view a discovery is required for the company to move to the next level.
Without such a discovery UBS sees Oz Minerals as fairly priced at current levels, as leverage to copper price moves is muted by the fact Prominent Hill only accounts for about 53% of the broker's overall valuation of the stock.
But GSJB Were is more bullish on the growth prospects of Oz Minerals, seeing the Sandfire stake as a potential expansion path in the future given it provides exposure to a new project. There is a caveat to the broker's view though, this being the expectation investors want Oz Minerals to move to full ownership of investments in companies such as Sandfire as projects are de-risked.
This leads GSJB Were to suggest the manner how management achieves the growth potential offered by high levels of available cash will be a key factor to investor interest going forward.
GSJB Were rates Oz Minerals as a Buy with a price target of $1.75, which suggests confidence in management's abilities to achieve such growth, especially as the average price target according to the FNArena database stands at $1.38.
Overall, Oz Minerals is rated as Buy eight times and Hold twice, with UBS offering the lowest price target at $1.16. Credit Suisse has a $1.30 target but today downgraded to a Neutral rating on valuation grounds.
Shares in Oz Minerals today are slightly higher and as at 11.35am the stock was up 0.5c at $1.14. This compares to a trading range of $0.945 to $1.325 over the past year and implies upside of better than 16% to the average price target in the FNArena database.
OZL Price at posting:
$11.85 Sentiment: None Disclosure: Held
