bell potter

OZ Minerals Limited - Cash squeeze developing

OZ Minerals Limited (OZL.AX - A$0.60) Buy Target A$0.65

The speed at which commodity prices have retracted continues to hurt OZL. After reviewing Prominent Hill capex, Century costs and marking metal prices to market for the current period, the cash outflow is worse than originally anticipated. As a result, we have concerns over the debt refinancing required in December. OZL is experiencing a squeeze in funds. This is the period of maximum drawdown with the final Prominent Hill capex payments anticipated. We express concern over the ability to refinance debt of US$600m in December with a forecast cash balance of ~A$680m and provisional price adjustments pending. Options include having to repay the short-term facility or negotiating a roll on the debt until cashflow from Prominent Hill is received (H1 CY09). With little market insight into the debt covenants on the long-term debt and until the short-term refinancing issue is resolved we feel it is prudent to downgrade our recommendation to Neutral. Under our assumptions, which assume falling prices but a flat currency, expansion plans and developments are highly unlikely. An operational review should be made public over the next month, which in our view is likely to highlight deferrals to Martabe, Dugald River and possibly to the Khanong and Golden Grove expansions. Our target price of $0.65 (was $1.00) is equivalent to a 35% discount to our NPV. We downgrade to Neutral (from Buy).