Credit Suisse report:CY10 NPAT as expected, $588mn in capital...

Credit Suisse report:

CY10 NPAT as expected, $588mn in capital management

■ Few surprises in the 2010 accounts with main update being a planned $200mn buyback, plus a 12 cent per share dividend (equivalent to $388mn) for $588mn total. We had been looking for $500mn buyback. Also a 10:1 share consolidation, resulting in under 324 million issued shares. Both require AGM approval, scheduled for 18 May 2011, suggesting the balance sheet capacity will continue to grow until mid year, preserving capacity for a significant transaction if an opportunity were to present.

■ CY10 underlying profit of $398mn, in line with expectations (CS fcst $395mn).

■ Cash balance decreased to $1.33bn, down $100mn on 1H $1.43bn. 2H cash consumed by $114mn investment in Sandfire Resources, unrealised FX losses on USD cash balance, $93mn dividend, exploration and development spending.

■ Final 4cps dividend (interim 3cps). Record date 23 February 2011, payment 9 March 2011. Policy to pay 30-60% of underlying earnings as dividends, subject to capital needs.

■ No change to production or cost guidance but clear articulation of management disappointment of Sandfire’s stalled exploration success and its 12-month investment review timeframe.

■ Catalysts: Copper price, exploration success and value adding of destroying transactions.

■ Valuation: DCF of $1.48/share on house assumptions sets basis for our A$1.55 target price. Spot NPV $2.12/share.


Key points

OZL delivered an expected strong 2H and full-year result, with underlying earnings and cash balance in line with our (and consensus) expectation.

Key news was confirmation of the much anticipated capital management to be executed by way of a $200mn buy back, and a 12cps unfranked special dividend ($388mn) for $588mn in total capital management initiatives, in addition to a continuing dividend with a pay out ratio of 30-60%.

■ The proposed capital management initiatives are subject to shareholder approval at the AGM in May.

■ ATO ruling pending re: tax treatment of dividend.

■ The $200mn buy seems almost discretionary. Being subject to shareholder approval at the AGM, OZL effectively has a four-to-five month option to find another source for this cash.

■ We have modelled the buy back at $1.70/share, with $200mn therefore cancelling 177.6mn SOI. Although this will be earnings accretive we see it as value destructive.

OZL’s paper is overvalued in our opinion (we have a $1.55/sh target price) – a situation more conducive to issuing new paper rather than buying it back. No other stock within our copper/gold coverage has a lower return implied from consensus or Credit Suisse target prices.