great article

Share Cafe Commentary



OZ Minerals And The Australian Mining Congress
FN ARENA NEWS - 20/11/2008


Yesterday I attended the 2008 Australian Mining Congress as an invited moderator on two discussion panels. Aside from having the opportunity to tap into the wisdom of my panellists, I was also able to gauge the current sentiment of the industry through the eyes of other presenters and attendees, most of whom were junior mining company executives.

There was clearly a level of anxiety in the room, although the tone was more realistically optimistic than realistically pessimistic if one takes a longer term view - more than a year or so - and mining projects are always long term propositions. Despite the extraordinary volatility of metal prices in the last couple of years, older hands had seen it all before - even if you have to go back to the seventies. But realism was certainly the key, with no one expecting sudden commodity price rebounds and all expecting funding options to be difficult to non-existent. However, such times also throw up opportunities. One speaker relayed the advice of a mentor in the business who suggested:

"We will be stepping over a lot of corpses and we will be rifling through their pockets as we go".

In other words, those in a stressed funding position will likely fall but those in a stable funding position will thus have the opportunity to pick up projects at various stages of development at fire sale prices.

It has now become a game of costs and margins, and sage advice was that mining companies need to very carefully and candidly review their projects. This should result in some projects being pursued as planned, others being put into care and maintenance, and others being sold off or abandoned altogether. No one can pitch their hopes on commodity prices rebounding tomorrow, but the super-cycle is not dead - just taking a breather.

Indeed, the super-cycle has been naively misconstrued by the inexperienced to mean prices just go up forever, but every super-cycle (including Japan in the 60s-70s and even the US in the late nineteenth century) has been peppered with significant intra-cycle peaks and troughs. All is not lost.

If ever there was good advice for junior miners it was to ignore the company's share price and just get on with the job, once projects have been realistically re-evaluated.

And if ever that conclusion could be supported, it came as a result of OZ Minerals (OZL) being given a "speeding ticket" by the ASX yesterday. The Exchange will request, as a matter of policy, a "please explain" from a company if its share price moves suddenly and materially in either direction for no obvious reason. OZ saw its share price drop sharply on Tuesday, although it was only another drop in a downtrend that began in May. OZ duly provided a response, only to see a bigger drop follow in yesterday's trading.

Macquarie suggests that yesterday's drop was a result of a naive report from the Reuters newswire service which suggested that OZ had issued a "profit warning". While management did indeed suggest that 2008 earnings would be lower than 2007 earnings (of the then Oxiana and Zinifex), a religious recluse sitting high in the Himalayas could have told you that. It often happens when metal prices fall 50% or more.

Nevertheless, when the market is on tenterhooks it's a case of sell first and ask questions later, so down we went. Macquarie, for one, noted this morning that management's "warning" merely matched consensus forecast.

It was, however, an opportunity for OZ to update the market on its operational review which it announced earlier in the month. The Prominent Hill and Sepon projects are going to be completed, but all other projects and capital expenditure plans are to be run through the wringer. This has sparked a lot of suggestions from analysts as to which projects might be shut down, deferred or downsized. Management also announced its review would bring asset write-downs, but then that's another case of "well blow me down".

Basically OZ is in the process of doing exactly what was suggested at the Mining Congress yesterday - evaluating projects and looking to head off refinancing obligations with reduced expenditures. It is unlikely Australia's third largest diversified miner is paying much attention to share prices at this point.

Analysts are, however.

This morning JP Morgan downgraded OZ from Overweight to Neutral, but while the analysts acknowledged the uncertainty of a company now reviewing projects the downgrade was all to do with one of JPM's intermittent commodity price reviews. Analysts don't plug spot prices into their models, they use their own price forecasts, and they don't like to change those forecasts more than about once a quarter. As such, it is not unusual for a screaming Buy to become a screaming Sell with the stroke of a pen, even though it was clear spot prices had put the screaming Buy up for question a while back.

JPM cut its target fro OZ from a database high $1.90 to $0.75 after slashing earnings forecasts in line with lower commodity price assumptions. All brokers reporting this morning took the opportunity to adjust their targets, taking the average in the FNArena database down from $1.42 (amongst those reporting recently) to $1.31. JPM is now the low marker.

UBS, on the other hand, conceded that nothing much is likely to spark the OZ share price in the short term but on a "look-through" basis the company's assets are now "significantly" undervalued. UBS thus upgraded to Buy this morning with a target of $1.00. The upgrade comes despite the fact OZ is currently "burning cash" (earning less than it's spending) ahead of the review outcome.

That makes three Buys in the database, although ABN Amro has not reported since last month. There are four Holds and one Underperform.

As a footnote to the Mining Congress story, what was also notable yesterday is that the smart money - money from seasoned investors, high net worth individuals and private equity- is queuing up to look at the right mining projects now that market weakness offers long term opportunity.

It was also suggested (and this is something I have raised before myself) that the Chinese will now "play chicken" for as long as they can and cry poor over commodity demand in order to exact some payback on pricing in 2009.