morningstar ozl versus pna

Colin1 over on the ozl board posted this below. Just thought holders and future holders here would like to know of it. So sort of pinched it :-) Huge cheers Colin hope you don't mind.

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Morningstar has published an article of OZL versus PNA at :

http://www.morningstar.com.au/stocks.mvc/article/minerals-versus-panaust/5447/1

Transcript below :

When it comes to getting ASX-listed exposure to copper, investors may find themselves often being told to look to the likes of BHP Billiton (BHP) and Rio Tinto (RIO), and simply leaving it at that.

But when looking beyond the "big two," they may stumble across companies such as OZ Minerals (OZL) or PanAust Limited (PNA) - and may discover a couple of mid-tier miners that have something to offer those who are willing to take on a tad more risk.

OZ Minerals, a South Australia-based miner, is focussed on its sole operating mine of Prominent Hill, which produces over 100,000 tonnes of copper and nearly 150,000 ounces of gold a year.

In May 2011, the company acquired the Carrapateena project, which Morningstar senior resources analyst Mathew Hodge says has the potential to be a second mine for the company that is similar size to Prominent Hill.

Hodge says part of the appeal of OZ Minerals lies in the fact that the commodity of copper is "not a bad place to be in" at the moment.

"It's pretty difficult to find big new copper deposits and whatever is being found tends to be deeper, take longer to get to, and have a lower grade. So, copper is becoming a scale business and there's a 'geological scarcity' angle to it too," he says.

Hodge explains that OZ Minerals' two deposits are reasonably large, and if a copper miner has a large deposit, it tends to have more exploration upside.

"They (OZ Minerals) are sort of in the medium-to-large range … so you would expect there would be some exploration upside," he says.

When it comes to the degree of risk tolerance investors should have when it comes to OZ Minerals, Hodge says that it "would be towards the outer edge".

"It's basically got a single commodity. It has got a little bit of 'kicker' from gold, it's not long-life, and Prominent Hill is only going to be around probably until the end of the decade … and in the meantime it has to develop Carrapateena, which is going to be significantly more expensive to develop than Prominent Hill was," he says.

But one thing in the company's favour, Hodge says, is that the "heat" is coming out of its capital and operating costs.

"So, in a year's time or so, it might not actually be a bad time for the company to spend money," he says.
Hodge says OZ has plenty of cash on its balance sheet - roughly $700 million and no debt. But while the company's balance sheet is well-positioned to profit from any fall in asset prices, he says the balance sheets of "the big guys" are also in pretty good shape.

"There's a fair bit of competition for copper assets in the world, so it's not the easiest space in which to pick up assets," he says.

When it comes to the company's expenses, Hodge says OZ Minerals sits about in the middle of the cost curve, "which isn't a bad place to be in copper".

And on the subject of capital management, Hodge says OZ Minerals is a reasonable payer of dividends. And while the dividends are currently unfranked, Hodge believes that franking is possible for the second-half dividend of the 2012 calendar year and also likely in 2013.

"They did return some cash to shareholders last year as well - they had a buyback … so they have been pretty reasonable on that front," he says.



A good, genuine mining business

Lining up alongside OZ Minerals, PanAust is a copper, gold and sliver miner focussed on operations in Southeast Asia. The company's Phu Kham copper-gold mine in Laos started in 2008 and produces 60,000 tonnes of copper a year.

Morningstar senior equities analyst Gareth James says PanAust has several appealing traits, including a good track record of building mines within budget, as well as good operating cash flow and a good production growth outlook.

"They're a good company … they're very professional in the way they go about things," James says. As an example of the company's professionalism, James says PanAust releases quarterly updates that are "extremely detailed" and which contain "important" information.

This good disclosure, James says, is a little bit unusual among ASX-listed mid-cap miners.

"A lot of mid-cap mining companies kind of try and play games by managing the release of information to cover up the poor quality of underlying assets and poor progress," he says.

"And a lot of the mid-tier mining companies have got 'colourful characters' behind them … whereas with PanAust it's just a kind of genuine mining business, which is pretty rare.

"With PanAust, they have got a track record of doing what they say they are going to do - and doing it for a low cost as well."

Like OZ Minerals, PanAust is also in the middle of the cost curve, James says.

Another one of PanAust's positive characteristics, James says, is the fact its mines are simple, low-cost, open-cut operations.

"That's the thing with PanAust - it's all very simple and straightforward. And I think with most investments, the simpler they are, the better. There's less to go wrong," he says.

But a big problem with all mining companies, James says, is that they are very capital-intensive. So, even the "good ones" that have both strong and growing cash flow will often have to pump it back into the business.

And this can often mean that shareholders end up with nothing. And while PanAust may pay a dividend, James says this is a questionable exercise, given the company's investing cash flow is often greater than its operating cash flow.



Exciting exploration potential

So, which company is the more preferable ASX-listed copper exposure? That, of course, depends upon who an investor talks to and upon an investor's individual needs and individual circumstances.

In a recent note, analysts at brokerage CLSA said that despite a disappointing third-quarter result, its preference remains with PanAust over OZ Minerals.

"Our preference for PanAust reflects the company's superior production growth profile, with the company offering a 9 per cent five-year compound annual growth rate compared to basically zero for OZ Minerals," the analysts said.

Analysts at UBS also recently echoed their preference for PanAust.

"PanAust remains our preferred copper producer in the Australian resources sector as we believe it provides investors with leading production growth and exciting exploration potential from the Laos tenement package," they said.