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Price Target: $3.00/sh
Reason For Update:
Quarterly Update & Revision to Forecasts
Comment:
Quarterly Update
Jun H’08 group earnings guidance has been revised up from “minimum $80m NPAT” to “minimum $85m NPAT”. June Q’08 Bootu Ck Mn ore production was weaker at 163kt v’s 183kt in the Mar Q’08. The lower result was due to several small isolated issues which should not impact the outlook. The previous Q was itself a very strong result. OMH maintains the production guidance of 700kt for the full year. Cash costs are in line with expection. The plant upgrade to process the lump reject material has commenced. This should deliver an additional 10% to the current production level at a capex cost of $13m. We had already factored this into our forecasts. Exploration was a real highlight. The Masai, Tourag SE, Fold Nose and Xhosa zones have recorded mineable Mn intersections consistently over much of the strike extent of the prospective zones. We believe that OMH is well on the way to defining an additional 10mt of mineable resource required to justify an expansion of the current processing facility. OMH is spending $10m on exploration during the current field season. Qinzhou Ferro Alloy smelter in SE China achieved record quarterly production of 17.0kt HCFeMn. This is coincident with record product prices and escalating power prices. We anticipate Qinzhou will contribute meaningfully to the June H earnings. A Mn ore sinter plant is currently being investigated as a growth opportunity. Testwork results due for completion in Sep’08. Trading operations have enjoyed “….. outstanding trading and financial results for the June Q”. This is driven by volumes comparable with the previous Q and product prices reaching new record levels. The Hong Kong listing process is due for completion in mid August. Peter Toth (former BHP carbon steel materials marketing executive) will commence as joint CEO from 3rd Sep based in Singapore.
Revision to Euroz Forecasts
June H’08 forecast group earnings have been revised up to $86m from $80m, consistent with company guidance. Dec H’08 forecast group earnings are upgraded to $103m from $88m previously. CY2009 forecast group earnings have been upgraded to $213m from $192m previously. Driving these upgrades are: 1. Upgraded assumed Mn ore prices by $0.50-$1.00/dmtu across the curve, consistent with higher contract prices recently. OMH suggests benchmark Lump 44% Mn CIF for Sep Q is US$16.20/dmtu. Our forecasts are based on this price trending to a LT assumption of US$9.00/dmtu from 2012 onwards.
2. Strong Mn ferroalloy prices, and on budget Qinzhou production should lead to more meaningful financial results.
NPV based valuation been upgraded to $2.57/sh, from $2.12/sh previously. The valuation recognizes impending dilution from the HK listing and new issues of options. We have assumed 10% issue of new equity at $2.50/sh raising $112m net from the HK listing. We have assumed an existing equity selldown will satisfy the balance required by the HKSE rules for 15% of issued capital. We have also assumed dilution for option issues proposed but not yet approved by shareholders. A Bootu Ck expansion to roughly double production at a capex cost of A$100m would add roughly $0.35/sh to the NPV. The NPV increment will grow as the timeframe for the expansion draws nearer. More importantly EPS would grow by 50% above our base case scenario to $0.48/sh in 2010 (assumed 1st full year). We have not yet included any value for an expansion in our model. The divisional split of our changes to forecasts is shown in the following table.
Investment Case:
The manganese market continues to look very robust although spot ore and alloy prices have steadied in the last 1 – 2 months, after the spectacular gains of the year prior.
A logistics infrastructure constraint on most other high grade producers globally (Gabon, Sth Africa, Brazil, Aust?) leaves Bootu Ck with enviable upside in production capacity. The supply side continues to remain tight and demand is driven by growth in global steel production. Manganese does not have any significant substitute. The proportional cost of manganese in steel production remains small at roughly 3-4% despite the price rises, compared with coking coal and iron ore at 25-30% each.
OMH remains as the largest (by production volume) listed producer of high grade Manganese ore globally.
The Bootu Ck asset is still far from mature as indicated by the solid exploration results achieved during the June Q and potential for expansion. In addition to the near mine prospects, other prospects at the nearby Renner Springs and Helen Springs also offer unexplored blue sky upside.
OMH remains cheap in the context of our NPV valuation of $2.57/sh, and against a PER of 7.0x current year. Our price target of $3.00/sh remains in tact and is supported by 13% earnings growth forecast into 2009 and the potential for expansion which should become clearer during the Dec H’08. An expansion would see OMH priced at a PER of 4.5x 2010 earnings based on the current share price. This suggests there is still potential for the share price to nearly double should the upside come to fruition.
Uncertainty exists in the short term as to the size and price of new equity to be issued under the HK listing. Once this is dealt with during the next month we expect the fundamentals will again come to the fore.
We estimate that OMH might end the year with roughly $250m in net cash. It has signalled an intention to assess acquisition and/or corporate opportunities. Perhaps Peter Toth may take a more aggressive line on acquisitions than existing management has done over recent history.
OMH Price at posting:
0.0¢ Sentiment: None Disclosure: Held
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