Company Overview: OZ Minerals Limited is a mining company with a focus on copper. The Company's principal activities are the mining of copper, gold and silver, carrying out exploration activities and development of mining projects. The Company's segments are Prominent Hill, which is engaged in mining copper, gold and silver from Prominent Hill Mine, a combined open pit and underground mine located in the Gawler Craton of South Australia; Carrapateena, which is engaged in exploration and evaluation activities associated with Carrapateena project located in South Australia; Exploration & Development, which is engaged in exploration and evaluation activities associated with other projects and includes interests in Jamaica and Chile, and joint ventures with Minotaur Exploration and Toro Energy Ltd., and Corporate Development activities, and Corporate, which is engaged in other corporate activities, including Consolidated Entity's Group Office, other investments in equity securities and cash balances.
 

OZL Details

OZL Entered to Spend upto $10 Mn on Investigator Resources’ Maslin Project: OZ Minerals Limited (ASX: OZL) has an engagement in the mining and processing of ore containing copper, gold, and silver; sales of concentrate; exploration activities; and the development of mining projects. On July 15, 2019, the company announced that it would spend upto $10 Mn on Investigator Resources’ Maslins Iron Oxide Copper-Gold(IOCG) project. The project comprises three-stage exploration program over the five years, whereby OZ Minerals Limited may earn up to 70% of Maslins Iron Oxide Copper-Gold Project. This project is expected to be a key opportunity for the company to explore the significant potential of IOCG target in its hunt for future copper resources in the State.

Its multiple projects are operational, under construction, study phase, and exploration phase. The projects under operation are Prominent Hill Province in Australia and Carajás Province (Antas) in Brazil. The projects which are under construction are at Carrapateena Province in Australia. The projects which are under study phase are Musgrave Province in Australia, Gurupi Province (CentroGold) in Brazil and Carajás Province (Pedra Branca) in Brazil. The projects which are under exploration phase are Yarrie, Nullarbor, Coompana, Eloise and Lawn Hill in Australia; Oaxaca in Mexico; Paraiso in Peru; and Carajás Province (Pantera) in Brazil. On the financial front, the company has achieved a decent growth path from FY14 top-line of $831.0 million to $1,117.0 Mn in FY18, posting a CAGR growth of 7.7% over FY14-FY18. Bottom-line also improved from $48.5 Mn in FY14 to $222.4 Mn in FY18, witnessing a significant CAGR growth of 46.3% over the period of FY14-FY18. The company’s decent top-line and bottom-line growth, strong cash balance, nil debt along with bright copper and gold outlook are expected to act as a tailwind for long-term growth.
 

Projects Overview (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 33.02% of the total shareholding. BlackRock Investment Management (UK) Ltd. and Dimensional Fund Advisors, L.P. hold maximum interest in the company at 7.30% and 6.59%, respectively. 


Top 10 Shareholders (Source: Thomson Reuters)

Key Risks: OZL’s business is susceptible to various risks and uncertainties that can be financial, political, operational, and environmental. These challenges include:

♦ One Operating Asset- The important challenge is operating only one material operating asset (Prominent Hill Province), which exposes the consolidated entity to concentration risks.
♦ Climate Change - Extreme Weather/Climate Change may disrupt the mine production, logistics, and water supply.
♦ Operational Risks- It involve risks, which are related to scope definition, cost estimation accuracy, and other external factors which present threats and opportunities to a project’s cost, efficiency, and profitability.
♦ Correct Estimation of Reserves and Resources,which involves the application of significant judgment and no assurance of mineral recovery levels or the commercial viability of deposits can be provided.
♦ Risks associated with the fluctuation of global commodity prices and exchange rates.

Key Ratios: Its EBITDA margin and net margin for FY18 stood at 40.0% and 19.9%, which are better than the industry median of 30.2% and 14.8% respectively, indicating decent fundamentals of the company. Its current ratio for FY18 stood at 5.08x, which is better than the industry median of 1.70x, implying a better liquidity position of the company to address its short-term obligations than its peer group. Its Return on Invested Capital for FY18 stood at 7.6%.

Key Ratios (Source: Thomson Reuters)

Q1FY19 Financial Highlights: Total production for Copper and Gold for Q1FY19 stood at 27,442 tonnes and 34,648 oz, respectively. The C1 Cash Costs and All-in-Sustaining Costs for Q1FY19 stood at 60.7 US cents/lb and 103.9 US cents/lb, respectively.


Q1FY19 Production Metrics (Source: Company Reports)

Important project and Working Capital Information: The following information is important for investors:
 

♦ Carrapateena development reaches first ore; project on schedule for Q4 commissioning.
♦ West Musgrave resource update improves confidence in Nebo-Babel; OZ Minerals moves to 70% ownership.
♦ Planning commences across multi-site exploration alliance entered with Red Metal Limited.
♦ Prominent Hill is on track for guidance; explorer challenge generates global interest.
♦ Carajás and Gurupi province drilling and studies continue with updates scheduled for Q2.
♦ Cash balance remains strong at $342 millionafter $116 million investment into Carrapateena and $48 million dividends.
 

Q1 Working Capital Movement (Source: Company Reports)

Working capital increased by $50 million as a result of:
 

♦ Increased trade receivables of $49 million (timing of shipments late in Q1)
♦ Increased concentrate inventory of $30 million (concentrate to be shipped in Q2)
♦ Decreased trade payables of $10 million (timing of payments)
♦ Decreased ore inventory of $39 million (stockpile processing)

The cash balance will continue to reduce through 2019 with ongoing growth capital expenditure, primarily in relation to the Carrapateena project. Ore inventory will also continue to deplete as open pit stockpiles supplement underground ore feed, maintaining the plant at full capacity to mid-2023.
 

FY18 Production & Financial Highlights: Revenue for the period was reported at $93.9 Mn, which is higher than the prior year. It was majorly driven by higher commodity prices, consistent production from Prominent Hill, and revenue from Antas. The amount of contained copper sold (114,722 tonnes) was 2% higher than in 2017, while gold sales of 131,929 oz were comparable to 2017 sales. 


FY18 Income Statement (Source: Company Reports)

As per realisation costs, treatment charges and refining costs were $13 Mn lower as a result of improved trading terms and lower refining charges in the market. The production costs in 2018 stood at $57.2 Mn, which is higher than the prior year, with the inclusion of Antas in the second half of the year, an increased proportion of underground ore and higher power costs at the Prominent Hill. Mining costs, including inventory movement and net realisable value adjustments were $30.5 Mn, which is higher than the prior year. 

What to expect: As per the release, FY19 production guidance for the copper and gold are estimated to be 97kt-109kt and 118koz-131koz, respectively. C1 Cash Costs have been estimated at US 65c–75c/lb, and All-In Sustaining Costs have been estimated at US 110c–120c/lb. The guidance excludes production for Antas, which will be released in Q2 2019 upon completion of the Mineral Resource and Ore Reserve update and revised mine plan.


FY 2019 Guidance (Source: Company Reports)

Its Brazil Project comprises important development projects at Carajás and Gurupi provinces. The Carajás province comprise Antas mine, Pedra Branca and Pantera development projects, and the Gurupi Province comprise CentroGold development project.

The Brazil project will involve a nine-month review and drilling program. It will include, (1) Resource infill and extensional drilling at Antas, Pedra Branca and CentroGold, (2) Internal and external reviews of all Mineral Resource estimates, (3) Revised estimates of Antas and Pedra Branca Mineral Resources, restated CentroGold estimate at a lower cut off (CentroGold update expected Q4 2019), (4) Project optimisation for CentroGold PFS, Pedra Branca FS and the Antas operational mine plan with a focus on cost reduction, (5) Compilation of all disparate exploration data into a single data warehouse.


Brazil Project Timeline (Source: Company Reports)

Copper Outlook: On the daily technical chart, Copper Future price (MCU/USD) recently bounced from its strong support level at ~US$5,742.50. On July 17, 2019, it was trading at around US$5,970.50, which is a ~4% rise from its 52 weeks low level of ~US$5,727.0. On July 8, 2019, the copper price retraced at 78.6% of the Fibonacci level, and therefore, probability for the price upward movement increases.

Gold Outlook: On the weekly technical chart, Gold Spot (XAU/USD) broke an important resistance level at around US$1,366.73, therefore, the probability for gold price upward movement increases. Moreover, rising geo-political tensions and interest rate cut expectations by US Fed chief is boosting investor sentiments towards Gold investments.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology 1: PE Multiple Approach (NTM):

PE Multiple Approach (Source: Thomson Reuters), *NTM-Next Twelve Months

Valuation Methodology 2: Price/Cash Flow Multiple Approach (NTM):

Price/Cash Flow Multiple Approach (Source: Thomson Reuters), *NTM-Next Twelve Months

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Stock Recommendation: OZ Minerals Limited’s share delivered a decent return of 7.68% in the span of the previous six months while, on the YTD basis, the returns stood at 12.17%. In FY19 guidance, the total copper and gold production levels are estimated to be 97kt-109kt and 118koz-131koz, respectively, which equate to the four times production of the current quarter. Moreover, the outlook for both the metals (Copper and Gold) looks bright, which is expected to help the company in delivering sustainable value to its shareholders in the coming years. Given the backdrop of a strong balance sheet, and decent top-line and bottom-line growth over the past five years, the company’s future earnings look promising. Considering the aforesaid facts and decent outlook, we have valued the stock using two Relative valuation methods, PE and Price to Cash Flow multiple, and arrived at target price in the lower double-digit upside (in %). Hence, we give a “Buy” recommendation on the stock at the current market price of $9.870 per share (up 1.963% on July 17, 2019).

 
OZL Daily Chart (Source: Thomson Reuters)

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