Company Overview - OZ Minerals Limited (OZ Minerals) is an Australia-based modern mining company with a focus on copper. OZ Minerals owns the Prominent Hill copper-gold mine and Carrapateena copper-gold project, both situated in South Australia. The principal activities of the Company are mining of copper, gold and silver, carrying out exploration activities and development of mining projects. The Company operates the Prominent Hill Mine, a copper-gold mine located in the Gawler Craton of South Australia. The Prominent Hill Mine generates revenue from the sale of concentrate products containing copper, gold and silver to customers in Asia and Europe. Prominent Hill is comprised of the Malu open pit mine and the Ankata underground mine. The Carrapateena copper-gold project is an undeveloped copper deposit. The exploration and development activities are mainly in South Australia and include the Carrapateena project. Other activities include investment in Toro.

Analysis - OZ Minerals Limited (ASX: OZL)has announced its quarterly results for the first quarter of 2015. A strong start to the year 2015 was reported with copper production of 31,160 tonnes and gold production of 32,874 ounces. Open pit mining costs of $5.77/t were incurred with one excavator and 12 trucks demobilised in January and C1 unit costs were reduced to US63.2 c/lb. The company announced guidance for copper production of 110,000 to 120,000 tonnes and gold production of 100,000 to 110,000 ounces for the year 2015.
 

The company also announced the completion of the strategic review which was started in December 2014. The new strategy will be underpinned by reliable and optimal production from Prominent Hill. The outcomes for the first quarter include the sale of the Sandfire stake for gross sale proceeds of $125 million, following the revised equity strategy formulated by the company. It has also decided to relocate the functions of the corporate office to Adelaide for cost reduction, better accountabilities, and close alignment with the current scope of business and opportunities in SA. Value optimisation studies started at Carrapateena including Hydromet, rail and actions taken included suspension of the sale process, suspension of Fremantle Doctor drilling, and clarification regarding the way forward.


The quarterly results demonstrate that the company has a strong platform on which to build. The quarterly copper production of 31,150 tonnes represents the highest quarterly production since the first quarter of 2010. The gold production was slightly lower than the previous quarter but this was because of the value maximisation by giving priority to copper ore. Underground mining at Ankata and Malu were as planned and the focus in 2015 will be on the improvement of development rates. Sales were lower than production because of timing by which March shipments have been made in April. Open pit costs rose from the fourth quarter due to demobilisation charges and lower tonnage though this was partly offset by the lower prices of diesel. Lower C1 costs are due to the higher copper production and the falling value of the AUD against the USD.



First Quarter Results (Source - Company Reports)


The guidance for 2015 shows a business that has become leaner and therefore much more agile. The accelerating plan for mining pushes copper production forward while reducing mine volumes results in the earlier release of cash flow. Mining unit costs are influenced significantly by fixed costs and do not change with volumes.C1 costs will continue to benefit from higher copper production and the continuing weakness of the AUD against the USD. Malu Underground capital expenditure will be lower than the previous estimate because drilling has been deferred and development rates reduced. Studies are being conducted to reduce risk and unlock value at Carapateena and exploration will focus on drilling at the Jamaican prospects which are potentially highly promising.


2015 Production and Costs (Source - Company Reports)

Company Managing Director and CEO Andrew Cole announced the Company’s new strategy following the completion of a three-month review of the whole of the business. The new strategy focused on value creation will emphasise safety, integrity and strong governance and disciplined deployment and use of capital. The focus will be on creating a lean business to suit the requirements of today with an agile and flexible approach to opportunities that arise, customer focus to become the preferred supplier to customers, to create a core foundation built on copper but making the most of opportunities arising in base metals and gold and building and operating a portfolio of assets which are risk managed to produce value.



 The company believes that safety performance in 2014 was not acceptable and comparison with its peers shows that there is room for improvement. There will be a programme of action implemented with the objective of creating a workplace with zero harm to employees. The commitment to strong values and governance will continue and the company will act in a manner that is both transparent and ethical. Engagement with stakeholders will be increased and local win-win situations will be sought with the help of local employment, local business development and local partnership. Capital will be deployed in the manner designed to deliver maximum value and growth options both internal and external must compete for resources against distribution to shareholders.


Uses of Capital (Source - Company Reports)

When it comes to strategy execution, the company has developed clear and realistic plans to grow in a disciplined fashion while adding value. Prominent Hill is expected to be the engine room for growth because the reliable and significant cash flows that it is expected to deliver will finance the development of a diversified portfolio of operations. Progress has already been made towards a leaner business by realising cost savings of $48 million (including $ 8 million from favourable market conditions) by relocating the corporate office and simplifying the structure, restructuring and trimming Prominent Hill and savings from drilling and exploration activities.


The plan for accelerated open pit mining involves accelerated rates of mining through the middle of 2017 when the fleet will be switched over to the smaller mining fleet. The open pit mine life is currently estimated as 2018 but cash will continue to be generated from stockpiles beyond this date. Open pit mining performance has improved significantly with the deployment of two excavators and 32 trucks with an availability in excess of 70%. The first ore from Malu UG was delivered according to schedule in Q4 of 2014 and the business case has been reconfirmed to prove that incremental value will be added to Prominent Hill. The long-term guidance has been involved from the strategy and copper ore will be milled on a priority basis with high-grade UP ore first and then OP ore. Copper production is expected to remain above 105,000 tonnes until 2018 and gold production is expected to be above 100,000 ounces until the same year.Ankata, Malu UG and open pit gold mining will facilitate production from 2020 and beyond.


Production Numbers (Source - Company Reports)

You will recall that the highlights of the company’s results for FY 2014 showed a welcome return to profits with the key commitments having been achieved or even exceeded. Revenues were $ 831 million, the underlying EBITDA was $341.1 million, underlying NPAT $30.3 million and statutory NPAT $48.5 million. The balance sheet continues to be strong with no debt and cash and equivalents of $ 218.5 million as well as an undrawn debt facility of $ 200 million. Higher production was effectively converted into higher sales resulting in a 29% increase in revenue.


The company succeeded in meeting or exceeding all of its production targets, as it returned to a copper production rate of 100,000 tonnes per annum and exceeded market guidance for copper production, gold production and costs. Ore production commenced on schedule at the new Malu Underground mine and very encouraging drill results were achieved at Khamsin and Fremantle Doctor. These results, along with the results of the pre-feasibility study for the Carrapateena project demonstrating a project net present value of $1.1 billion have been characterised by the company as a solid foundation going forward.



OZL Daily Chart (Source - Thomson Reuters)

We endorse the company's stand that the current period in the commodity cycle is a good time to selectively seek acquisitions. Copper is the core of the company which has a large resource portfolio in the metal but diversification in the form of other commodities assets would provide an element of de-risking. Moreover, the broadening of the horizons would open up opportunities which were previously excluded in terms of preventing the company from considering deposits which, in addition to copper, contain other metals such as lead, silver and zinc. The approach to a leaner business is evident in the new flat corporate structure whereas the commitment to add value to investors is reflected in the new commitment to reward shareholders with 20% of net cash generation not required for fresh investment activity. The new strategy does not really contain many surprises and much will depend on efficient execution. Moreover, the base metal strategy makes eminent sense to us since the processing process is similar to that of copper.


Despite the reduction in copper prices over the past few years, we believe that the new strategy is going to pay off and that the company has undoubted growth prospects. Consequently, weput a BUY recommendation on the stock at the current price of $4.71.
 
 

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