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
 
OZ Minerals Limited (ASX: OZL) is involved in the mining and processing of ore containing copper, gold, and silver; sales of concentrate; exploration activities; and the development of mining projects. Company’s profit in the first half of FY19 was impacted by lower revenue given the shipment timing aligned to first half market dynamics and additional growth investment. However, revenue in the second half year is expected to rebound strongly given the fact that all 2019 production tonnes are committed. From the analysis standpoint, the company's top-line and bottom-line have grown at a CAGR of ~7.7% and 46.3%, respectively, over the period of FY14-FY18. The company witnessed a decent performance in terms of top-line, margins along with healthy cash balance at the end of FY18. Going forward, considering the promising copper and gold outlook, the company is likely to improve its bottom-line performance in the upcoming years.
 
H1FY19 Key Highlights: The revenue for the first half of FY19 was reported at $419.2 million, which was $111.1 million lower than the comparative period, mainly due to certain customers preferencing concentrate sales to the second half of 2019 to align with smelter requirements. Contained copper and gold sold during the half-year were subsequently lower than the comparative period by around 11,400 tonnes and 4,300 ounces, respectively. The average copper price was 3% lower than the comparative period while the net gold price was in-line with the comparative period.
 
The net profit after tax for the half-year period was reported at $43.9 million, as compared to $127.8 million for the corresponding period of FY18, after several customers preferred the delivery of concentrate into the second half of 2019. This change in buyer’s behaviour can be attributed to the trade war between the USA and China, and higher scrap importation, maintenance, new smelter start-up issues and tighter credit for smelters. As at 30 June 2019, the company had a cash balance of 185.5 Mn. Moreover, Company's strong cash flows along with undrawn debt facilities of $300 million have enabled it to pay fully franked interim dividend of 8 cps and will continue to help it in executing its growth strategy in the coming times.
 

H1FY19 Underlying NPAT Data (Source: Company Reports)

Cash Flow Analysis: 

Operating cash flows: OZL’s operating cash flows for the half-year period was reported at $101.2 million, which was $53.3 million lower than the comparative period.  Customer receipts during the half-year were lower by $108.2 million due to the timing of concentrate sales. Payments to suppliers and employees were at a similar level as the comparative period due to the inclusion of the results from Antas in the half-year. Payments for exploration and evaluation increased by $24.7 million, reflecting an ongoing investment in the growth pipeline during the half-year. PAYG tax payments were substantially lower in the half-year due to the lower revenue base.
 
Investing cash flows: The net investing cash flows for the half-year period was reported at $354.7 million, majorly due to development costs at Carrapateena; general property, plant, equipment and mine development at Prominent Hill and Antas; and exploration costs associated with the West Musgrave project. The costs incurred under Capitalised Carrapateena mine development, Prominent Hill mine development, sustaining capital expenditure, Brazil and other capital expenditure and West Musgrave capitalised exploration and evaluation stood at $293.0 million, $36.2 million, $5.3 million, $5.2 million and $15.0 million, respectively.
 
Financing cash flows: The net financing cash outflows for the period comprised $48.4 million in dividend payments to shareholders and $18.7 million in payments to suppliers. Since the end of the half-year, the Board of Directors has resolved to pay an interim dividend of 8 cents per share with record date and payment date on September 3, 2019, and September 17, 2019, respectively.

H1FY19 Cash Flow Data (Source: Company Reports)

Balance Sheet Analysis:
 
The total equity of the company decreased by $25.4 million to $2,889.8 million, mainly due to the returns to shareholders in the form of dividends amounted to $48.4 million, a mark to market decline in the value of open gold derivative contracts of $18.8 million (net of tax), partially offset by NPAT for the half-year of $43.9 million. The cash balance at the end of the period was reported at $185.5 million, with undrawn debt facilities of $300.0 million, providing the liquidity and flexibility to execute its growth strategy. The reduction in the cash balance was a result of operating cash flows being offset by the ongoing investments in Carrapateena, West Musgrave, Property Plant and Equipment (‘PP&E’), as well as the payment of dividends. Inventories as on June 30, 2019, were reported at $671.7 million. Trade receivables increased due to the timing of shipments during June 2019.


H1FY19 Balance Sheet data (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 32.39% of the total shareholding. Dimensional Fund Advisors, L.P. and BlackRock Investment Management (UK) Ltd. hold maximum interest in the company at 6.59% and 6.51%, respectively.
 

Top 10 Shareholders (Source: Thomson Reuters)
 
A Quick Look at Key Metrics: Its EBITDA margin and net margin for FY18 stood at 40.0% and 19.9%, better than the industry median of 30.9% and 15.6%, respectively, which implies decent fundamentals for the company. Its current ratio for FY18 stood at 5.08x, better than the industry median of 1.71x, which implies that the company is in a better position to address its short-term obligations. Its debt to equity multiple for FY18 stood below the industry median of 0.13x.
 

 Key Metrics (Source: Thomson Reuters)
 
Key Risks: The company is susceptible to certain risks such as climate change (disruption in the mine production, logistics and water supply), operational risks (cost estimation accuracy which may affect project’s cost, efficiency and profitability), risks associated with the fluctuation of global commodity prices and exchange rates.
 
Advancement of Pre-Feasibility Study report on the West Musgrave Project: On August 28, 2019, OZ Minerals Limited and Cassini Resources provided a progress update on the West Musgrave Project Pre-feasibility Study. The Pre-feasibility Study is advancing on a base case assessment aligned with the Further Scoping Study conclusion of a 10 Mtpa copper-nickel open pit mine. The parties are using an innovative and inclusive process to develop West Musgrave as a modern mine that creates maximum value for their key stakeholders. The West Musgrave project is a joint venture between OZ Minerals (70%) and Cassini Resources (30%) (ASX: CZI) to develop the Nebo and Babel copper and nickel deposits in Western Australia; some 800 km west of Uluru, near the intersection of the borders between Western Australia, South Australia and the Northern Territory.
 
Under the collaborative process, the parties have identified several opportunities, including some significant innovations that will help improve the valuation of the project in one of the most remote areas of Australia. These include the use of a reduced site footprint via a Remote Operations Centre, the use of hybrid power solutions, potential to use innovative technology and a process flowsheet, which pilot testing has shown, could result in a significant reduction in power usage. In addition to focusing on the opportunities, the community engagement and regulatory approvals processes will continue in-parallel to secure all government approvals by Q2 2021. To complete these works, the OZ Minerals’ Board has approved an additional $10 million to complete the PFS.
 
What to expect: As per the release, the outlook for revenue is positive with 2019 production tonnes committed for the remainder of the year and smelter demand rebounding strongly in the second half of 2019. The underground production rates at Prominent Hill are expected to improve, and C1 costs are currently expected to finish the year at the lower end of guidance. At Prominent Hill, OZL will receive the full results of the gold ore trials and the haulage feasibility study, which supports potential future expansion.
 
Feasibility study work will continue at Pedra Branca in the Carajás. Near mine exploration will also continue at Antas as part of the processing hub strategy. Activities at CentroGold in the Gurupi Province will focus on permitting and village relocation planning with the feasibility study and further regional exploration to begin following the removal of the injunction.
 
FY19 Guidance: FY19 production guidance for Copper and Gold have been estimated at 103,000-115,500 tonnes and 122,200-135,600 ounces, respectively. The All-In Sustaining costs and C1 costs for FY19 have been estimated at US$125-135 per lb and US$77-88 per lb, respectively. The exploration cost for FY19 has been estimated at A$30-35 Mn. The site sustaining capital expenditure and growth capital expenditure (including mine development) for FY19 have been estimated at A$26-31.5 Mn and A$575-615 Mn, respectively.
 

FY19 Production Guidance Data (Source: Company Reports)


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodologies- 
Method 1: Price to Earnings (PE) Multiple Approach (NTM):

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

Method 2: Price to Cash Flows (PE) Multiple Approach (NTM):

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

Method 3: Enterprise Value to Sales (EV/Sales) Multiple Approach (NTM):

Enterprise Value to Sales (EV/Sales) 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: OZL’s share generated a positive YTD return of 3.36% and is trading below the average of 52 weeks high and low levels of $11.040 and $8.080, respectively. As per the technical analysis, on daily chart framework, the stock of OZL bounced from an important resistance level of $8.807, which increases the probability of buyer’s strength. Moreover, decent cash position, respectable margins, and positive outlook from the ongoing pre-feasibility study at West Musgrave Project, are expected to help the company in delivering sustainable value for its customers and shareholders in the coming times.

Looking at the business prospects over the long-term, we have valued the stock using three relative valuation methods, Price to Earnings (PE), Price to Cash Flows and Enterprise Value to Sales (EV/Sales) multiple and have arrived at a target price upside of high single-digit to low double-digit growth (in percentage term). Hence, in view of aforesaid parameters and current trading levels, we recommend a “Buy” rating on the stock at the current market price of $9.430 per share, up 5.717% on August 28, 2019.
 

 
 
OZL Daily Technical Chart (Source: Thomson Reuters)

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