Company Overview: OZ Minerals Limited (ASX: OZL) is an Australia-based mining company with a focus on copper. The company’s operations include Prominent Hill, Carrapateena, West Musgrave, Antas, Pedra Brance and CentroGold. Prominent Hill 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 is engaged in exploration and evaluation activities associated with Carrapateena project located in South Australia. West Musgrave project is located in the Musgrave Province of Western Australia and includes the Nebo-Babel nickel-copper and Succoth copper deposits. Antas is a high-grade open pit copper-gold mine located in the Carajas, Brazil.


OZL Details
 


Carrapateena Mine Reports First Saleable Concentrate in December’19: OZ Minerals Limited (ASX: OZL) is involved in the mining and processing of ore containing copper, gold and silver; sales of concentrate; undertaking exploration activities and the development of mining projects. Its strategic assets include Prominent Hill, Carrapateena and Carajás sites. The Prominent Hill mine is located in the Gawler Craton of South Australia, and it generates revenue from the sale of concentrate containing copper, gold and silver to customers in Asia, Europe and Australia. The Carrapateena mine located in the Gawler Craton of South Australia was constructed during the year and produced  first saleable concentrate in December 2019. The Carajás hub in Brazil comprises Pedra Branca Mine and generates revenue from the sale of concentrate containing copper and gold to customers in Europe and Asia.

Investment Rationale:
Positive Development at OZL’s mines: Carrapateena produces first saleable concentrate; optimised design de-risks mine and shortens expected ramp-up to 12 months; targeting 4.7-5.0Mtpa throughput rates from 2023. Prominent Hill mine life extended to at least 2031 with Proved underground Ore Reserves increasing to 77% of underground reserves; expansion studies considering production scenarios ranging up to 8Mtpa. West Musgrave Pre-Feasibility study demonstrated low carbon, long life, lowcost mine with robust economics. Carajás Hub strategy is progressing well, where decline development underway at Pedra Branca and Vale agreements have been established.

Decent Past Financial Performance: Looking at the past performance over FY15 to FY19, total revenue and net income of the company have grown with a CAGR (compounded annual growth rate) of 5.92% each. Group’s total revenue improved from $879.4 Mn in FY15 to $1107.0 Mn in FY19, and net income improved from $130.2 Mn in FY15 to $163.9 Mn in FY19. 

The company registered strong financial performance for FY19 over reliable and consistent operation of Prominent Hill, creating a solid foundation to progress its growth strategy and bring on new assets in Carrapateena and the Carajás during 2020. The Prominent Hill exceeded copper production guidance for the fifth consecutive year. At the end of 2019, newly build Carrapateena produced the first saleable concentrate, enabling the company to post a net profit after tax of $164 million on net revenue of $1,107 million. Its operating cash flow stood strong at $511 million, leading to cash balance of $134 million at the end of the year. The company is well-positioned to advance its quality growth pipeline during 2020 while its new assets ramp up to full production.


OZL Operational Overview (Source: Company Reports)

FY19 Key Highlights for the period ended December 31, 2019:Gross revenue for the period was reported at $1,174 million, lower than the previous year by $17 million, mainly due to lower copper sales largely offset by the higher Australian dollar realised copper and gold prices. The revenue includes realised losses on gold hedges of amount $24 million, associated with the prior establishment of stockpiles.

Underlying EBITDA for the period was reported at $462 million, at a robust margin of 42% resulting from consistent strong operating performance at Prominent Hill, delivering segment EBITDA of $587 million. Expensed investment increased by $27 million (on prior year) to $94 million into the wider growth pipeline and expansion evaluations. Net profit after tax (NPAT) for the period was lower than 2018 at $164 million, mainly because of lower copper sales as Prominent Hill transitions from its higher copper grade open pit stockpiles. Moreover, realised losses on gold hedges and increased corporate costs on higher insurance and restructuring costs and a full year amortisation charge relating to intellectual property technology, also impacted NPAT by the amount of $24 million.

Operating cash flows for the period improved by 14% (on prior year) to $511 million, primarily due to lower tax payments following OZL’s transition to progressive installments in 2018 and the reclassification of certain payments as financing cashflows under AASB 16 Leases.


FY19 Key Metrics (Source: Company Reports)

Recent Updates:

OZL Achieves Nameplate Milling Rate at Carrapateena: On March 4, 2020, the company’s new Carrapateena mine achieved nameplate mill throughput rate, with stable operational periods at 500t/hr and in excess of 90% runtime achieved for 24-hour periods. Moreover, flotation recovery for many shifts has already exceeded 90%, with concentrate grades in excess of 40% copper.

Cloncurry Alliance Establishes JV with SFR: Minotaur Exploration and OZL’s Cloncurry Alliance came into a joint venture with Sandfire Resources Ltd (ASX: SFR) over an extensive Sandfire tenement group near Cloncurry, Queensland. This new ‘Breena Plains Joint Venture’ with SFR requires the Alliance to invest $1 million in exploration in the first year. It emphasizes over hub concept and incorporates some 1226 square kilometer of tenure immediately surrounding the existing JV assets, prospective for Cannington style and Eloise style polymetallic base metals mineral systems. The Alliance is expected to earn an initial 51% tenement interest by sole funding a further $3 million through the next 2-year period, later on earn an additional 24% interest for the further expenditure of $4 million over the subsequent 2 years.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 33.69% of the total shareholding. Dimensional Fund Advisors, L.P. and BlackRock Investment Management (UK) Ltd. hold maximum interest in the company at 6.58% and 5.17%, respectively.


Top 10 Shareholders (Source: Thomson Reuters)

A Quick Look at Key Metrics: Its EBITDA margin and net margin for FY19 stood at 31.4% and 14.8%, better than the industry median of 29.1% and 10.8%, respectively, which implies decent fundamentals for the company. Its debt to equity multiple for FY19 stood at 0.06x, 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.

What to expect: As per the release, the positive development at OZL’s new Carrapateena mine is expected to help the company to enhance its production in the coming times. The mine establishment is expected to further improve with the larger sub-level cave footprint and optimised mine design, enabling a faster 12-month ramp-up to the 4.25 Mtpa run rate by end-2020 and increase throughput rates to target 4.7–5.0 Mtpa from 2023.

The processing plant will continue to be optimized through H1FY20, and along with mine production ramp-up, it is expected to drive progressively higher throughput and concentrate production during H2FY20.


OZL’s Multiple Projects Timeline (Source: Company Reports)

FY20 Guidance: Prominent Hill production highlights prioritising regular grade gold stockpiles in place of the lowgrade copper stockpiles from the initial period of 2020, leading to substantial uplift in gold production offsetting lower copper grades. Carrapateena is in ramp up phase, and gradual throughput and recovery increase, expected to lift output in the second half of 2020. Estimate cost involved in Mine development (~+$80 million), FSU items - crusher 1 completion and sundry infrastructure (~+$20 million), Value acceleration capital (~+$45 million) and Project finalisation costs (~+$30 million), led to increase in 2020 capital expenditure guidance.


FY20 Guidance Data (Source: Company Reports)


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

EV/Sales Multiple Based Valuation (Source: Thomson Reuters)

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

Technical Analysis:

Monthly Chart:


(Source: Thomson Reuters)

Weekly Chart:

(Source: Thomson Reuters)

On both the charts, the stock is trading close to strong support levels. It is close to a trending support on monthly chart, whereas it is on horizontal support on weekly chart. Stochastic Oscillator on weekly chart states that the stock is in oversold zone, indicating challenge to the bearish momentum supported by a weekly bull candle formation. The pull-back possibility here can not be ignored and therefore investors are advised to build long position judiciously and book profit on the rises.

Note: EMA – Exponential Moving Average

Stock Recommendation: The company is ramping up production at Carrapateena, which is expected to help it in increasing its production in the coming times. Its strong operating cash position and balance sheet, along with project pipeline enabled the board to declare a final fully franked dividend of 15 cents per share in-line with the policy of prioritising a sustainable ordinary dividend. Moreover, Pre-Feasibility Study for the West Musgrave copper-nickel project has demonstrated a lucrative NPV and IRR. Considering the aforesaid facts, business operation, FY19 results, margins, outlook provided and current trading levels, we have valued the stock using an EV/Sales Multiple based relative valuation method and arrived at a target price of lower double-digit growth (in % terms). Hence, we give a “Buy” recommendation on the stock at the current market price of $6.980, up 7.883% on March 25, 2020.

 
OZL Daily Technical Chart (Source: Thomson Reuters)

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