Category: Financial Markets

Business Strategy and Outlook

Oz Minerals is a midtier Australian miner, primarily exposed to copper and, to a lesser extent, gold. Prominent Hill and Carrapateena mine is fully owned by Oz Minerals Ltd.

Expected fiscal 2021 annual production at Prominent Hill of less than 70,000 tonnes of copper and 120,000 ounces of gold is globally small-scale. Barring a significant new discovery, life at Prominent Hill is likely to extend only incrementally with exploration. Cash costs have consistently been at competitive levels below USD 1.00 per pound since 2015, below the industry average. Prominent Hill output is likely to fall as the company processes stockpiles where grades are set to decline and eventually as those stockpiles exhaust around 2023-24. Regional exploration acreage around Prominent Hill is extensive and the company has focused on near mine areas with some success.

The Carrapateena mine, also in South Australia, produces about 70,000 tonnes of copper a year and is likely to expand to just over 110,000 a year from around 2028. Carrapateena comes with an approximate 20 year reserve life and a similar competitive position to Prominent Hill. 

Oz Minerals has targeted acquisition of advanced-stage exploration plays, development projects, or operatingmines. The company has built an encouraging pipeline of projects. Management developed Carrapateena to deliver a vastly more attractive project than initially planned. The acquisition of Brazil-based Avanco is a modest addition. Longer-term output hinges on successful acquisitions and/or exploration and development.

Higher Copper Price and Futures a Tailwind for Oz Minerals, but Shares Remain Overvalued

The fair value estimate as per Morningstar analyst remains at AUD 16.60 and the current near-record high copper price means the shares remain substantially overvalued.

We expect Oz Minerals to continue to benefit from near term strength in copper prices. This augments an already strong balance sheet with net cash. It is expected that copper prices will remain elevated at an average of USD 3.70 per pound to the end of 2024 and  prices to wane longer-term to USD 2.50 per pound from 2025 as the strong economic growth and post COVID-19 stimulus abate.

Financial Strength 

The balance sheet is sound with modest net cash at the end of March 2021. Single-commodity miners should have a conservative balance sheet and is considered as appropriate as per the viewpoint of Morningstar analyst. Longer-term, Oz Minerals could again start to generate significant excess cash flow, though if the company decides to push ahead with some of the potential development projects it has, this cash could largely be put to work and the firm could carry modest net debt at some points through our 10-year forecast period. The company is likely to further invest in Carrapateena, potentially develop the West Musgrave nickel/copper mine and some of the copper/gold assets acquired with Avanco Resources, as well to build and advance the company’s project pipeline. If an acquisition is made, the balance sheet might temporarily be more highly geared, but it seems unlikely Oz Minerals would buy a large new mine while it has so many internal development options.

Bulls Say 

• Oz Minerals brings leverage to copper, a key metal for the emerging economies of China and India. 
• Carrapateena extends Oz Minerals’ production of copper at a low operating cost. Successful development increases the likelihood nearby deposits could become economically viable. 
• Oz Minerals holds significant exploration acreage around Prominent Hill and Carrapateena, with potential for life extensions and new discoveries. Management has done a creditable job of building a large and diverse pipeline of development options at different stages of maturity.

Company Profile

Oz Minerals is a midtier copper/gold producer. Prominent Hill produced about 100,000 tonnes of copper in 2020 with cash costs well below the industry average. The mine is a very small contributor to total global refined output of about 24 million tonnes in 2020. Finite reserves are a challenge, but management has extended life at Prominent Hill, albeit at a lower production rate. Life extension comes with development of the nearby Carrapateena mine, which started in 2020. Carrapateena should initially ramp up to produce at about 70,000 tonnes a year before expanding to just over 110,000 a year from around 2028. The acquisition of Brazil-based Avanco Resources adds volumes but the scale is smaller than the Australian assets, costs are higher and growth is likely to be incremental.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.