OZ Minerals: Takeover defence mode

About the author:

Author name:

By Tom Sartor

Job title:

Senior Analyst

Date posted:

26 August 2022, 3:00 PM

Sectors Covered:

Junior (Emerging) Resources, Bulk Materials

• The in-line 1H22 result takes a back seat to OZ Minerals (ASX:OZL) launching into takeover defence mode.
• It’s hard to argue against the logic that OZL’s large, long-life Australian domiciled copper-nickel Resources hold significant medium-term value optionality.
• We believe that BHP’s $25ps indicative takeover materially undervalues OZL and that a higher offer looks more likely than not.
• An offer above ~$28ps would imply a ~30% control premium and would oblige OZL’s board to engage, in our view.
• Traders may consider trimming some profit, otherwise we think OZL is worth holding on for the ride.

1H22 result snapshot

Key 1H22 financials were mixed, but broadly in-line with our expectations.

Revenue of $909m was pre reported, EBITDA of $358m was 12% below (higher exploration and development), NPAT of $109m was 15% above (lower depreciation and Operating cash of $375m was in-line. The 8cps interim dividend was in-line with our forecast (8cps).

FY22 production and cost guidance (recently downgraded at the 2Q result) was maintained, although planned spending at WMP has accelerated.

Analysis

WMP pushing forward: OZL’s tone towards a positive WMP investment decision (still due by year end) dramatically improved with the 1H commentary. Higher guided CY22 project study spending (+$90m) largely reflects $60m in WMP spending for long lead items to keep to OZL’s development schedule.

Coupled with comments about reversals in some escalation trends/ pricing of key inputs, we’d be surprised if WMP wasn’t approved this year.

OZL ramps up its defence: We take OZL’s updated 54-slide “Strategy, Aspirations & Province potential” as read. Our valuation materially risks OZL’s brownfields expansions, and does not yet fully integrate the greenfields projects (particularly Gurupi).

Hence OZL’s aspirations to more than double production are significantly ahead of the market.

Strategic value/ upside: We think OZL can easily argue/ justify a higher takeover price linked to upside to a consensus LT copper price assumption of US$3.40/lb (Morgans: $3.50).

This in turn is linked to:

1. A scarcity of first-world sources of “green metals” including copper.
2. Demand upside risk (global decarbonisation.
3. Existing supply challenges (grades, orebody/labour issues).
4. Material threats to new supply (discovery, financing, jurisdictional risks, resource nationalism).

It’s also hard to argue against OZL’s point that large, long-life and Australian domiciled copper-nickel Resources hold significant medium term valuation optionality when weighed against the electrification thematic.

Forecast and valuation update

Minor EBITDA adjustments reflect the application of 1H22 actuals and higher guided capex, funding with higher assumed debt drawdown in the 2H.

We maintain that intact CY22 guidance now looks a significant challenge.

Investment view

The industrial logic (“future facing commodities”, SA synergies/ provincial play, WMP synergies) suggest to us that a higher offer from BHP is more likely than not. 

Our DCF valuation revises to (login to view) target applies a ~15% premium to balance the probabilities of another bid. OZL offers only ~14% upside to a revised offer at a 40% corporate premium, and ~25% downside to the pre-bid closing price.

Traders may therefore consider trimming some profit, otherwise we think OZL is worth holding on for the ride.

Price catalysts

M&A developments, directional copper price moves, West Musgrave FID (2H22), Prom Hill shaft study (2H22) Hub studies (2H22).

Risks

Production disruption (technical, absenteeism), industry cost inflation, commodity/ FX volatility, Macro slowdown.

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