OZ Minerals: On a strong footing for another big year

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
21 February 2022, 4:00 PM
Sectors Covered:
Junior (Emerging) Resources, Bulk Materials

  • The slightly larger dividend was a modest surprise among strong CY21 financials.
  • CY22 guidance maintained as OZ Minerals (ASX:OZL) manages lingering disruption/ challenges.
  • Rising execution risks (timing, capex escalation) may serve to temper the premium the market had built into OZL’s growth assets (Carra BC, WMP).
  • Our valuation adjusts to (login to view) target maintains a 5% premium for OZL’s quality versus peers.
  • Maintain Hold but note macro-inspired volatility has a history of uncovering buying opportunities.

CY21 Result snapshot

Typically solid overall and in-line to ahead of Factset consensus. Revenue pre released ($2.1bn), EBITDA was in-line ($1.16bn) and Op cash flow was ~5% ahead helped by a working capital release ($971m).

The 18cps final div was 2cps ahead reflecting a net cash position ($215m) and solid outlook.

Analysis

Unchanged guidance adds comfort. Covid absenteeism has slowed but is lingering. Record SA rainfall in late Jan saw freight (consumables in, concentrates out) heavily disrupted for 2-3 weeks. OZL’s confidence in still meeting guidance suggests in-built conservatism and/or good flex in the assets to catch-up.

OZL’s decarbonisation pathway was material new news. Decarbonisation of the SA power grid and already committed materials handling projects (conveying/ hoisting) explains the bulk of the reduction toward a 2030 net zero target (Scope 1+2).

$12m is committed by 2023 (opex, no change to capex) on battery powered mobile equipment trials in efforts to eliminate residual site diesel. The pathway can be looked at in various ways, but its articulation can only assist in retaining OZL’s ESG credentials ahead of its peers.

Capex and execution risk: OZL has committed ~$1.6bn to the Carra Block cave (4 yrs only) and $600m to PHOX (3 yrs). The 2020 PFS flagged pre-production capex of ~$1.1bn at WMP (ex power) and Carajas hub studies are ongoing. Carra capex has crept up with the market although PHOX pricing is largely locked in (4Q report).

Industry-driven risks to project execution/timing and capital escalation are rising, particularly at WMP where labour constraints risk its deliverability within OZL’s tolerances. (OZL moderating expectations here?).

Given these projects account for ~25% of our estimate of OZL’s asset value, capital escalation and/or delays placing incremental downward risks on project returns/valuations while industry pressure unfolds.

Forecast and valuation update

Only minor forecast changes mainly due to higher depreciation. Our DCF based valuation adjusts to (login to view) and our target applies a 5% premium to reflect OZL’s premium sector status (Reserves, margins, balance sheet, growth, management). 

Dividend outlook: We forecast a conservatively lower CY22 dividend (20cps) as a forecast CY22 Operating cash flow is consumed by higher growth capex at the Prom/Carra expansions. OZL looks capable of self-funding these programs, whereas WMP would require an additional debt funding piece.

Investment view

We’ve previously noted that OZL’s longer dated valuation upside (PHOX ramp-up 2025, Carra BC ramp-up 2024-29 and WMP) have at times looked baked in to the share price, leaving OZL vulnerable to disappointment.

The capex and execution risks building across the industry takes some shine off those growth options and we see incremental risk to their valuations in the absence of higher commodities prices. Maintain Hold, but note macro-inspired volatility has a history of uncovering buying opportunities.

Price catalysts

  • Copper price moves above/below our forecasts.
  • West Musgrave DFS/ Investment decision, Carajas Hub studies (2H22).

Risks

  • Production disruption at key assets, cost inflation, commodity/ FX volatility.

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