OZ Minerals: Beginning of the end-game

Author name:: By Tom Sartor
Job title:: Senior Analyst
Date posted:: 22 November 2022, 7:30 AM
Sectors Covered:: Junior (Emerging) Resources, Bulk Materials

We think BHP’s revised takeover offer has a high likelihood of proceeding.
In our view OZ Minerals (ASX:OZL) will likely trade at a discount to the $28.25ps bid price to reflect: 1) low likelihood of a higher competing offer; and 2) significant time to implementation/ time value of money.
Investors may consider alternative opportunities in ASX-listed copper (SFR) or base metals (S32).

Event

Revised, $28.25ps cash takeover offer from BHP.

Analysis

Co-operating towards a deal: BHP’s $28.25ps offer is conditional on: 1) satisfactory DD, 2) entry into a scheme implementation, and 3) OZL board approval.

BHP has been granted 4 weeks exclusive DD, while OZL has agreed to work co-operatively towards entry into a scheme and intends to recommend the proposal (in the absence of a superior offer), and subject to the Independent Expert’s report.

There is no certainty of completion, however co-operation on both sides leads us to think the transaction is likely to proceed.

Price now in the right ballpark: The industrial logic behind this deal remains unchanged (SA provincial play, BHP copper-nickel exposure).

The revised offer is at a 27% premium to our OZL NPV, which isn’t stunning, although we do note some large moving parts in our valuation, including how much to risk-weight the large development projects (Carra block cave, WMP) given execution is looking increasingly challenging, which suggests downside to market valuations in the absence of copper price movement.

We think it is therefore prudent for OZL to co-operatively engage with BHP, with the price/ value offered now easily defendable by both parties. I.e. BHP’s offer looks like a fair price inclusive of control.

Hurdles to overcome: Overcoming technical due diligence is a risk, albeit a modest one in our view given OZL’s public disclosure. We don’t think the Independent Expert report poses a significant risk.

Forecast and valuation update

Forecasts/ valuation are unchanged. We now set our 12-month target in-line with BHP’s revised bid. Note BHP’s offer allows OZL to consider paying a franked dividend prior to implementation, with the cash offer reduced by the dividend amount.

This would allow OZL to unlock some value from its franking account balance, which we now estimate at +$350m.

Investment / Tactical view

We think BHP’s proposal is likely to proceed, however completion could extend beyond mid-2023. We think an approach by a third party is unlikely and see limited scope for another bump in price by BHP in the absence of a pop in the copper price.

OZL will likely trade at a discount to the offer to reflect these views and the time value of money.

Investors need to balance their views/actions around:

The downside risk of the transaction not proceeding (unlikely in our view).
Upside risks of a higher competing bid (unlikely).
Potential for a top-up in price (less likely).
Holding for access to some franking benefit.
Selling to consider better relative opportunities elsewhere.

Investors may consider alternative opportunities in ASX-listed copper (SFR) or base metals (S32).

Price catalysts

Due Diligence progress, entry into Scheme documentation.

Risks

Failure to enter Scheme documentation.
Sharp copper price moves potentially affecting deal terms.
Production disruption, cost inflation, commodity/ FX volatility, Macro slowdown.

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