OZ Minerals: Another hectic year ahead

Author name:: By Tom Sartor
Job title:: Senior Analyst
Date posted:: 25 October 2022, 8:00 AM
Sectors Covered:: Junior (Emerging) Resources, Bulk Materials

3Q performance was sound in the context of industry challenges.
We still think BHP is more likely than not to re-visit another offer for OZ Minerals (ASX:OZL); however, a hypothetical timeframe, circumstances and price are becoming less clear.
OZL has an incredibly busy year period ahead suggesting BHP could afford to wait for a potential mis-step. We flag OZL’s many moving parts/catalysts and some risks.
We think traders should consider trimming profits, while investors should be conscious of the risk that OZL ratchets lower if M&A expectations fade.

Event

3Q production/financials.

Key points

3Q production: 3Q production was sound in light of ongoing challenges (skills, logistics, etc). 3Q cashflow (pre investing) of $156m beat our forecast ($94m), but was assisted by large WC movements ($69m net receivables release).

Needs a big 4Q: Lower gold guidance reflects adjusted Prom Hill sequencing (high Cu stopes, 6% lower Au), and combined with lower gold prices (5-7% below previous forecast) contributes to higher Group C1 cost guidance (+9% to US$1.20- 1.35/lb). Note this includes a material FX benefit (3Q ~12 USc benefit). OZL is confident that improvement initiatives underway can see it meet CY22 guidance.

Forecast and valuation update

We adjust for: 1) 3Q actuals, 2) adjusted guidance; and 3) copper and AUD forecast changes.

Note the significantly lower AUD has nearly negated the downward adjustments to copper prices.

Investment view

Our DCF valuation revises to (login to view) and our (login to view) target price applies a ~15% premium to balance the probabilities of a revised bid.

The industrial logic (“future facing” commodities, SA provincial play, WMP synergies) suggest to us that BHP is more likely than not to re-visit another offer for OZL. However, confidence in another approach near term is waning.

We think the coming period could challenge OZL. We think that some upcoming milestones include material risk (e.g WMP execution, Carra BC re-costing) with potential to weigh on equity value. It may pay for BHP to wait.

Many OZL holders are also likely larger holders of BHP. We can understand why these holders might prefer BHP not over-pay for acquisitions, versus launching a knockout bid. BHP’s scale brings larger scope for M&A error if ill-discipline is applied into OZL and/or larger deals elsewhere. Recent comments show BHP is conscious of this, with history also showing that capital mis-allocation in previous cycles has been problematic for both shareholders and management.

OZL offers ~20% upside to a revised offer at a 35% corporate premium, and ~25% downside to the pre-bid closing price. Copper peers have also weakened further since. BHP’s body language suggests the M&A risk-reward arbitrage for traders looks difficult.

OZL is best-of-breed ASX copper exposure and is easy to own for the longer term. However, we think investors need to be mindful of the risk the stock ratchets lower if no further approach from BHP materialises.

Price catalysts

WMP technical (MHP Study) and commercial (partnering/ sell-down) updates are due by year-end.

OZL reports very strong JV interest (seeking indicative offers from 5 parties) with a deal (or colour) on this process OZL’s strongest value-endorsing catalyst ahead in an otherwise challenging period.

Risks

Production disruption.
Cost inflation.
Commodity/FX volatility.
Macro slowdown.

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