EUR 850.00 For Business Accounts Only

Morningstar | OZ Minerals' in Strong Financial Shape, FVE Unchanged at AUD 8.80

OZ Minerals' full-year 2018 underlying net profit after tax of AUD 228 million was broadly flat compared with AUD 231 million a year ago. The result was softer than our AUD 251 million forecast, though, as we had expected the firm's Brazilian operations to make a larger contribution. Expenditure related to growth was also higher than we expected. The company spent AUD 67 million on exploration and corporate development in 2018, more than triple the 2017 level.

Our AUD 8.80 per share fair value estimate is retained with our key assumptions and outlook for the company essentially unchanged. We have adjusted our estimates for the drawdown of the company's stockpiles, which has an impact on the profit forecast. However, the drawdown of stockpiles represents a noncash expense. Our aggregate free cash flow forecast for the next four years is essentially unchanged. For Brazil, accounting for the first six months of the Avanco acquisition won't be representative of future business performance. Our forecasts for the company's Brazilian operations are unchanged. Management will update the market on the outlook in Brazil in the first half of 2019. Full production from Antas and the development of Pedra Branca should increase OZ Mineral’s Brazilian copper output to about 60,000 metric tons by 2022 from just 6,100 metric tons in 2018.

OZ Minerals' shares have rallied with the price of copper and are again overvalued. In just three months, the shares are up 24% from a low of about AUD 8.30 per share in December. Management has earned a strong reputation for execution and delivering above expectations. However, the rally in the copper price to around $3.00 per pound now means it's meaningfully above our unchanged $2.30 per pound midcycle assumption. Our no-moat rating remains. We forecast midcycle returns on invested capital of 8%, below the company’s cost of capital.

Management recently raised gold production guidance by 15,000 ounces to 115,000-125,000 ounces at Prominent Hill. Copper guidance is unchanged at 95,000-105,000 metric tons. Our production forecasts for Prominent Hill are unchanged and sit near the middle of those ranges. Operating costs are expected to be similar to last year. Guidance is for all-in sustaining costs of $1.10-$1.20 per pound and cash costs before royalties of $0.65-$0.75 per pound in 2019.

Production in 2018 was above guidance, with copper production of 110,111 metric tons and gold production of 130,856 ounces. All-in sustaining costs of $1.14 per pound and the cash cost before royalties of $0.73 per pound in 2018 were below guided ranges. Prominent Hill's mine life is extended to 2030 and beyond, with 50% growth in proved underground ore reserves. Our unchanged production and cost assumptions for fiscal 2019 are in line with guidance.

OZ Minerals is in very strong financial shape with net cash of AUD 505 million. The company remains well placed to fund the elevated growth expenditure while continuing shareholder returns. Elevated development expenditure requirements and dividends for shareholders can be funded from existing cash reserves and operating cash flows. Given the current slate of projects, and in the absence of a major acquisition, we think OZ Minerals will remain in a net cash position for the foreseeable future.

Net operating cash flows in 2018 grew 31% to AUD 450 million from AUD 343 million last year. Net cash was down 31% to AUD 505 million from AUD 729 million a year ago but is still very healthy. The reduction reflected investment of AUD 335 million for the development of Carrapateena, AUD 59 million for Prominent Hill Mine development, and AUD 183 million spent in the Avanco acquisition. We expect Oz Minerals to remain well positioned to fund the projects in the pipeline. OZ Minerals declared a fully franked dividend of AUD 0.15 per share, bringing the full-year dividend to AUD 0.23 per share, which reflects a 15% increase on 2017 and a payout ratio of 32%.

Revenue in 2018 rose 9% to AUD 1.1 billion mainly driven by the higher Australian dollar copper price and a modest benefit from copper volumes. The copper price increased 8% and sales volumes 2.2% to 114,700 metric tons of copper. Higher costs drove the underlying EBITDA margin to 48% from 53% a year ago.