Collected Wisdom: The miners' numbers

This week we look at Rio Tinto, South32, OZ Minerals, Evolution Mining, BHP and more.

Summary: Rio Tinto posted strong first quarter production numbers, and analyst consensus is a hold as many are bearish on future prices of iron ore. Cost cutting measures at South32 (S32) are seen as a positive, with the stock trading in line with consensus 12 month price targets. OZ Minerals’ production numbers showed it was on track to meet gold and copper output guidance, with consensus remaining a hold, while Evolution Mining (EVN) also remains a hold, with a small increase in gold production numbers for the quarter. BHP’s downgraded guidance for FY16 sees it remain a hold in analysts’ eyes, and while Woodside reported lower numbers, these were stronger than anticipated.

Key take out: Oil Search (OSH) is the only stock with a buy consensus for this edition of Collected Wisdom, with analysts praising long term production growth and are tipping the company will hit upper end of guidance this year.

Key beneficiaries: General investors.  Category: Shares.

This is an edited summary of the Australian investment press: It includes investment newsletters, major daily newspapers and broker reports. The recommendations offered represent the views published in the other publications and may not represent those of Eureka Report. This article is general advice only which has been prepared without taking into account your objectives, financial situation or needs. Before acting on it you should consider its appropriateness, having regard to your objectives, financial situation and needs.

Rio Tinto Limited (RIO)

In RIO’s own words the first quarter production numbers were “robust”. Not too many analysts disagreed and even less were surprised, with the numbers coming in line with almost all analyst expectations.

Total iron ore production increased by 13 per cent on the prior corresponding period (pcp), up to 84Mt. Aluminium increased by 10 per cent on the pcp while hard coking coal and semi-soft and thermal coal decreased by one per cent and three per cent respectively.

RIO also updated guidance for 2016/17. Although there is no change in the numbers for expected total shipments of iron ore (350 million tonnes) there has been a delay in the Pilbara which will cause shipments in 2017 to drop to between 330 and 340 million tonnes. Previous announcements had guided to 350 million tonnes.

The quarterly update allowed several analysts to marginally upgrade their price target due to the recent increase in the price of iron ore. Currently the average 12 month price target sits at $47.82. The most bullish case for RIO weighs in at $55.92 and the most bearish is $40. The only thing separating the two cases is the view of the individual analysts on the outlook for the price of iron ore.

Investors are generally advised to hold Rio Tinto Limited at current levels.

South32 Limited (S32)

The biggest story to come out of BHP spinoff South32 was not the quarterly production numbers but more the positive story on the cost out exercise. There were no surprises in production as S32 remains on track as alumina and metallurgical coal continued to track along nicely.

The bigger story is that South32 remains on track to reduce controllable costs by $US300m in FY16. Another positive for shareholders was the completion of metallurgical coal project, Appin Area 9, 33 per cent below budget and ahead of schedule.

With analysts anticipating flat volume growth ahead, the cost reduction strategy is a key factor for S32 to keep its nose ahead of the competition. S32 management are doing all they can to put the business in a winning position, it is now up to commodity prices to help with the rest. 

Currently the average 12 month price target sits at $1.61 which is exactly in line with share price at the time of writing. The most positive price target is $2.60 and the negative outlook is $0.97. As far as buy holds and sells are concerned, we have six analysts with a buy, seven with a hold and only three calling it a sell.

Investors are generally advised to hold South32 Limited at current levels.

OZ Minerals (OZL)

Prior to the release of OZ Minerals quarterly production numbers analysts had the gold and copper miner as a resounding hold – and very little has changed after the numbers.

Copper production numbers were solid and even came in ahead of some analysts’ expectations at 31,018 tonnes. Management reaffirmed it was on track to meet FY16 copper guidance of 115,000 - 125,000 tonnes, and 125,000 - 135,000 ounces for gold.

The other news to come from the update was a report on the pre-feasibility study for the potential Carrapateena project will be released in May. Management stated the project had the potential for an internal rate of return of “well over 20 per cent”. Analysts commented this particular project could be a catalyst for the OZ Minerals outside of an increase in copper prices.

The current average 12 month price target is $5.46, below the current share price of $5.65 at the time of writing. There are few analysts who are bullish on OZL and the most optimistic of the lot has a price target of $7.84. There are also few who are pessimistic, with the most bearish case coming in at $3.27. The bulk of analysts are neutral at current levels.

Investors are generally advised to hold OZ Minerals at current levels.

Evolution Mining Limited (EVN)

Evolution Mining came out strong for the calendar year with record gold production numbers this quarter, producing 208,963 ounces at an all-in sustaining cost of $1,015 per ounce. This is a three per cent increase on the prior corresponding period (pcp).

Analysts were unanimous in their praise for the Cowal operation, producing 70,803 ounces at an all-in sustaining cost of $757 per ounce. It wasn’t all beer and skittles for the gold producer with two operations being marred by heavy rainfall in January and February which cut off access to higher grade deposits. Additionally, weather proved troublesome with another site with outages causing delays to production.

Analysts have noted the above setbacks should not impact the current quarter and many commented this is why it is good for EVN to have a range of mines to offset unforeseeable issues such as weather. A number commented EVN was their preferred gold stock currently and look forward to production numbers when all sites are fully operational at the same time.

The level of buy calls has increased for EVN, however due to the price increase over the last 12 month it is still a resounding hold. The current average 12 month price target is $1.79. At the time of writing the share price was trading just above at $1.89. The most bullish analyst has a price target of $2.10 and the most bearish sits at $1.02.

Investors are generally advised to hold Evolution Mining Limited at current levels.

BHP Billiton Limited (BHP)

The story coming out of BHP’s quarterly production figures is the underperformance of its iron ore production and subsequent downgrade in FY16 guidance for the commodity.  

Year to date, total iron ore production has been 171Mt, a one per cent decline on the pcp. Due to this BHP has reduced guidance to approximately 229Mt, a decrease of three per cent on previous numbers. BHP cited adverse weather conditions as well as the commencement of its rail upgrade project in the Pilbara which is expected to complete in two years. Analysts see a reduction in production by BHP and RIO a short term positive for the iron ore price.

On the whole the change in iron ore guidance has not altered the analysts’ views. Those who were bullish still are and those who are bearish still are, while the overwhelming majority who have BHP listed as a hold still have it as a hold.

The average 12 month price target for BHP is $19.73 with the most bullish at $26.80 and the most bearish at $15. At the time of writing the share price and average price target were perfectly in line.

Investors are generally advised to hold BHP Billiton Limited at current levels.

Woodside Petroleum Limited (WPL)

Woodside reported a 4.8 per cent decrease in production in the first quarter, predominantly due to scheduled maintenance on the North West Shelf and lower volumes from the Vincent operation. Sales volumes fell in line with the decrease in production numbers. Guidance for FY16 remained unchanged.

Despite the decreases the numbers were stronger than most analysts were anticipating. This came down to higher than expected LNG prices in the face of weak crude oil prices.

Woodside last featured in Collected Wisdom when management decided to shelve the Browse project, freeing up a lot of capital (read more: click here). Analysts were hoping for some insight into plans to spend up and fund future growth but there was no sign.

Analysts maintain their resounding hold call on the oil and gas producer with an average 12 month price target of $28.22, which is exactly in line with the current share price at the time of writing.

Investors are generally advised to hold Woodside Petroleum Limited at current levels.

Oil Search Limited (OSH)

After six hold calls we finally finish this edition of Collected Wisdom with a buy.

Another quarter rolls on and so does another record for Oil Search. It is the fourth quarter in a row the oil and gas producer has reported production growth. Despite the production growth overall, revenue for the quarter was down nine per cent on the pcp due to lower LNG and gas prices as well as lower oil prices.

Commodity prices aside, analysts were in universal praise for OSH and yet another solid set of numbers. The production numbers exceeded all expectations and analysts are tipping for OSH to hit the upper level of guidance for the full year.

Encouraging to those following the Oil Search story is news the Elk-Antelope fields are undertaking testing and so far the results have been very pleasing. Management have commented the wells are of excellent quality and have good connectivity. Testing is still taking place but it is a good sign for a future growth catalyst.

The OSH share price is currently $6.90, 6.3 per cent below the average 12 month price target of $7.37. The most optimistic analyst has a price target of $9.50 while the most pessimistic has a price target of $6.

Investors are generally advised to buy Oil Search Limited at current levels.

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