OZ Minerals: Interim result 2014
Recommendation
At first glance, OZ Minerals' half-year result appeared fine. Fuelled by higher gold production and higher copper prices, revenue rose 11% to $351m; lower operating and exploration costs helped earnings before interest, tax, depreciation and amortisation (EBITDA) climb 144% to $122m; the company carries $155m of net cash on its balance sheet and paid an interim dividend of 10 cents per share (unfranked, ex date 9 Sep).
Yet as OZ released its results, its share price slumped and disappointment bubbled. What's the problem? Like too many miners, OZ capitalises a large portion of costs, creating significant depreciation expenses. After accounting for these, underlying profits turn negative and have been so for a while.The underlying interim loss was $14m this year and $36m last year.
As recently as 2010, the company held $1.5bn of net cash as the commodities boom was drawing to a close. Management was adamant it wouldn’t be fooled into paying too much for assets at the top of the cycle. They would be no ‘Rio moment’ here.
Key Points
- OZ missed a golden opportunity
- Dividends are a return of capital
- Cash balance fast disappearing
Yet in its extreme caution, management has forsaken a golden opportunity. It held cash as asset prices crumbled and instead of pouncing opportunistically in the vein of, say, Northern Star Resources, OZ has been content to pay dividends. The cash pile has fallen to just 10% of its peak haul and the business has little to show for it. This is a classic case of management being suckered into the latest investor fad – in this case, the search for yield.
Six months to 30 June | 2014 | 2013 | /(–) (%) |
---|---|---|---|
Revenue ($m) | 351 | 316 | 11 |
Underlying EBITDA ($m) | 122 | 50 | 144 |
Underlying NPAT ($m) | (14) | (36) | n/a |
Underlying EPS ( cents) | (4.6) | (11.8) | n/a |
DPS (cents) | 10.0 | 10.0 | 0 |
The flagship Prominent Hill mine has just four years of ore left and its best days are long gone. Waste material is increasing and grades are falling. The one asset that was purchased, Carrapateena, is still in exploration stage and, so far, has failed to excite with a large stock of low grade material. Production is still years away and development costs will probably force OZ to take on debt. The company has resorted to drilling in Jamaica for new projects.
To be fair, OZ has tried to buy assets. It took a sheepish minority stake in Sandfire Resources and pursued Rio’s Northparkes copper and gold mine before it was sold to a Chinese miner for a silly price. Timidity has been joined by bad luck but the results are the same. The company was perfectly positioned for the slowdown and did little to capitalise on it.
There is little reason to buy OZ Minerals today; in fact, we struggle to find cause enough to hold. The company appears cheap, trading at 60% of net tangible asset value. That, however, could be a warning of write downs to come. A better reason to hold is for the upcoming feasibility study on Carrapateena which will provide clues to its future. Although the share price is up 8% since OZ Minerals: Interim result 2013 (Hold – $3.98), the company has disappointed. We're lowering the prices in our recommendation guide to account for the falling cash hoarde. It could have been so different. HOLD.