OZ Minerals: Result 2012

Faced with declining production, declining revenues and declining profits, OZ Minerals surprised investors by raising dividends and, perhaps, raising hope. Revenue for the full year to December 2012 fell 12% to $986m, leading to a calamitous 45% decline in net profit to $152m. From earnings per share of 49.5 cents, down 40%, an unfranked dividend of 20 cents was declared (est. ex date 20 Feb), taking full year dividends to 30 cents.

The savage profit fall reflected lower copper prices and the high dollar, but it was mostly due to dwindling production at Prominent Hill, the company’s sole producing mine. Almost $70m was lost to lower volumes as copper output fell 6% to 102,000 tonnes and gold output fell 12% to 140,000 ounces. Digging deeper into the waning orebody also raised operating costs, although at $1.20 per pound of copper, these costs are still low by industry standards. The company spent more than $100m last year on exploration, an effort that left no lasting impression.

With over $800m in cash and receivables and a further $288m in listed investments on the balance sheet, OZ certainly isn’t poor; cash and investments make up more than 40% of the market price and OZ still trades at a discount to net tangible assets. Yet Prominent Hill’s resources will be exhausted by 2019, so the discount is appropriate. OZ needs to find another mine to stay in business. Brokers and bankers are pushing corporate action; the company already has stakes in several promising listed miners, including star performer Sandfire Resources. An acquisition is still possible but the company appears content to develop the large, low grade Carrapateena copper deposit, a prospect that has left the market less than enthused. Management also raised the prospect of resource expansion at Prominent Hill, suggesting an underground operation could be developed to extend mine life. That possibility saw the share price tick up today but we're less excited. OZ is inexpensive and cash rich, a combination that leaves us happy to HOLD.