How long have you held the stock?
We initiated our position in May 2014 post operational improvements over two successive quarters, and conducting further site based due diligence at Prominent Hill copper/gold mine, located 130km SE of Coober Pedy in NW South Australia.In January 2016, we increased our OZL position to become our largest Materials exposure, a timely move, taking advantage of the sector’s rally over the last six months. On our recent site visit, we pleasingly witnessed progress on the second underground decline access development; key to enabling more efficient ore development and mining.Furthermore, we obtained further insight into key development project – 100% owned Carapateena copper/gold, located 250km SE of Prominent Hill, and the commerciality benefits of linking both operations to a larger, centralised concentrate treatment process (CTP) at Whyalla.
What do you like about it?
We like management’s low risk approach; focused on progressing mine life extensions, prioritising higher grade ore feed and selecting fit for purpose mining method e.g. investigating the use of sub level cave mining (sub level open stoping used currently) for extracting much wider portions of Prominent Hill mineralisation, which we see as a well-timed investigation prior to mining Carapateena.
How is it better than its competitors?
It stands out from the pack with our expectation for up to $375 million free cashflow generation this year, and capability to self-fund project development without equity market assistance.Its ASX listed mining peers fail to compete on these commerciality metrics. Globally it’s one of few miners successfully generating cashflow against a tough commodity price backdrop.
What do you like about its management?
Management is very good at driving productivity improvements and delivering strong cash flow at Prominent Hill operations, and derisking Carapateena development.With $800m cash expected by end 2016 and negligible debt, their development plans and also acquisition ambitions can be both catered for.
What is your target price on OZL?
Our target price is +$8/share, post $975m Carapateena project development funding, assuming $300m project finance and remainder cash.Given the copper concentrate will be the highest concentrate grade globally, we see potential for smelter/s to request early product offtake and/or invest at project level.Our valuation could be refreshed with further study work; we conservatively factor 25% buffer on project capex for Carapateena mine and CTP.
At what point would you sell it?
In the event of a production downgrade or cost escalation at its low cost Prominent Hill underground mine, operating at <$1.00/lb.A further sell trigger is a big downgrade or reduced quality of the Prominent Hill and/or Carapateena Resource leading to consequential cost base escalation.We see downgrade risk as a low probability for high grade Carapateena, given robustness of orebody continuity, will use process automation to better manage mine dilution during conventional sub level cave mining, and effectiveness of the CTP for upgrading concentrate grade.
How much has it added to your overall portfolio over the last 12 months?
Added 95bps performance over past 12 months.
Is it a liquid stock?
Liquidity is excellent, with an average of 20 million shares traded per week over the past 12 months.
Is there anything else you would like to say about OZL?
We see potential for Prominent Hill near mine extension drilling, with management targeting 10Mt Reserve additions in the next 2 years.Once first Carapateena concentrate is produced, we see further Resource additions from several near mine ore sources may provide significantly more upside.Our expected Carapateena production and expansion scenario may never eventuate; there’s high likelihood a larger mining peer may emerge with a takeover offer and stop management’s development aspirations in its tracks.
Source: Yahoo!7
*Anna Kassianos is Senior Analyst – Materials and Energy
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