According to OZ Minerals Limited's (ASX: OZL) website, the company is covered by 18 different broking analysts. With a market capitalisation of $1.1 billion it's hardly an enormous miner, so investors could fairly query why the stock is so widely covered. At least part of the answer lives in the firm's past; as recently as 2010 OZ Minerals commanded a market capitalisation of over $5 billion.
It would also be a fair point for an investor to argue that such a widely analysed stock is unlikely to be mispriced. Foolish investors know however that the market (analysts included) has a habit of swinging between extremes which can lead to significant mispricing even amongst widely followed stocks.
In the case of gold and copper miner OZ Minerals, the many difficulties the miner has faced in the past few years have arguably led the market as a whole to shun the stock. These difficulties include a major mine wall slippage event which was caused by heavy rains at its flagship Prominent Hill open pit mining operation, which not only hindered production volumes, but also forced the miner to spend millions of dollars removing the slippage material.
For shareholders in OZ Minerals, the troubled past and beaten-up share price have of course been an unpleasant experience, however there are at least three reasons to be positive about the future outlook for this stock.
Operational Turnaround
Accurately forecasting the average price of copper and gold is a difficult job for even the most experienced resource analyst. While the price of copper and gold will undoubtedly affect OZ Minerals' revenues, volume is also an important consideration. On this front the investment merits of OZ Minerals are appealing.
The recent March quarter results showed a strong improvement in volumes and also a reduction in costs per tonne mined. The copper results easily beat analyst forecasts, while the gold results were in line with expectations. Overall the first quarter result led a Deutsche Bank analyst to state that OZ Minerals, "could be on track to meet or exceed the top end of the copper production guidance range of 57,000 to 85,000 tonnes."
Asset Backing
OZ Minerals operates on a December financial year, the release in February of the company's full year results showed that as at 30 December 2013 the company has no debt, $364 million in cash and $214 million in equity investments.
The equity investment relates primarily to a to a 19% shareholding in Sandfire Resources NL (ASX: SFR), but also a few much smaller holdings including in gold miner Beadell Resources Ltd (ASX: BDR).
Subtracting $252 million of exploration assets which are classified as intangibles, the per share net tangible asset value at balance date was $6.84. With OZ Minerals' shares currently trading at $3.57, this is a hefty discount.
Potential Asset Sales
Sandfire Resources currently has a market capitalisation of $870 million implying OZ Minerals' stake is currently worth $165 million. This stake is liquid and judging by comments made by management now considered to be non-core. It would not be surprising to see this holding sold.
OZ Minerals also owns the copper and gold exploration project Carrapateena. The group is currently in discussions with interested parties about exiting the project with the Australian Financial Review recently reporting that, "a dozen global copper producers are combing the asset's books in the data room." Exactly what price this asset might attract it is hard to say, however we do know that the miner purchased Carrapateena for around $250 million in 2011, with a further $150 million being invested in developing the resource since.
The dual headwinds of weak gold and copper prices certainly doesn't boost the chances of a re-rating for this sector anytime soon. In OZ Minerals' case though, long-term investors may not have to wait for commodity prices to head higher. The potential catalysts of asset sales which will lead to the asset backing of the company becoming even more liquid, and the apparent pick-up in operational performance could see this re-rating take place sooner than the current share price suggests.
