The big uptick in profits from OZ Minerals Limited (ASX: OZL) has been overshadowed by news that copper has entered a bear market. It almost fees like the party is over before it begun with the share price of the copper producer crashing over 3% in early trade before staging a big rebound to trade up 1.7% at $9.10. In contrast, other base metal miners like South32 Ltd (ASX: S32), Sandfire Resources NL (ASX: SFR) and Independence Group NL (ASX: IGO) are down between 2% and 4% this morning. The initial sell-down in OZ Minerals was triggered by the drop…
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The big uptick in profits from OZ Minerals Limited (ASX: OZL) has been overshadowed by news that copper has entered a bear market.
It almost fees like the party is over before it begun with the share price of the copper producer crashing over 3% in early trade before staging a big rebound to trade up 1.7% at $9.10.
The initial sell-down in OZ Minerals was triggered by the drop in the September futures contract of the red metal to a more than one-year low of US$2.55 a pound on concerns about a weakening Chinese economy and the surge in the US dollar.
The copper price is down by more than 20% from its peak and that fits the classic definition of a bear market.
But sentiment towards OZ Mineral soon turned when investors digested the earnings report with the miner posting a 59% surge in first half net profit to $128 million and a 33% increase in its interim dividend – its first increase since 2014.
A strong focus on costs and a higher copper price in the period contributed to the strong result but copper prices have since tumbled, which will undoubtedly raise questions about whether this is as good as it gets for OZ Minerals.
However, supporters will be encouraged by its cost control given that miners have been complaining about their rising operating expenses.
Not only were operating margins broadly flat, which helped OZ Minerals deliver an improved underlying earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 55%, costs are expected to fall in the current half.
That’s not an easy feat in this environment. Not to take the shine off this achievement but the expected drop in C1 costs over the first half is largely due to additional costs of a pit closure the miner had to endure in the first six months of 2018. C1 refers to the net cash costs at each stage of ore processing.
Supporters will also be happy that management is making shareholder returns a key focus. That’s taking a leaf out of BHP Billiton Limited’s (ASX: BHP) playbook as the mining heavyweight prioritised capital return over expansion.
That’s exactly what mining investors want to hear in this climate, particularly as some believe that OZ Minerals paid too much in its acquisition of Avanco Resources Limited.
OZ Minerals is still flushed with cash as it has $493 million in its kitty with no debt. Management is open to the idea of returning cash to shareholders and to take on a modest level of debt (up to 20% gearing) to help fund expansion.
The miner is also lowering its capital expenditure target from around $500 million to $400 million -$430 million as it defers the construction of a new road and optimisations to a tailings storage facility.
I think OZ Minerals delivered a good result and is likely to outperform the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) over the next 6 to 12 months – barring a deeper and more sustained downturn in the copper price.
But OZ Minerals is better placed than most of its global peers as it is one of the lowest costs producers in the world and it can benefit from the weakening Australian dollar.
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and South32 Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.