OZ Minerals Ltd. (OZL) has fallen so far that it offers potential suitors decades of Australian copper production at the world’s cheapest valuation.
After its shares plunged 76 percent in less than three years, and a slump in copper prices prompted a writedown on its only producing mine, the Melbourne-based company was yesterday valued at $1.2 billion, one third below an appraisal of its two mines by Macquarie Group Ltd. Excluding cash, no peer trades lower relative to earnings and only one is cheaper relative to reserves, according to data compiled by Bloomberg.
The company’s Carrapateena project is slated to produce copper for more than 20 years once it reaches production, while its current working mine, Prominent Hill, could yield the metal until 2019, Macquarie said. Glencore Xstrata Plc, Anglo American Plc (AAL), and a venture formed by the former head of Xstrata Plc, Mick Davis, are among possible buyers, said Morningstar Inc. (MORN)
“As a package, OZ Minerals, in terms of their projects and their prospects, is very attractive,” Peter Esho, Sydney-based chief market analyst at Invast Securities Co., said by phone. “There’s been a destruction in shareholder value and that’s what makes it a prime takeover target.”
OZ Minerals Chief Executive Officer Terry Burgess said in an e-mailed response to questions that the company “would always consider any offer that provided value to our shareholders.” Any deal would need to recognize efforts to lower costs and the potential of development projects, he said.
The shares today rose as much as 2 percent before closing up 1.6 percent at A$4.40 in Sydney. The benchmark S&P/ASX 200 index gained 0.1 percent.
Australia’s third-largest copper producer is at a “turning point,” Burgess said in an interview in August. OZ Minerals will post a A$196.6 million ($185 million) loss in 2013 before returning to profit next year, according to analysts’ estimates compiled by Bloomberg. Income will nearly quadruple to A$124 million two years later, according to the estimates.
“While it’s had a tough couple of years, in 2014 they will turn the corner,” Michael Evans, a Sydney-based analyst at CIMB Group Holdings Bhd. said by phone.
The profit slump has followed a drop in copper prices this year amid a glut of supply. After more than quadrupling in the decade to 2012, copper for delivery in three months has fallen about 9 percent in 2013 on the London Metal Exchange. While copper is forecast to drop another 4 percent over the next four years, consumption by China and India means demand will rebound, said Invast’s Esho.
“There’s still a fair bit of supply to work through the market, but the long term’s very different,” he said.
With Oz Minerals’s shares trading at just A$4.33 yesterday after plunging from a November 2010 peak of A$18 a share, miners have an opportunity to acquire its copper projects at a discount. The operations have a combined net present value of about A$1.9 billion, Macquarie analysts wrote in a Sept. 30 note. That’s about 46 percent more than the company’s A$1.3 billion market capitalization.
Cash and investments in companies including Sandfire Resources NL (SFR) total about A$666 million, accounting for about half of the current market value. OZ Minerals has no debt.
After stripping out the company’s cash, OZ Minerals trades at only twice its earnings before interest, taxes, depreciation and amortization in the past 12 months, according to data compiled by Bloomberg yesterday. That’s less than any of its 30 global peers with a market value greater than $1 billion, the data show.
It also fetches just 0.006 times its valued reserves and resources. Among copper miners, only Grupo Mexico SAB de CV, which says it has the world’s largest copper reserves, trades more cheaply, the data show.
OZ Minerals would be a bargain for larger copper producers including Glencore, Anglo American, Lundin Mining Corp. or Antofagasta Plc, Mathew Hodge, a Sydney-based analyst at Morningstar, said by phone. The bigger operators would be better able to extract profits from the mines by cutting down expenses, he said.
“It’s a small bite for any of those guys,” Hodge said. Carrapateena has the potential to be “a very, very, good long-term, long-life mine.”
Representatives for Anglo American, Glencore and Lundin Mining declined to comment on their interest in OZ Minerals. In an e-mail, Antofagasta also declined to comment.
The U.K.’s Mail on Sunday newspaper said Sept. 29 that Glencore is weighing a bid for OZ Minerals after buying as much as 10 percent of the stock. Glencore at the time declined to comment on the report, which cited unidentified sources, and OZ Minerals said it hadn’t been told Glencore had bought such a stake.
Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a non-executive director of Glencore Xstrata.
The Baar, Switzerland-based commodities trader in May completed the $29 billion purchase of Xstrata and is currently selling a Peruvian copper mine, which may be valued at more than $5 billion, as part of an agreement to win Chinese approval for the deal.
X2 Resources, the venture founded by Xstrata’s former CEO Mick Davis and its former chief financial officer Trevor Reid, this week said it raised $1 billion to start a mining and metals group. The new company may target OZ Minerals, said Warwick Grigor, Sydney-based Australian executive chairman and research director at Canaccord Genuity Wealth Management.
Andy Mills, a London-based spokesman for X2 Resources at Aura Financial, declined to comment.
Having unsuccessfully bid for Rio Tinto Group’s Northparkes copper mine in New South Wales and a state-owned mine in Romania in the last 18 months, OZ Minerals may be keener to acquire assets than be bought, said Matthew Keane, a Perth-based analyst with Argonaut Securities Pty.
“As a target, it’s pretty hard to fathom,” he said. “It’s hard to see anyone getting excited about potentially a high development cost stock with a rapidly declining mine life.”
Prominent Hill is scheduled to close by around 2019, though OZ Minerals is considering adding a second underground pit to extend the mine’s life. Discovered in 2005, Carrapateena will need A$2 billion to A$3 billion of investment before it’s operational, the company said in a presentation in May.
Still, the project could produce as much as 110,000 tons of copper per year and yield metal for at least 20 years, according to OZ Minerals. In central South Australia, Carrapateena offers buyers a “top-tier asset,” Vince Pisani, an analyst at Shaw Stockbroking Ltd., said by phone from Sydney.
After a stock-market battering, OZ Minerals may be too good a target to ignore, according to Esho at Invast Securities.
“This is a perfect time to pick this up,” he said. “It is a very attractive set of assets.”