More life in the OZ Minerals share price yesterday, with another nice gain of 3.5c, or just over 5% to 71c after an encouraging production report for Prominent Hill, which will be the company’s major asset after the sales to China Minmetals happens.
As well a speculative, but interesting piece of research from JPMorgan floated the suggestion that OZ could be a nice buy for BHP Billiton because of Prominent Hill.
It’s not a new piece of speculation: it was suggested in Air Daily much earlier this year and late 2008, but the Morgan reasoning a sound geological and structural basis.
Firstly the production report. OZ said yesterday that said production at the Prominent Hill copper and gold operation in South Australia had started and is likely to meet its annual forecast.
In the March quarterly production report filed with the ASX, OZ said the mine produced 4,338 tonnes of copper and 5,567 ounces of gold in the three months ended March 31 after starting output in late February.
OZ has forecast output of 100,000 tonnes copper and 70,000 ounces of gold this year.
Production from its Century operation, the world’s second- largest zinc mine, dropped 20% to 101,961 tonnes after an enormous wet season in Northern Queensland.
OZ said its 2009 production guidance remained unchanged at 495,000 tonnes of zinc concentrate.
At the Sepon project on Laos, copper production was 17,217 tonnes and gold output was 26,422 tonnes and once again guidance for calendar 2009 copper production at Sepon was unchanged.
OZ Minerals recently recommended a revised offer from Minmetals that will deliver it $1.75 billion in cash.
Minmetals hopes to acquire all of the company’s metals mining assets, including Century, Sepon, Golden Grove, Rosebury, Avebury and Dugald River.
The deal excludes the Prominent Hill project in South Australia and selected assets in Cambodia and Thailand, which OZ Minerals will retain.
Minmetals had originally also wanted to acquire Prominent Hill.
OZ Minerals also said that it continues to work with its bank lenders to secure an extension to an upcoming debt maturity.
"The company continues to work with its lenders to secure a further extension to its facilities to 30 June 2009 to facilitate completion of the Minmetals transaction,” OZ Minerals said yesterday.
So what did JP Morgan say yesterday?
Well the research was summed up this way:
"In our opinion, BHP can achieve a number of operating synergies at Olympic Dam (OD) via the acquisition of OZ Minerals, and therefore ownership of the Prominent Hill copper deposit. Synergistic benefits available to OD include: 1) optimised copper sulphide (Cu:S) ratio for concentrate feed into the smelter, 2) additional uranium production via OD’s concentrate leach circuit, and 3) the ability to supplement OD feed to ensure processing facilities maintain steady state capacity operations.
"In our opinion, these synergies could result in increased production output, increased operating efficiencies, and as a result, optimised unit costs for BHP’s Olympic Dam operation.
"If we assume a potential bid is priced at 30% above the current share price at a total bid value of A$2.75bn (or A88c/share), then BHP would have to achieve synergies above our standalone OZL valuation (currently A$2.6bn) equating to A$157M over the life of the mine. This we believe could be achieved from potential uranium production synergies alone.
"As previously stated, we like the outlook for OZL now as a pure Australian copper play. Copper remains our preferred mid-term exposure of the base metals.
"With what we see as upside to Prominent Hill’s resources, which we believe will result in lower depreciation costs and provide the capability to expand production growth beyond current market expectations; along with the project’s corporate appeal, we maintain
"Minmetals deal will now likely proceed and the Martabe sale will be successfully completed. In our opinion, with potential for corporate activity overlaying the stock, we move to a price target in line with our company NPV. Key risks to our PT include potential failure of any of the Minmetals bid pre-conditions or Martabe sale conditions, our copper price forecast, and risks during the commissioning of Prominent Hill."
BHP is expected to release details of enviromental assessments of the Olympic Dam project later this week or next week in which details of the development timetable could appear.
