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OZ Minerals beats its own drum

The release of OZ Minerals' fourth quarter numbers has been met with glee by the market after production numbers came in on the upper end of the company’s forecasts.

Copper production for the December quarter hit 73,400 tonnes with its gold production hitting 128,000 ounces compared to its December forecast of 70,000 to 75,000 tonnes of copper and 120,000 to 130,000 ounces of gold. These are solid numbers on face value however the final read is almost 45% lower than originally forecasted in December 2012 and the fact that OZL only downgrade its guidance in December makes this report feel arbitrary.

C1 cash cost are certainly at bright spot at $1.796 per pound and that is well below the forecasted range of $1.90 to $2.05 per pound.

However the cash balance of $363 million is well below the company’s expectations at this point in the investment cycle. The original budget was for $454million; the company is pointing to its undrawn loan facility of $200 million as a point of capital management that offsets the lower cash reserves. However, the reserves where for M&A and may mean OZL could tap its holding in Sandfire resources to shore up is original commitment to M&A, as SDR now has a market cap above OZL.

The trade

On current forward guidance OZL has a forward P/E multiple of 32 times earnings and with gold and copper prices still struggling I can see a prospect for further disappointments over the coming months.

The pop in the share price today is likely to be short covering, having seen a rather large short build up in the stock over the past month.

I see this as a covering rally and a chance to sell on strength. In my opinion the covering rally is overdone and I see OZL easing again in the coming weeks.

I would look to sell OZL at $3.60 or higher and would expect OZL to settle back down towards $3.15 and lower in the coming weeks and would place a limit at $3 which is strong support. The current strength is unlikely to last.

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