Another poor showing from OZL

I have repeatedly called OZL out on fundamentals and today’s outlook statement completely justifies that call.

The company released the following statements to the markets:

The company is ‘on track’ to reach the guidance given in September for 70-75 kilotonnes (kt) of copper and 120-130 kilo ounces (koz) of gold at the conclusion of FY13. The expected cash costs are believed to come in at US$1.90-US$2.05 per pound.

The company estimates copper output for FY14 to come in at 75-80kt with gold at 130-140koz. Cash cost are estimated to come in at US$1.15 to 1.25 a pound.

Guidance past FY14 (FY15 to FY18) should be "at least" 95kt of copper and 95koz of gold.

This announcement is another disappointment in the long line of issues facing OZL. The production numbers are well below expectations across the market, and with the lowest estimate coming from JP Morgan which estimated FY14 numbers to come in at 91.7kt of copper OZL is a long way off the market.

What is also highly detrimental to the share price from this update is the strip ratio is getting higher and higher which is likely to blow this cash cost estimate out of the water and why most believe the estimates are unrealistic.

With Carrapeteena over four years away from production and still in the feasibility phase and Malu Underground mine requiring at least $160 million to develop, plus the fact the short dated project is returning lower and lower copper grades, OZL looks like it is running out of short term options and will continue to find itself on the outer.

The Trade

I recommended a very short term technical buy on OZL around six weeks ago, from $3.20 to $3.40. I believed at the time, with copper popping, that OZL may see a short pick up. This trade did come about and as expected ended quickly as the fundamentals once again took over.

I have, on a fundamental basis, been short OZL all year and today’s update reiterates my call.

On current estimates for FY14 there is no reason OZL won’t fall to $2.25 in the medium term. I believe bargain hunters will try to fill the gap created by today’s fall in the next few days and selling on strength would be advantageous to a medium term view. I believe even with solid copper prices in 2014 OZL has put itself in a situation where even good underlying commodity news will not override its structural headaches.


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