Another disappointment from Oz Minerals

Oz minerals (OZL) released its third quarter production guidance numbers today and for the fourth time this calendar year downgraded its copper production guidance.

  1. Fourth production downgrade inside a year
  2. Cash cost increase by 10%
  3. Support: $3.98, $4.00, Resistance $4.24, $4.54

Production Downgrade

Oz minerals (OZL) released its third quarter production guidance numbers today and for the fourth time this calendar year downgraded its copper production guidance.

Guidance has been slashed by up to 20%, with expectation for CY13 to now at 70,000-75,000 metric tonnes of copper, down from 82,000 to 88,000 metric tonnes in April.

The April forecast was a downgrade itself following on from a January downgrade figure of 90,000-95,000 and that followed on from the original forecast in December 2012 of 90,000-100,000 metric tonnes. If OZL was to hit the bottom figure it would be a 30% reduction over the year.

Gold production numbers have held firm at 120,000 ounces however this too has been downgraded over the year. With the Prominent Hill asset struggling to keep its head above water as strip ratios fall further and management estimating it has a mine life of six years, OZL is running out of time to find a way forward.

OZL does have cash on the balance sheet it has set aside for acquisitions, the question is what assets can they afford that will offset the slide at Prominent Hill and will those assets tie the company over to until Carrapateena hits production (which is expected to commence in FY16 at the earliest)?

The issue I see is that OZL paid a special dividend in August, suggesting the cash on the balance sheet could be returned to shareholders rather than being invested in the next stage of the company. What does this mean for the high capex year of FY14 and FY15 as they look to bring Carrapateen up to operation stage?

Cash Cost

The other issue OZL faces is ballooning cash cost. C1 cash costs are set to jump 10% from the April forecast to $1.80-$2.05 a pound from $1.65-$1.80 a pound. The increase in costs is down to mine slippages in June and extra processing costs which are really depressing profit. With over $150 million now set aside for the development of Carrapateena, further reductions in production and increases in costs are going to see OZL slipping further into the red.

Technicals

The downgrade has pushed OZL right onto its lower Bollinger band, which is two standard deviations from its 50-day moving average (in a sideways moving market this can be taken as the mean). If the negative band holds true, OZL will find support at $3.98 and should revert to the mean of $4.24.

However, if fundamental trades finally lose patience with OZL the band will be broken and will see OZL heading to $3.60. 

OZL with is Bollinger Bands of the last four months
OZL with is Bollinger Bands of the last four months

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