UBS morning espresso:
OZ Minerals enters Brazil: Are the increased risks worth it?
OZ Minerals has announced that it will acquire Brazilian copper miner Avanco, in a cash & scrip deal that values the company at A$418m, a 119% premium and ~16% of OZL's market cap. The deal comes as a surprise to us, not because of the premium but rather the timing and the country. In our view, while the business has matured and settled following the CEO's strategy, which started 3 years ago, we saw OZL's plate as full; Carrapateena is in development, there is a growing pipeline of local targets.
While OZL's exposure to Australia allows for some geographic diversification, we think managing assets in Brazil will present unique risks in terms of labour (unionised), politics (bureaucratic) and balancing management's time. Offsetting this is OZL's experience in IOCG copper. To overcome risks, we think OZL will need to depend heavily on the existing Brazilian team. Overall the deal is a slight negative for us, while it does offer more long term optionality, OZL is perhaps no longer the simple story of Aussie copper. OZ Minerals eyeing long term options, but has the overall portfolio benefitted?
Avanco's operating asset Antas is small (15ktpa Cu, 4 year life) and is likely not the reason for the transaction, in our view. We think the prize is Avanco's option to acquire a 100% interest in Pantera from Vale and the undeveloped Pedra Branca asset. The option cost to acquire Pantera of ~US$20-35m would provide access to a 350kt copper resource, which has been estimated with just 5km of drilling, so there is likely sizeable upside. Pedra Branca is at an advanced study level and could deliver ~25ktpa and possibly more with OZL re-working the study. The CentroGold project is likely to be non-core given its 100% gold.
Ultimately, we need more from OZL to see the real upside, clearly they see it with the premium paid, but before then we think the market will question if Avanco's assets have improved the overall quality of OZL's portfolio. Neutral – Can long mine life offset short-term development risks? As Carrapateena enters a 2-year development phase, scope changes or cost overruns are at heightened risk. Offsetting this is positive sentiment towards copper. Valuation: A$11.09/sh (DCF, 10% discount rate) Our forecasts are yet to be updated for the Avanco transaction. Our price target is set at 0.9x P/NPV
