Copper and gold miner OZ Minerals Ltd. (OZL.AU) will return
nearly half of its 1.33 billion Australian dollars ($1.35 billion)
cash holdings to shareholders after surging back to profit in 2010
after a near-death experience during the financial crisis.
The capital return comes at the start of a reporting season for
Australian miners in which analysts expect to see a wave of cash
flowing to shareholders, as booming commodities prices and a
cautious approach to spending in the wake of the financial crisis
leave the sector sitting on outsized cash piles.
BHP Billiton Ltd. (BHP) and Rio Tinto PLC (RIO), the world's
largest and third-largest miners by revenues, are expected to hand
back around US$10 billion in their results over the next week,
according to a note by Deutsche Bank analysts.
OZ Minerals, whose sole producing asset is the Prominent Hill
mine in South Australia, said it planned to pay back around A$600
million by the end of June through a capital return, share buyback
and dividends.
The cash return was "the right balance between returning funds
to shareholders and having balance sheet strength to continue to
grow value in the business", Chairman Neil Hamilton said in a
statement.
Record copper prices have buoyed the miner, which said in annual
results Wednesday that net profit hit A$586.9 million last year,
reversing a A$517.3 million loss in 2009.
Three-month copper futures on the London Metal Exchange hit an
all-time high of $10,160 a metric ton Monday, while spot gold
peaked at $1,431.30 an ounce on Dec. 7.
However, OZ Minerals' announcement Wednesday underlines the
potential pitfalls of such cash distributions, with some analysts
querying the shareholder benefits of the move and suggesting the
money could be better used for investment.
"They need to go and get an acquisition," said Hayden Bairstow,
an analyst at CLSA in Sydney. "They need to extend the life of the
company beyond Prominent Hill because once the open pit is finished
they need to find some longer-term growth options."
Chief Executive Terry Burgess said that while the company had
looked at several potential acquisitions over the past year, the
booming copper price meant there were few good assets
available.
"There are opportunities out there but we just don't see the
value we're looking for," he said. "If you rush into things you can
repent at your leisure, and we're not going to do that. The copper
price is fantastic (but price) expectations have risen
accordingly."
Over the past year, investors have been keen to see how OZ
Minerals would deploy its capital against a backdrop of rising
copper and gold prices and busy mergers and acquisitions activity
in the sector.
With no debt, the company's A$1.33 billion cash holdings at Dec.
31 account for nearly a quarter of its market capitalization,
though they have ebbed slightly from A$1.43 billion at the end of
June due to dividend payments and capital spending.
Another Sydney-based analyst, who didn't want to be named as he
wasn't authorized to speak to the media, said OZ had missed
opportunities when it failed to make takeover offers for Citadel
Resource Group Ltd. and Sandfire Resources NL (SFR.AU).
"It's tough for OZ. These opportunities are few and far between,
but Citadel and Sandfire were good opportunities and they were in a
position to make a move earlier than their peers because they had
the cash from the get-go," he said.
Equinox Minerals Ltd. (EQN.AU) spent A$1.25 billion taking over
Saudi-focused Citadel in an offer that closed last month, while the
share price of Western Australia-focused explorer Sandfire has more
than doubled since OZ took out a 19% stake in the miner last July,
making a full cash offer likely beyond OZ's reach.
Acquisitions are essential because, given the typical
uncertainties around mining operations and commodities prices,
investors prefer companies that have more than one producing
mine.
"A company that has one commodity and one operation is quite
risky from a financial sense," said Chief Financial Officer Andrew
Coles.
OZ Minerals also needs to move forward as Prominent Hill's own
outlook weakens. Analysts expect the mine, which started production
in 2009 and produces around 0.7% of the world's mined copper, to
have around eight years of good production left.
It produced 112,171 metric tons of copper and 196,400 troy
ounces of gold during 2010 at average cash costs of 46.4 U.S. cents
per pound.
But lower ore grades and larger quantities of overburden needing
to be removed to get at its ore bodies will push up cash costs to
60c/lb next year, while production volumes will be roughly
static.
The cash return to shareholders will comprise a 12 Australian
cents per share capital return, costing around A$388 million; a
A$200 million share buyback; and a year-end dividend of 4 cents per
share, the company's first since 2008.
Last year, OZ Minerals proposed a half-year dividend of 3 cents
per share, bringing the full-year total to 7 cents per share.
The company will also carry out a 1-for-10 share consolidation,
a move which the Sydney-based analyst said would be marginally
negative for shareholders.
OZ Minerals almost collapsed under its debt load after it was
created from a merger of Zinifex Ltd. and Oxiana Ltd. on the eve of
the global financial crisis in March 2008. The bulk of the merged
company was sold off to Chinese state-owned miner China Minmetals
Corp. in June 2009, but Prominent Hill was held back because of
national security concerns.
The mine is in the Woomera Prohibited Area, a weapons-testing
range where the U.K.'s atomic bombs were tested in the 1950s.
-By David Fickling, Dow Jones Newswires; +61 2 8272 4689;
david.fickling@dowjones.com
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