OZ Minerals (OZL) is an Australian based mining company with a focus on copper and gold.

The company owns and operates the Prominent Hill copper-gold mine and the Carrapateena copper-gold project located in South Australia and has a number of equity interests in listed resource companies.

Copper crunched

China's slowing economy has darkened the outlook for miners such as OZ Minerals. The country's manufacturing sector contracted sharply in June, and its credit markets have tightened in response to its weakening economy.

Below we highlight the deterioration in the price copper since the beginning of the year. There has been divergence in London Metals Exchange copper inventories (white line) and the price of New York Sep-2013 copper futures (green line):

The spike in inventories highlights how copper demand is failing to keep with up supply, a result of China's contracting manufacturing sector. Similarly, gold prices have plummeted in recent months as bullion exchange traded funds (ETFs) have dumped their supply onto the market.

The US Federal Reserve's plans to curtail monetary stimulus has significantly lowered the likelihood of rising inflation, thus eliminating a key reason for holding the precious metal as an inflation hedge.

Production issues

In addition to lower copper and gold prices, OZL is facing operational issues at its mines.

In late April, the company reduced its 2013 copper production guidance from 90,000 - 95,000 tons to 82,000 - 88,000 tons. It also raised its cash cost guidance due to the weaker output expectations.

Total cash costs for the March 2013 quarter were US$2.03 per pound (lb), up 11% on the previous quarter's US$1.83/lb. This was a result of a 12% fall in quarter-on-quarter drop in copper output.

This was related to problems at Prominent Hill, where access to a section of the site has been obstructed until August.

Outlook

OZL is facing a deadly problem of falling commodity prices, lower production and rising cash costs.

The issues mostly relate to Prominent Hill, which experienced a drop in output during the March quarter, forcing the miner to slash its full year copper production forecast and raise its cost guidance.

With China's economic problems mounting, we see further declines in the price of gold and copper. In our view, production concerns and lower commodity prices will drag on OZL's share price in the near-to-medium term.

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