OZ Minerals Switches On

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OZ Minerals has outlined plans to develop a 270km transmission line to provide power to its Prominent Hill and Carrapateena mines from 2020.

-Unlikely to materially affect the economics of Prominent Hill
-Purchase agreements for grid power expected by the end of 2018
-Uncertainty remains over South Australian power prices
 

By Eva Brocklehurst

OZ Minerals ((OZL)) is seeking an alternative means to transmit power to its South Australian mines, as BHP Billiton ((BHP)) has stated it would no longer provide access to its infrastructure from mid 2020.

OZ Minerals plans to develop a 270km transmission line as well as an on-site solar plant at its Prominent Hill mine. The development will also provide power for the mine's future expansion and remove a power bottleneck at the Carrapateena development.

While details are limited, brokers understand the line will be built, owned and operated by ElectraNet and lie parallel with the existing BHP line. OZ Minerals will be blocked from using that line on August 31, 2020 as part of BHP's long-term power strategy for Olympic Dam

Part of the new connection involves a SolarReserve Aurora thermal power array and Citi suggests OZ Minerals clearly expects renewables to be part of its future supply.

Operating expenditure will increase, resulting in a 3-4% increase in costs at Prominent Hill from mid 2020. Citi notes this is actually a saving over the previous Carrapateena plan, so operating expenditure there could decrease by -1%. Development costs are estimated to be around $1m per kilometre to construct the high-voltage lines.

There remain a number of hurdles to clear before construction can begin, including several agreements, SA government regulatory approval and community engagement. Purchase agreements for grid power should be reached in the second half of this year.

Deutsche Bank considers the construction a positive development, given the importance of power security in South Australia, and expects OZ Minerals to enter into a combination of short and long-term agreements to satisfy its requirements.

Credit Suisse asserts the update does not address the main issue of where power will come from to meet the increased draw. Supply appears dependent on a private company, SolarReserve, developing a 150MW solar thermal generation and storage facility 30km north of Port Augusta, that will be capable of providing 5% of South Australia's power needs, with 25MW available beyond the state government's requirements.

Power Pricing

The market has not been too concerned ahead of the power strategy update, UBS suggests, with a view that this is a long-dated issue and would not materially affect the economics of Prominent Hill. While the update relieves any concerns over long-term power access it does not mitigate pricing issues.

Prominent Hill's power price is fixed until the end of 2018 and since 2017, OZ Minerals has been on 18-month contracts because of an expected drop in South Australian power prices. The market appears more positive about future capacity, Deutsche Bank observes, as energy price forward curves in South Australia show a downward trend. However, UBS notes liquidity at the long end of the energy curve is low and therefore a limited guide to long-term pricing.

Yet capacity in the state needs to lift over the medium term, particularly with BHP expanding production at Olympic Dam and OZ Minerals bringing Carrapateena on line. The Australian energy market operator's December 2017 regional generation outlook indicates current installed capacity of 4.9GW in South Australia, with a further 2.0GW of committed and proposed projects scheduled to come on line before the end of 2020.

UBS rates the stock Neutral, as Carrapateena enters a two-year development phase to first production by the end of 2019. Downside risk is traditionally elevated during this period, as potential delays and scope changes or cost over-runs heighten the risk. Offsetting this is positive sentiment about copper. The broker suggests there are a few ways to play copper locally and OZ Minerals offers a genuine growth trajectory.

There are two Buy ratings and five Hold on FNArena's database. The consensus target is $9.84, signalling 5.3% upside to the last share price. Targets range from $8.25 (Credit Suisse) to $11.10 (Citi).

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