Australia | Mar 07 2019
OZ Minerals plans to increase copper production at Carrapateena significantly, which is expected to more than offset the forecast decline in output from Prominent Hill.
-Satellite deposits could extend copper production for decades
-Block caving technically more challenging, sufficient water needs to be defined
-Capital expenditure substantial, expansion not included in most base case valuations
By Eva Brocklehurst
OZ Minerals ((OZL)) is flowering, outlining a much more significant mine development at Carrapateena. Just four years ago, Shaw and Partners points out, the stock was considered a "one trick pony", facing a short mine life at its one asset, Prominent Hill in South Australia. There are now several growth options across the province.
Macquarie suggests the increased production at Carrapateena is likely to more than offset the forecast decline in output from Prominent Hill. The Carrapateena ore body appears to justify a block cave with expanded infrastructure and 10-12mtpa milling capacity.
The scoping study has revealed an increase in mined ore to 10-12mtpa from 4.2mtpa, raising production to 105-125,000tpa of copper over 20 years. The growth options also highlight the potential for extra units of gold and nickel.
The first production from the block cave is expected in 2026 and pre-production capital expenditure is calculated at $1-1.3bn. UBS asserts this is a refinement of the block cave strategy that has been considered before but the plan and the sequencing makes sense.
The broader province and satellite deposits, such as Khamsin, Saddle and Fremantle Doctor also provide potential to extend the life beyond 20 years. Shaw and Partners is most enthusiastic, expecting a lot of copper will be produced for decades to come.
The ramp up of the mine is expected to take three years and optimise higher grade ore within the deposit. As this is only a scoping study there is no economic outcome outlined. A pre-feasibility study is due mid 2020 and the company has committed an extra $30m to project studies over the current year.
A final investment decision is expected in the second half of 2021. At that point, Canaccord Genuity believes OZ Minerals should have enough cash to progress the project, should the outcomes of the pre-feasibility be positive.
A higher level of upfront capital from 2022-23 is modelled, in order to establish the infrastructure and development and because of the bottom-up method of block cave mining. The broker considers the expansion around 20% accretive to the base case project. Nevertheless, increased study costs are expected to offset the benefits in the short term.
Canaccord Genuity, not one of the eight stockbrokers monitored daily on the FNArena database, has a Buy rating and $11 target. The broker believes the superior mine life, health of the balance sheet and diverse assets support the stock as its preferred copper exposure.
Credit Suisse is less positive, as headline expenditure is well above forecasts. The additional capital required to get more appropriate scale for the resource signals that greater efficiency and value creation could have been achieved if this scale was initially implemented. The trade-off was lower initial expenditure but at a unit cost disadvantage.
The broker is frustrated by the lack of detail in the study and simplistic modelling. Credit Suisse models on the basis of life-of-mine grade, assuming this will be consistent from the blending of in-cave ore, and asserts the risk lies with an understatement of initial grades and an overstatement of later grades.
Block caving is technically more challenging and there is also the issue of water availability. Credit Suisse notes management is already contemplating pumping seawater from the coast if sufficient local water cannot be defined. UBS and Macquarie agree water seems to be the largest risk. Management is drilling wells, and seeking ways to reduce water use.
Macquarie finds the economics of the expansion study encouraging, pointing out the block cave design is smaller than previous studies, and expects the sustaining capital for the block cave will be significantly lower than for the sub-level cave. Still, a lot of cash will be needed, UBS notes, to unlock the company's vision and capital pay-back is not envisaged until 2028.
Morgan Stanley also believes the amount of capital expenditure is significant, when considered in light of the production uplift and reduction in operating costs. The broker acknowledges this is an early stage in the study and future opportunities in the region could make the development attractive.
UBS suspects investors will be reluctant to include the value of the expansion upfront but instead will wait for milestones, such as first sub-level cave production in the December quarter of 2019, in order to de-risk the project.
Citi also leaves the expansion out of its base case valuation, because the company could still find a more value accretive use of its capital. Macquarie does not have a block cave production scenario factored into its modelling and therefore assesses there is upside risk to its base case for OZ Minerals.
Shaw and Partners, not one of the eight monitored daily on the database, believes the market has not fully grasped, let alone valued the long-term outlook. Top-line growth could hit around 200% out to 2026/27, the broker calculates, which is a compound growth rate of around 15%, and mostly internally funded.
OK, the ups and downs in the copper price will chop the share price around but, over the long-term, valuation should grow with future cash flow, and Shaw and Partners maintains a Buy rating and $13 target.
FNArena's database shows three Buy ratings, four Hold and one Sell (Credit Suisse). The consensus target is $11.21, suggesting 7.8% upside to the last share price. Targets range from $9.50 (Credit Suisse) to $12.50 (Citi).
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