Australia | Aug 30 2019
OZ Minerals has signalled it will start processing stockpiled ore at Carrapateena in November and brokers keep fingers crossed for a smooth ramp-up over the subsequent 18 months.
-Carrapateena ramp up risks delivering recovery and grades below expectations
-Difficulty in modelling costs for Carrapateena in 2020
-More capital expenditure at Carrapateena expected in 2020
By Eva Brocklehurst
OZ Minerals ((OZL)) has refined its guidance for the Carrapateena development in South Australia and brokers welcome the new detail, as the de-risking of Carrapateena has long been anticipated as a milestone for the company.
Morgans suggests the main risk for the company in the near to medium term is prolonged trade tensions and the impact on global growth while price tension in both the copper and gold markets offers the best chance for the stock to re-rate towards fair value.
The first half result was messy, involving material movements in inventory, stockpile accounting and the fact that only 78% of production at Prominent Hill was sold. The build up in inventory was the main item that displeased brokers, in addition to the depressed copper price. Inventory is expected to return to normal levels by the end of 2019.
Credit Suisse was not surprised by the confusing numbers in the first half, which included various non-cash accounting adjustments and a re-statement of quarterlies. The company has insisted that Carrapateena is on budget and schedule but the broker argues otherwise.
The decision to start mining at Carrapateena in November with stockpiled development ore appears to signal the project is on schedule, but the broker asserts the mine is clearly behind schedule as production ore is not available.
The company expects Carrapateena's ramp up will take 18 months and the mill will run on a campaign basis until the full run rate of 4.25mtpa is achieved. Ord Minnett also notes plant construction will be well ahead of the ability of the mine, which raises issues around how to model costs for 2020.
UBS lifts cost estimates to take into account the higher contribution from development ore and campaign processing in 2020. This reduces 2020 operating earnings (EBITDA) forecasts by -16%. the broker reduces estimated mining rates at Carrapateena in 2022 2.3mt and maintains a 2021 forecast of 3.6mt.
Yet there is no guidance for 2020 production and Credit Suisse points out the year will be characterised by stop-start operations as production catches up with the mill's capability. This is likely to deliver recoveries and concentrate grades that are below expectations amid potential for an extension to capital expenditure until stable operations are achieved.
Morgans is confident de-risking of the project will take place steadily over the 18 months. The broker forecasts OZ Minerals will draw down $150m in debt in the second half to complete the project before free cash flow rebounds strongly from 2020.
The company has confirmed capital expenditure for 2019 but also noted there will be more expenditure in 2020 to set up development areas. The full extent has not yet been detailed and UBS factors in total expenditure at Carrapateena in 2020 and 2021 of $190m per annum.
The scoping study has outlined the potential to shift from a sub-level cave to a block cave and a pre-feasibility study has now commenced. Macquarie estimates conversion to a block cave at Carrapateena would more than double the mining throughput rate and increase average copper production from 2026. This would more than offset the forecast decline in output from Prominent Hill.
The haulage study for Prominent Hill (South Australia) is nearing completion. Management is trying to prevent a reduction in production which will occur when stockpiles are exhausted and the mill is only being fed by the underground mine via truck haulage. Shaft or conveyor extraction is being considered. The main positive aspect to this is achieving 3.7mtpa underground ore haulage rates, consistent with guidance, Credit Suisse asserts.
The broker upgrades OZ Minerals to Neutral from Underperform on valuation, assessing strong operating cash flow at Prominent Hill should continue for the two years of copper stockpile recovery before a step down, when low-value gold-only stockpiles replace the high-grade copper as the dominant feed from early 2022 to mid 2023.
Morgans considers the stock is cheap, now trading at a -15% discount to valuation and approaching levels where it has received strong support over the last 3-4 years. The broker believes Carrapateena remains the critical factor, well ahead of Brazil or other growth projects to which little value is ascribed.
Antas, the company's sole operating asset in Brazil, sustained weak production, higher costs and consumed cash in the first half. The Antas pit will close in early 2021. Morgans notes the company has defended its capital allocation strategy, which came into question following an underwhelming financial performance at Antas.
The broker currently ascribes only $109m in value to Brazil and $90m to other joint ventures, assessing the market is sceptical about other growth investment while attention is required at Carrapateena.
Management hopes to accelerate the Pedra Branca development to provide continuity of feed to the Antas mill. The Pedra Branca development will now be undertaken on a smaller scale than originally envisaged, Macquarie points out.
The broker notes some delays have also been flagged for the West Musgrave (Western Australia) pre-feasibility study, now due in early 2020, with a risk the environmental regulator may require an assessment that could result in a delay to the current timeline. The main environmental risk is the presence of subterranean fauna in groundwater and first production is now envisaged in mid 2023.
Shaw and Partners, not one of the seven brokers monitored daily on the FNArena database, has a Buy rating and $12.50 target. The database has four Buy and three Hold ratings. The consensus target is $10.82, suggesting 18.4% upside to the last share price. Targets range from $9.50 (Credit Suisse) to $12.40 (Citi).
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