Australia | Jun 26 2020
A block cave expansion at Carrapateena has been outlined, with potential to transform the long-term production outlook for OZ Minerals.
-Increased conceptual value from a transition to block caving at Carrapateena
-West Musgrave deal may signal OZ Minerals believes the project could be larger
-Brazilian assets provide no clear path to an acceptable return
By Eva Brocklehurst
Carrapateena is performing well for OZ Minerals ((OZL)) with the latest pre-feasibility study outlining potential for a block cave expansion and transforming the long-term production outlook for the company.
UBS asserts the vision and sequencing outlook delivered in the study are sensible. The broader province has prospects for satellite deposits and for the life of the mine to extend for decades beyond the current 20 years.
The expansion of Carrapateena drives increases of 50% to Macquarie's 2029-32 copper production forecasts and 30% to gold production forecasts. The expansion is expected to cost $1.25bn.
The inclusion of the larger scale development at Carrapateena leads to a 13% lift in Macquarie's price target, to $13.00 from $11.50. The broker expects OZ Minerals will be able to fund the project from operating cash flow and existing debt.
2020 guidance remains intact, supported by the mill at Carrapateena operating at rates above nameplate for six days of continuous operations. UBS considers OZ Minerals has several growth options that will be de-risked over time and drive outperformance in the share price. If the expansion is undertaken, production could grow to an average of 110-120,000tpa for 2026-37.
Citi believes the challenge for OZ Minerals will be choosing between spending US$1bn after FY22 on a block cave at Carrapateena or developing West Musgrave.
OZ Minerals has announced a $73m scrip offer for Cassini Resources ((CZI)) in a move to acquire control of West Musgrave. However, management has signalled this should not be taken as an intention to develop the asset but rather as offering the potential to progress the project, perhaps to sale.
Ord Minnett envisages merit in the ownership structure being simplified ahead of the project financing. For Cassini Resources, the deal realises immediate value for shareholders rather than waiting for a longer-dated development.
The broker does point out that OZ Minerals recently indicated it had reservations over increasing its exposure to nickel, which is more than 50% of project revenue, which may indicate plans to reduce the commodity exposure or sell the project outright.
The deal may also be a sign that OZ Minerals is confident the project can become bigger, Citi asserts. Still, the broker considers the project ambitious with modest grade and limited options to push throughput higher.
Management has committed to providing more detailed asset and planning information once it secures ownership. Credit Suisse does not support the advancement of the project based on the current studies, which outline a sub-optimal risk/return profile based on high expenditure, modest grade, remote location as well as complex metallurgy.
It may be that ongoing drilling and improved understanding of the orebody could yield a project which improves the theoretical economic outcome but this is yet to be demonstrated.
The capital required to develop West Musgrave and Carrapateena's initial block cave expansion is material, although Credit Suisse acknowledges the conceptual timing around project development and transition could work out well.