OZ Minerals: More Gold Yet Higher Costs

Australia | Jul 28 2021

The outlook for OZ Minerals has improved, with strong copper/gold prices and several production catalysts in the wings

-Cost inflation in the spotlight across the mining industry
-OZ Minerals seen a strong performer amid earnings growth, commodity tailwinds
-Approval of the Prominent Hill expansion could be a catalyst


By Eva Brocklehurst

The outlook has improved for OZ Minerals ((OZL)) which achieved better-than-expected June quarter production, as Prominent Hill becomes the main driver of an upgrade to expectations with mining reaching record output of 4.6mtpa.

Morgan Stanley points out this is important, given rising tonnage targets for 2022, and forecasts 5mtpa from the March quarter onwards. Nevertheless, costs were also much higher than expected. Guidance for 2021 is being driven by higher capital expenditure and a focus on the effective formation of the Carrapateena cave while prioritising mine development infrastructure.

Gold guidance has increased at Prominent Hill on assumptions the positive grades obtained from the stockpile in the June quarter will be maintained. Yet Morgan Stanley highlights the risk that the better gold grades could be reversed over the remainder of the year.

Production in the June quarter consisted of 32,700t of copper and 57,900 ounces of gold and C1 cash costs of US61c/lb were well ahead of estimates, while AISC (all-in sustainable costs) of US$1.34/lb was 8% higher than Macquarie forecast.

Still, the broker was impressed by the performance of Prominent Hill as it enabled OZ Minerals to upgrade gold production guidance for 2021 by 6-7%. Gold production guidance for 2021 is now 205-228,000 ozs and copper is unchanged at 120-145,000t.

The $500m underground expansion at Prominent Hill is expected to be approved in the third quarter as is the update on West Musgrave, which Macquarie considers are near-term catalysts. Earnings growth appears compelling to Goldman Sachs as well, forecasting operating earnings will double in 2021 and increase by around 15% in 2022.

Cost Inflation

Shaw and Partners notes cost inflation is gaining attention across the industry and the company is working through the impact on its capital cost assumptions as important milestones and decisions approach later in 2021.

While cost guidance was decreased for Prominent Hill, it was raised for Carrapateena because of increases to sustaining capital expenditure, and the main disappointment for Macquarie was the fact the strong volumes in the quarter did not translate through to cash costs.

Citi updates gold price forecasts, believing they have peaked, but concludes they are also unlikely to fall rapidly. After updating for gold prices and the company's revised guidance for 2021, the broker's estimates of operating earnings (EBITDA) rise 5%, while for 2022 and 2023 these are eased back -4% and -3%, respectively.

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