Can OZ Minerals Bank On Carrapateena?

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Copper-gold miner OZ Minerals maintains guidance for 2017, despite heavy rain adversely affecting production in the March quarter. A delay has been flagged to the bankable feasibility study for the Carrapateena project.

-Change of consultant delays completion of Carrapateena feasibility studies.
-Is there a change in view on Carrapateena concentrate?
-Is the concentrate treatment plant at Carrapateena no longer needed?
 

By Eva Brocklehurst

OZ Minerals ((OZL)) reports March quarter production was soft, adversely affected by heavy rain at Prominent Hill and scheduled plant maintenance. Milled tonnage disappointed brokers but guidance for both production and costs is uncompromised. Production was -11% below Deutsche Bank's forecast, attributed to the heavy rainfall. Production also missed Morgan Stanley's forecasts but a catch-up in the second half is expected to deliver on guidance.

The company has indicated the Carrapateena project is on track, although the bankable feasibility study has been delayed, and aims to have critical work completed by the next quarter. The project requires federal and state government approvals plus the native title agreement to be finalised before an investment decision is made by the end of the year.

The greatest near-term opportunity appears to be optimising Prominent Hill underground to progressively include additional resources, Credit Suisse asserts. The opportunity is yet to be examined in detail, the broker acknowledges, to determine if a lower cost mining method can be applied without risk of material establishment capital.

Carrapateena

Critical threats identified in the pre-feasibility study such as power and water have all been significantly reduced or resolved, Citi notes. Overall, the company has indicated the market should rely on assumptions in the pre-feasibility study for operating metrics, costs and timing and proposes commercial operations from the second half of FY19.

Credit Suisse believes confusion has increased, as the relative certainty and definitive nature of the pre-feasibility in November appears to have turned into an incomplete bankable feasibility study. A key underground study will now not be completed until the end of the year.

The delay appears to be because the original study was not considered satisfactory and could not be audited. As a result a new consultant has been appointed. Credit Suisse is sceptical. Management presented the update on Carrapateena as a de-risking of key factors but to the broker this exposed previously unknown risks and materially increased uncertainty.

Some positive surprises actually add to the broker's confusion, such that the expectation that Carrapateena concentrate will be cleaner than Prominent Hill concentrate and readily saleable without processing through the concentrate treatment plant.

The broker's understanding was that Carrapateena contained more uranium than Prominent Hill, suggesting larger penalties and restricting offtake partners. All up, until the underground study is delivered and there is greater clarity on the uranium issue, Credit Suisse believes the project retains elevated risks and lacks certainty on budget and schedule.

Macquarie gleans more confidence as a result of the update, in contrast, believing the move to twin declines accelerates the start date for the project. The broker accepts the concentrate treatment plant is no longer on the critical approval path, as metallurgical test work suggests saleable concentrates can be produced without it, but suspects approval will eventuate regardless, as the plant improves medium-term marketability of both Carrapateena and Prominent Hill concentrates.

Technical concerns continue to hamper Deutsche Bank's view on the project yet the broker carries Carrapateena at 100% in its discounted cash flow valuation. As the stock is now trading closer to fair value Deutsche Bank upgrades to Hold from Sell.

On the known inputs, given the two-year lead time for production as well as technical risks, Morgan Stanley considers it prudent to only attribute $380m in value to Carrapateena. The discount is expected to unwind as a project advances. Canaccord Genuity also retains a cautious view of the development, given the various challenges.

The broker considers Carrapateena one of rare but more challenging Australian long-life scalable base metals projects, and its outcome will depend on the company's ability to execute as well as the prevailing copper price. The broker, not one of the eight monitored daily on the FNArena database, has a Sell rating and $7.20 target.

Citi remains upbeat, maintaining a Buy call and reducing its target to $10.30 from $11.50 because of accounting rather than softening a bullish view. The broker was initially concerned about the change to an early contractor involvement (ECI) model at Carrapateena but believes it should, in the end, make the project easier to manage and is a prudent way to lock in contractor and procurement prices.

FNArena's database shows three Buy recommendations, three Hold and two Sell. The consensus target is $8.73, signalling 21.9% upside to the last share price. Targets range from $7.00 (Deutsche Bank) to $10.40 (UBS).
 

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