OZ Minerals Fires Interest In Smaller Carrapateena Option

This story features OZ MINERALS LIMITED. For more info SHARE ANALYSIS: OZL

-Potential to fund this option on its own
-Private equity stake adds to speculation
-Suppressing uranium even more critical
 

By Eva Brocklehurst

OZ Minerals ((OZL)) has reignited interest in its Carrapateena deposit, defining a high-grade resource in order to provide a more manageable start to the project, along with lower up-front capital requirements.

The defined high grade  is 61m tonnes with 2.4% copper, 0.9 grams per tonne gold and 11.7g/t silver. The company will pursue a scoping study to further a 3mtpa processing option and has indicated capital expenditure should be less than $1bn.

JP Morgan considers this an important step to introduce a joint venture partner to the project. Assuming cash costs around $65 per tonne of ore and $10 per tonne for processing, the preliminary assessment is that the project could pass a 15% internal rate of return hurdle at US$2.50 per pound of copper, which compares with spot around US$2.35/lb.

Having a smaller, high-grade option should allow the company to negotiate a fall-back if the larger block cave project falls through. The company could fund the smaller option on its own, which is a key difference with the larger proposal where OZ Minerals needs a partner.

The smaller option could present a more attractive risk/reward proposition. JP Morgan suspects there are relatively few buyers willing to take on the risks of the larger project. The broker is negative on copper prices and its forecasts for these are below spot until 2018, so Carrapateena is considered to be a post 2020 project. The market is unlikely to ascribe much value for the project until there is a clear path towards development, in JP Morgan’s opinion.

Citi notes the company has been on the acquisition trail for some time to find another development which could fill the production gap between the run-down of Prominent Hill in FY20 and the potential start of Carrapateena but this strategy now competes with the latter’s high-grade option for scarce capital.

The entry of Kohlberg, Kravis and Roberts (KKR) onto the register as a substantial shareholder has provoked interest. The private equity group recently acquired 10% of OZ Minerals and, while the resources sector has become more active in terms of asset sales and minority interests, UBS flags the fact it is unusual for private equity to be so active in resources, as this is usually attracted to assets which are generating cash and light on capex requirements. The broker suspects, in this case, KKR is of the opinion there is value at current prices and this may signal a cyclical low is near.

Macquarie make changes to forecasts to incorporate a smaller scale development at Carrapateena. Longer-term forecasts rise significantly as the broker’s small option development scenario delivers a 20% rise in the price target, to $5.50 from $4.60. The smaller scale option is encouraging as the evaluation of the larger development delivered sub-economic returns.

Macquarie suspects suppressing the uranium grade will be the critical component in moving forward with the high-grade option. The uranium grade of the high-grade core is too high, at 328ppm, to produce a saleable copper concentrate and the success of hydrometallurgical trials to suppress the uranium will be critical to the assessment of its potential.

Morgan Stanley, too, considers this problematic. The Hydromet process could support a high-grade development but just how much additional capital is required is uncertain at this stage. Meanwhile, the stated capex outlay remains ambitious, in the broker’s opinion. Operating and capital costs could face downward pressure with a weaker Australian dollar and, as large-scale resource projects wind up, these factors may weigh in the company’s favour.

All up, for Credit Suisse the existence of high-grade uranium is a major issue. OZ Minerals was not able to attract an offer for Carrapateena during stronger copper market conditions and the high-grade core option has been well understood for some time.

Hence, the broker considers the improved grade and the more favourable capital requirements are just a small net positive. Moreover, the market is attributing a negative value to Carrapateena because of the cash that is expected to be spent on investigating options that might not have a commercial outcome.

Credit Suisse suggests the smaller scale option is probably too small to attract a JV interest unless it is seen as a low-cost option for a larger play on the balance of the project. Maybe the project could become a more marketable divestment option if private equity were to gain sufficient control and seek to extract maximum cash over the next two years of peak free cash generation?

FNArena’s database has six Buy ratings, one Hold and one Sell on OZ. The consensus target is $4.39, suggesting 6.5% upside to the last share price. Targets range from $3.00 (Deutsche Bank, JP Morgan) to $5.50 (Macquarie).
 

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms