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OZ Minerals: More Gold Yet Higher Costs

Australia | Jul 28 2021

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

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.

For Shaw, OZ Minerals has been a performer since 2015, with growth, earnings and commodity price tailwinds. Guidance over the past six years has also been "best in class" Yet, this means the stock does not leave any room for error. The broker, not one of the seven stockbrokers monitored daily on the FNArena database, rates OZ Minerals Buy with a target of $25.

Goldman Sachs, also not one of the seven, retains a Neutral rating with a $25.30 target, based on valuation and the prospect of elevated capital expenditure and low free cash flow.

Morgans expects board approval for the expansion at Prominent Hill in the September quarter will be a catalyst for momentum despite it being incorporated into valuations. The broker maintains a 5% premium to derive its target ($24.44), reflecting a scarcity of high-quality copper plays.

The first half results are due on August 18 and the database has three Buy ratings, two Hold and two Sell. The consensus target is $24.20, signalling 4.5%  upside to the last share price. Targets range from $19 (UBS, yet to comment on the update) to $31 (Macquarie).


Carrapateena's gold recovery was maintained and guidance is now $30-35m for sustaining mine development, as the decline is prioritised over lateral development to make up for underdevelopment in the first quarter. Management indicated this increase in expenditure is about timing rather than any acceleration in costs, although acknowledged ground support costs have increased.

Stronger copper production at Carrapateena was largely because of the average grades milled and Macquarie notes copper concentrate grades increased to 44% in the June quarter from 37-38% in the prior six months. Shaw also flags the availability and reliability of the mining fleet has improved at Carrapateena after the transition of the underground mining contractor.


The performance of the Carajas operation was weaker than most expected. Mining at Antas has now ceased and the Pedra Branca underground is the sole source of ore. Pandemic-related restrictions have resulted in delays to the completion of the ventilation infrastructure at Pedra Branca and this has driven a downgrade to 2021 production guidance and a material lift in costs.

Any improvement in the outlook for the Brazilian assets could be a positive catalyst, Macquarie asserts while Shaw notes the maiden resource for the option known as Saint Lucia is due in the September quarter and this could be a future hub in the Carajas strategy.

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