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
 

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.

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.

Carrapateena Pre-feasibility

The Carrapateena pre-feasibility study has shown increased conceptual value from optimising a transition to block caving from sub-level caving. The first stage of the block cave development will be completed in 2021 while the current sub-level operation will be able to continue uninterrupted until 2023.

A final decision on the first block cave is expected in 2023, allowing for first production in 2026. A final investment decision on block cave 2 is expected in 2036.

The transition from sub-level caving at a point where grades are higher means mining will be in a sweet spot and drive production in the early years of the block cave to 140,000tpa of copper over 2028-32. This is expected to aid pay-back on the project and support de-leveraging. The main block cave will extend life until 2037, with the smaller one after that extending life to 2045.

Brazil

Credit Suisse also notes the Brazilian projects remain difficult as there is no clear path to an acceptable return on investment. The broker accepts that the move into Brazil came before the Vale dam disasters and the coronavirus pandemic but these factors have now simply increased the challenges for what is regarded as an inferior portfolio of assets.

FNArena's database has six Buy ratings and one Sell (Credit Suisse) for OZ Minerals. The consensus target is $11.18, suggesting 3.5% upside to the last share price.

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