Company Overview - OZ Minerals Limited (OZ Minerals) is an Australia-based modern mining company with a focus on copper. OZ Minerals owns the Prominent Hill copper-gold mine and Carrapateena copper-gold project, both situated in South Australia. The principal activities of the Company are mining of copper, gold and silver, carrying out exploration activities and development of mining projects. The Company operates the Prominent Hill Mine, a copper-gold mine located in the Gawler Craton of South Australia. The Prominent Hill Mine generates revenue from the sale of concentrate products containing copper, gold and silver to customers in Asia and Europe. Prominent Hill is comprised of the Malu open pit mine and the Ankata underground mine. The Carrapateena copper-gold project is an undeveloped copper deposit. The exploration and development activities are mainly in South Australia and include the Carrapateena project. Other activities include investment in Toro.


Analysis - Oz Minerals (OZL) in its third quarter 2014 update reported that Hill production successfully returned to the 100,000 tonne per year copper production run-rate. Gold production was also expected to be at upper end of guidance. Further, the Company was focused on minimizing cost base at Prominent Hill (low C1 costs of US60.5 cents/lb have been reported). The Company updated that first production from Malu underground was reported to be on schedule with first ore achieved in early October 2014. Another achievement was with regards to the successful completion of the Carrapateena Pre-Feasibility Study with viability demonstration. We note that OZL is now past the extreme cash drawdown period. During the second quarter of 2014, OZL’s sales totaled A$351.00 million, which is an increase of 11.0% from the A$316.20 million in sales during the second quarter of 2013.


Malu Open Pit September 2014 (Source – Company Reports)

With regards to the Carrapateena, new results underscored exploration success at Fremantle Doctor showcasing an interval of more than 1 kilometre of mineralization; 1053.3m @ 0.56% Cu, 0.38g/t Au, from 1220.0m; and a higher grade zone including 577m @ 0.84% Cu, 0.60g/t Au, from 1445.0m.


With the release of the annual mineral resource and ore reserve statements for the Prominent Hill operations in South Australia in November 2014, we note that the Prominent Hill ore reserves and mineral resources remain robust with the majority of changes in reserves and resources at Malu open pit and Ankata underground due to mining depletion. Successful drilling at both Ankata and Malu undergrounds led to further additions. The overall mineral resource base at Prominent Hill is 178 million tonnes at 1.1% copper and 0.7 grams per tonne gold for 1.9 million tonnes of contained copper and 4.0 million ounces of contained gold. Further, ore reserves of 79 million tonnes at 1.0% copper and 0.6 grams per tonne gold for 800 thousand tonnes of contained copper and 1.4 million ounces of contained gold have been identified. This enables OZL to have global mineral resource base, including the Carrapateena and Khamsin deposits in South Australia, of 1.2 billion tonnes at 0.8% copper and 0.3 grams per tonne gold for 9.3 million tonnes contained copper and 13.2 million ounces contained gold. The global ore reserve base, including Prominent Hill and Carrapateena, is brought to 349 million tonnes at 0.9% copper and 0.4 grams per tonne gold for 3.3 million tonnes of contained copper and 4.9 million ounces of contained gold.


Prominent Hill_Low C1 Costs (Source – Company Reports)

Details of the Malu open pit ore reserves indicated that the ore tonnes reported estimate are unchanged from the 30 June 2013 estimate despite mining depletion of 8.1 million tonnes, due to increased call factors (which converts mineral resources to ore reserves)  for both copper and gold. There was a decrease by 54 thousand tonnes in line with mining depletion of 59 thousand tonnes for the copper metal contained in reserves. The gold metal contained in reserves reported decrease by 20 thousand ounces despite mining depletion of 154 thousand ounces.


Prominent Hill_Ore Milled per Quarter (Source – Company Reports)

For the Ankata underground ore reserves, the ore tonnes estimated in the reserve increased from the 30 June 2013 estimate as a result of conversion of inferred resources to measured and indicated resources and the definition of additional resources in the ‘Pea Brain’ area, despite the depletion from mining of 1.2 million tonnes. The copper metal contained in the reserve estimate increased marginally to 155 thousand tonnes despite depletion from mining of 26 thousand tonnes. The contained gold in the reserve estimate reduced with mining depletion and lower grades in the resource estimate.


Carrapateena: Fremantle Doctor Q3 Significant Intersections (Source – Company Reports)  

An initial ore reserve for Malu underground was estimated as at 31 December 2013 and in the following six months drilling has seen the addition of 2 million tonnes of ore to the ore reserve. The copper metal contained in the ore reserves estimate has increased by 20 thousand tonnes to 190 thousand tonnes. The contained gold estimate has increased by 20 thousand ounces to 240 thousand ounces. The Company reported that no current exploration or mining activities have taken place at Kalaya underground. Mineral resource estimates in this area decreased slightly with geological interpretation changes bringing the resource into line with the current Malu underground resource. Copper-gold ore stockpiles to 30 June 2014 increased by 700 thousand tonnes to 1.7 million tonnes and gold-only ore stockpiles increased by 2.0 million tonnes to 8.5 million tonnes.

As per the Company’s last guidance, OZL expects to see copper production of more than 105,000 tonnes in 2015 and between 105,000 and 115,000 tonnes from 2016 to 2018 in view of the fact that the expected production from Malu underground is currently based on resources. Gold production is expected to be in excess of 105,000 ounces in 2015 and more than 120,000 ounces from 2016 to 2018. OZL also stated that the Malu underground is expected to see production from Prominent Hill to continue until at least 2024. Mining in Malu Open Pit is expected to continue until 2018 based upon the current mine life plan. Mining from Ankata underground is expected to continue until 2022. With the lower volumes of ore mined after completion of the open pit, plant throughput will be reduced post 2019 to around 6Mt per annum with reduced output and possible batch processing is envisaged after 2022.


Copper Price 2013-2014 (Source – Company Reports)

From market standpoint, operational risks for OZL should be lower than previous years given the lower waste stripping expected at Prominent Hill in 2015. More particularly, OZL’s deferred waste stripping costs may fall by around $100m from over $200m in 2014. However, Malu underground development appears to remain relatively high in 2015. Risks such as commodity price (copper and gold prices) and exchange rate fluctuations, resource growth and mine life, regulatory changes, and operating and development risks need to be considered. Further, steps such as putting Malu underground on care and maintenance may be value accretive given the associated costs. With improvement in copper price, mining may be resumed in a positive cash-flow environment. Nonetheless, a robust quarterly result, debt-free balance sheet, optimized mine plan and sale of a stake in the Carrapateena development project, and falling A$ driving earnings upgrades, are all prospective catalysts in 1H15. The September 2014 quarter updates are expected to continue into the December quarter and 2015. In the December quarter, copper averaged A$3.50/lb and gold averaged A$1,405/oz, whereas the oil price dropped ~40% in A$ terms. This is indicative of reduced operating costs with better gains.



Based on the foregoing, we put a BUY recommendation for this stock at the current price of  $3.39.

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