Kalkine Resources Report

OZ MINERALS LIMITED

Oct 28, 2015

| Read Time :10 Mins

OZL

Investment Type

Mid - Cap

Risk Level

Action

Rec. Price ($)

Company Overview - OZ Minerals Limited is an Australia-based mining company with a focus on copper. The Company's principal activities are mining of copper, gold and silver, carrying out exploration activities and development of mining projects. The Company owns the Prominent Hill copper-gold mine and Carrapateena copper-gold project, both situated in South Australia. The Prominent Hill consists of the Malu Open Pit, Ankata Underground mine and the Malu Underground mine. The Prominent Hill is engaged in the sale of concentrate products containing copper, gold and silver to customers in Asia, Europe and Australia. The other activities of the Company include its Group Office, other investments in equity securities and exploration projects, including Carrapateena.

Focus on copper feed led to higher copper production: OZ Minerals Limited (ASX: OZL) Prominent Hill operations generated a copper production of 33,518 tonnes during the third quarter of 2015, reaching a total of 97,669 tonnes for the nine months to September. This is an increase from 32,991 tonnes of copper production in the second quarter of 2015. But, Gold production decreased to 23,817 ounces during the quarter, as compared to 24,790 tonnes in second quarter of 2015, while achieved 81,481 ounces of production for the nine months to September. The group’s focus on copper feed also led to the lower production of gold during the quarter. Meanwhile, the open Pit was on track with the group’s mining plans while the Ore mined during the third quarter reached 3.0Mt with 2.6Mt of copper-gold ore and 0.4Mt of gold only ore. Waste to ore strip ratio decreased to 3.2:1 during the quarter against the 4.0:1 in the earlier quarter. The group’s de-risking initiatives were also on track, wherein OZL estimates a planned expenditure of over $5.0 million for 2015. The Malu underground operation started ahead of schedule during July 2015, while the underground operations generated high grade copper ore of 0.45Mt at 2.0% copper during the quarter.

Enhanced copper production (Source: Company Reports)

Declining production costs: The group was able to decrease the C1 cash costs of Prominent Hill operations production to US74.3 c/lb of payable copper during the third quarter of 2015 as compared to the US75.3 c/lb in the second quarter of 2015. This decrease was driven by better copper production due to higher ore milled, coupled with the falling Australian dollar and decrease in net costs. Accordingly, the C1 costs reached US71.1 c/lb during the nine months ended to 30 September. The Open Pit mining unit costs also decreased to $5.62/t during the third as the group’s cost control strategies and mining efficiencies efforts had paid off. But, underground operating costs rose to $46/t mined on the back of higher operating development and the group estimates its fourth quarter underground operations also to be maintained as in third quarter. However, the processing and maintenance costs improved as compared to the second quarter driven by better wear performance of mill liners.

C1 factor analysis (Source: Company Reports)

Partnered with PepinNini for Nickel Sulphide Polymetallic Exploration at Mt Woods SA: OZ Minerals recently made a farm-in joint venture with PepinNini Minerals (PNN) for the Mt Woods Inlier, which is situated around the locality of the OZ Minerals' Prominent Hill Copper-Gold Mine, Gawler Craton and over 600km northwest of Adelaide. The project area has exploration licenses 5210 and 5439 in South Australia. Meanwhile, PepinNini has the right to earn up to an 80% interest over five Stages of exploration for up to 10 years which include drilling. PNN might spent over $4.4-million to get first 40% interest in the project area and would drill a minimum of 8,000 m. On the other hand, the group might not fund further expenses during stages three to five of the explorations and PNN could earn extra 40% interest by conducting a further 30,000 m of drilling and spend $12-million on exploration during stages three and four. PNN might need to spend over $15-million on the prefeasibility study during stage five. PepinNini would search non-ferrous mineralized mafic to ultramafic magmatic geological environments comprising Nickel (Ni) Sulphides, Platinum Group Metals (PGE) as well as commercial accessory minerals like Cobalt, Gold and Silver (excluding Copper)

Mt Woods project location (Source: Company Reports)

Carrapateena Project highlights: The Carrapateena Project, new mineral resource statement recognized a high grade core with the mineral resource which was being projected at 61Mt @2.9% CuEq2. Accordingly, the group started a scoping study which targets the potential mining and processing project of up to 3 Mtpa, which would need a capital of less than $1 billion using selective mining methods. Meanwhile, the first results from the Hydromet demonstration plant showed that the process is scalable and delivered copper-in-concentrate levels of > 55%, and the completion of this demonstration trial would enable the group to be the cleanest copper concentrate producer with no impurities.

Carrapateena Project’s indicated and inferred mineral resources (Source: Company Reports)

Global Exploration highlights: As per the Bellas Gate project at Jamaica, drilling of seven holes for 1,435 meters was finished during the quarter which includes 1 hole for 235 meters at Hendley Prospect, two holes for 220 meters at Charing Cross Prospect, two holes for 413 meters at Dry Hill Prospect, one hole 262 meters at Congo Prospect and one for 307 meters at Kola Prospect. Meanwhile, drill holes at Charing Cross and Dry Hill intersected minor chalcopyrite and bornite in veins and structures. Mab Hill first hole results delivered low grade copper and gold related with porphyry veining. Provost Prospect Field mapping recognized many areas of intense porphyry-style quartz veining and variation related to iron oxides, copper oxides and limonite at surface. Extra field reconnaissance would be finished along the Hendley – Provost - Geo Hill trend. The group intends to conduct Kola Prospect drilling during the fourth quarter of 2015. With regards to Rodinia project at Jamaica, the group entered into a definitive Joint Venture agreement with Carube Resources Corp., wherein OZ Minerals might be appointed to participate in exploration on up to three additional projects in Jamaica, which would earn up to 80% in each.

OZL Daily Chart (Source - Thomson Reuters)

Partnered with Minotaur Exploration to quicken brownfield copper resources potential study around Prominent Hill: The group wants to fasten its hunt for brownfield copper resources around Prominent Hill in South Australia’s Gawler Craton region, as OZ Minerals intends to further grow its copper production in the future. Therefore, OZ Minerals joined Minotaur Exploration to leverage their expertise in exploration and analysis, which would lead to a better chance of making major new discoveries. Therefore, OZ Minerals can now divert its focus on its core efforts like enhancing the Carrapateena high grade resource option, growing the Prominent Hill underground mine as well as pursue growth opportunities. According to the initial drill testing results which would be conducted by Minotaur in 2016, the group would take decision on making any drill targets as projects or low priority targets. Accordingly, if the group enters into a joint venture with Minotaur, than for a designated project, Minotaur would be considered to have earned a 20% interest in the relevant target and might receive an extra 10% interest in the appropriate target if it elects to fund the early $2million of exploration activity. Otherwise, each party would contribute for exploration costs in proportion to their related interest in the target or Minotaur’s interest in the designated project might be diluted. For a low priority target, then Minotaur has the option to explore and solely fund the whole expenditure. Minotaur might need to fund the first $2 million in exploration expenditure of any low priority targets in return for an 80% interest in the relevant target. If a JORC resource of at least 200,000 t of contained copper or its comparable is discovered, then the group can buy-back to get 80% ownership in the applicable target by paying Minotaur 3 times the exploration expenditure as per the relevant target.

Positive outlook: OZ Minerals improved its copper production guidance for the full year of 2015 to the range of 126kt to 131kt, driven by its consistent and reliable production performance in prominent hill operations during the past few quarters. The group is also improving its production costs and accordingly estimates a lower C1 unit cost for the fiscal year of 2015 in the range of US70-80c/lb. OZ Minerals even reduced the Open pit unit mining cost (inc. geology) guidance to $5.60 - $5.80/t for the year. Meanwhile, OZ Minerals shares surged over 30.8% in just last four weeks as rumors have been swirling around the stock on a potential takeover. Kohlberg Kravis Roberts (KKR), a private equity firm offered$3.60 offer price for a 10% stake at to OZ Minerals. Despite such a rally, the stock is trading at a cheaper P/E of 12.5x and also has a decent dividend yield of 3.6%. Based on the foregoing, we give a “BUY” recommendation to the stock at the current price of $4.47.

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