HAVING struggled to fund the development of its flagship Prominent Hill project, OZ Minerals has now been rewarded with billions of dollars in revenue following the start-up of the copper-gold operations in 2009.
As a result of the Global Financial Crisis that began in late 2007, OZ was “facing serious financial difficulties”, according to then-chairman Barry Cusack.
China Minmetals Non-ferrous Metals Company (Minmetals) had proposed to take over the besieged entity, but Federal treasurer Wayne Swan refused to approve the buyout in late March 2009. He said the Government’s main reason for the decision was that it wanted the Prominent Hill mine to remain Australian owned.
By May 2009, the mine was officially opened and operating. However, it was not due to become cashflow positive until the second half of that year and OZ remained weighed down by debt.
Minmetals and OZ worked together on a revised arrangement and devised a modified sales agreement whereby OZ would sell Minmetals its Sepon, Golden Grove, Century, Rosebery, Avebury, Dugald River, and Izok Corridor projects, plus additional exploration and development assets. The sale was finalised in mid 2009 and OZ received US$1.354 billion, enabling it to pay down its debt and more forward with cash on hand of almost US$600 million.
There was no stopping OZ in the 12 months following and, by the end of the 2010 calendar year (also OZ’s financial reporting year), Prominent Hill had earned OZ $1.128 billion in revenue.
“In 2011, continued good production performance from Prominent Hill, along with strong commodity prices, underpinned our financial performance and saw us deliver strong revenues of $1.1 billion,” OZ managing director and chief executive officer Terry Burgess said in the company’s annual general meeting in late May this year.
“Underlying net profit after tax was $322.7 million; this was $75.5 million lower than the 2010 financial year, primarily due to higher mining costs caused by an increase in material
movement from the open pit, higher exploration expense and a higher income tax expense, partially offset by lower unrealised foreign exchange losses.
“[In 2011], we had higher operating cash flows of $647.1 million: a record for current operations. This has been an important element in allowing us to retain a healthy cash balance in order to carry out our strategy of growing the business through acquisition, new developments and exploration while also returning capital to shareholders.”
Cash costs for Prominent Hill during 2011 were about $35.50 per tonne of ore milled.
“Costs were impacted by increasing volumes and higher fuel input costs as well as lower by-product credits, primarily reflecting lower gold production when compared with 2010,” Mr Burgess said.
“Cash costs are expected to rise during 2012 as mining activity increases, as well as higher costs associated with underground mining and reduced gold by-product credits.
Prominent Hill copper-gold project
Prospective for copper and gold, the Prominent Hill project is 650km northwest of Adelaide in South Australia and 130km northwest of BHP Billiton’s Olympic Dam mine.
The Prominent Hill project has an 8 million tonnes per annum processing, grinding and flotation plant on site to refine the ore from the Malu open pit mine.
In 2010, about 112,171t of contained copper and 196,400oz of gold were produced. Last year, Prominent Hill produced 107,744t of contained copper and 160,007oz of gold.
Both years exceeded OZ’s output guidance, which was between 100,000t and 110,000t of copper and 150,000oz and 160,000oz of gold.
“[In 2011], we achieved a new Prominent Hill record with over 11 million tonnes of ore mined within the Malu open pit. The processing plant showed excellent performance with record throughput and averaged production 25 per cent above design capacity,” Mr Burgess said.
“Importantly, as throughput has increased we have been able to maintain both copper and gold recoveries…during 2011, within our stated guidance.
“Production guidance for 2012 is 100,000 tonnes to 110,000 tonnes of copper and 130,000 ounces to 150,000 ounces of gold.
“Copper and gold are currently on track to meet this guidance, although copper production is likely to be towards the bottom half of this guidance range as we balance waste mining and ore mining during the rest of the year,” he said.
“Prominent Hill produces one of the highest-grade copper concentrates traded on the open market, with copper grades at or above 50 per cent. Our concentrates are sold to smelters in Asia and Europe.”
Prominent Hill also hosts the Ankata underground deposit, which is undergoing development. The deposit is expected to produce an extra 25,000t of copper and 12,000oz of gold annually, following the completion of ramp up at the end of this year.
At the end of 2011, total JORC-compliant measured, indicated and inferred resources at Prominent Hill were 272.7 million tonnes grading 0.98 per cent copper and 0.7 grams per
tonne gold for 2.678mt of copper and 6.3 million ounces of gold. Reserves were 72.3mt grading 1.13 per cent copper and 0.64g/t gold for 810,000t of copper and 1.5moz of gold.
OZ owns the rights to about 7000 square kilometres of land, including its Prominent Hill project and the right to explore for copper and gold at the Mt Woodsproject, which is near
Prominent Hill. The Mt Woods package is owned via a joint venture with IMX Resources whereby OZ can explore for copper and gold, while IMX retains the right to explore and develop magnetite deposits.
For 2012, OZ has allocated $70 million for exploration at the project.
About $40 million will fund near mine exploration and $30 million will be spent on regional exploration including the IMX JV area.Carrapateena copper project
In May 2011, OZ acquired the Carrapateena project, 100km southeast of BHP’s Olympic Dam development in South Australia, for US$250 million.
According to Mr Burgess, Carrapateena had the potential to produce between 50,000t and 150,000t per annum of copper, with an initial resource of 203mt grading 1.31 per cent copper at the southern part of the deposit.
“We are currently undertaking an extensive drilling program at Carrapateena, as well as associated feasibility studies to further define and potentially extend the known resource,
with an expected total expenditure of $60 million for 2012,” Mr Burgess said.
“Our exploration drilling has returned excellent early results that support the existing model and, in some areas, show some mineralised extensions to the model.
“The current objective is to convert the previously announced inferred resource to an indicated resource.”
Mr Burgess said that the main ore body was 500m below the surface and the company was evaluating different underground mining techniques to extract it, including block caving,
sub-level open stoping and sub-level caving.
“The next critical step in the project will be around the decision to develop access to the ore body to allow more efficient testing and characterisation of the deposit than drilling from the surface. We will reach a decision on this around the third quarter of 2012,” he said.
“This is a long-dated project and we anticipate that we have around four years of exploration and studies ahead, and then a further two years of construction and development. We are hoping to reach a decision to mine at Carrapateena by 2015.”
Strategies for the future
In addition to maximising value from Prominent Hill and eventually Carrapateena, OZ’s business development team is actively pursuing possible acquisitions.
“We are seeing more opportunities in the last few months than we didin the previous two years, especially with the current uncertainty in the economy. Our preference is to acquire
assets that will deliver production in the short term, but we also will review later-dated opportunities,” Mr Burgess said.
“Our first objective will be to ensure that [a potential asset] meets our objectives of commodity, scale and country risk, and that we apply the appropriate disciplines to our assessment of the project and the price we are prepared to offer.”
In addition to adding assets and financial value to the company, Mr Burgess said that OZ had implemented policies to ensure its work force had a low turnover rate, increased female
representation at all hierarchal levels and employed workers from local towns.
He said that OZ had also conducted training programs to boost literacy and numeracy.
“One of our goals is to increase the representation of females in our workforce to 25 per cent across all job bands. We have made good progress in this area and have achieved a minimum of 25 per cent within four of our six job bands. We are continuing to target the areas that remain under-represented, particularly in the middle management area.”
Mr Burgess added that a diverse workforce made “good business sense” and was part of the reason the company’s turnover rate was low.
As part of its company strategy, OZ chairman Neil Hamilton said the company would remain focussed on copper.
“The average copper price in 2011 was US$4.00 per pound while gold averaged US$1572 per ounce: record averages for both commodities,” Mr Hamilton said.
In mid 2011 the copper price dipped, stabilising in the last couple of months of the year to end at $3.43/lb.
“For much of 2011, commodity markets tended to react to wider macroeconomic concern, including the European debt situation and a potential slowdown of Chinese growth,” he said.
“Global copper supply looks like it will continue to remain under pressure. History has told us that the market has frequently over-estimated the supply side [of copper].
This has been evidenced more so in recent times with lower grades from various mines [and] strikes, together with projects being delayed or deferred. This has placed a lot of pressure on the copper market and we see this underpinning the healthy outlook for the copper market [and] sector.”
Mr Hamilton said he believed that with the copper price at about US$3.45/lb in late May this year, and taking other variables in to account, the outlook for copper was positive.