Robust operations with mine life extension emerging
Prominent Hill site visit revealed confidence of mine life extension from drilling demonstrating continuity of previously discrete mineralized zones. Management is now sharing its geologists? long-held conviction that underground resources will grow, convert to reserves and extend mine life.
While mine life extension appears likely, an open-pit resource needs to be discovered to provide base load for the 10mtpa mill. An underground mining rate cannot yet be speculated, but feeding half the mill capacity would be an optimistic outcome. The shape of the ore body suggests that sub-level open stoping may be more likely than lower-cost, more productive caving methods.
Any reduction in mill tonnage has implications for unit milling costs and fixed site administration cost allocation. Underground grades appear to be 1.2-1.4% copper, a little higher than the current pit grade, but not sufficient to offset likely higher unit costs.
Current costs total $35/t ($10/t processing, $4/t site G&A and $21/t mining). Approximately half the milling costs appear to be variable, suggesting, at half tonnage, milling cost could increase from $10/t to perhaps $13/t, admin could double to $8/t and mining increase from ~$21/t to perhaps $30/t for a theoretical cost of $51/t from $35/t currently. A 0.1% higher copper grade at $2.50/lb generates about $5/t of additional revenue, implying a significant reduction in margin and earnings, but without the need to carry the $1.5bn establishment cost of Prominent Hill, already paid for by the pit.
Valuation: No change to target price but we need to review mine life assumptions. Upgraded to OUTPERFORM based on improved outlook but weaker share price.
OZL Price at posting:
$14.95 Sentiment: Hold Disclosure: Held
