Century footing seems secure Michael Quinn, 3 November 2008 THERE is lot of pain being borne but anybody canvassing the closure of OZ Minerals’ Century zinc mine in anything other than a rhetorical sense, is surely either struggling with reality or is a foundation member of an Armageddon sect. Surely?
Century is clearly a major concern for OZ at present, with cash costs last quarter of US69c/lb (including pre-strip costs of US8c/lb) a major cash drain for a 1.1 billion lb annual producer given a zinc price of about US50c/lb. However, reducing output doesn’t make much sense and given its position on the cost curve, closing the operation looks out of the question.
“Cutting production at Century may seem like the logical thing to do, but in reality simply moving equipment from ore production to stripping does not reduce the cash outflow, but will reduce the cash in-flow due to lower metal production,” Citi pointed out. “The other option is to shut down the operation entirely. While this would benefit players further up the cost curve given Century produces about 500,000t or approximately 4% of [world] mine production, it is not going to drive needed rationalisation of the industry given Century sits midway on the cost curve.”
Still, even with favourable oil and Australian dollar movements, the next 6-9 months can’t come quickly enough for OZ at Century, given the pre-strip cost begins to fall from mid-2009 and decline at a rate of 50% per year to less than $A50 million in 2011 – from a peak of over $A300 million this year.
Meanwhile, from a macro perspective, the solution for zinc is, as always, found in China.
“The reality is that the most likely mine production curtailment will come from China where production has increased from two million tonnes in 2004 when prices were less than US50¢/lb, to an estimated 3.5Mt in 2008, incentivised by the price spike to over US$2/lb,” Citi said. “Not all the Chinese mines are small, high-cost operations that will be losing cash at current prices, but we need to see a significant reduction in production from this source to bring the market back into balance.”
However, while Century’s future should not be in doubt, development of Dugald River looks down the gurgler.
Disclosure: The reporter holds OZ Minerals shares
OZL Price at posting:
$1.02 Sentiment: LT Buy Disclosure: Held
