Caving Choices At Carrapateena
Ord Minnett has reviewed OZ Minerals’ proposal for a block cave expansion at its Carrapateena copper-gold project in South Australia. Based on our preliminary model, the expansion project is essentially value-neutral for the company, with only a minor uplift in our net present value (NPV) measure versus Carrapateena’s base-case operations of $100m, or 30c per share.
- Drawbacks include: 1) lowering the internal rate of return (IRR) for the asset given the block caving method has a higher capital intensity than the existing sub-level caving (SLC) plan; 2) negative free cash flow (FCF) through the construction phase; 3) a delay in the payback period to CY28 from CY25; and 4) additional technical risk as the project ramps up.
- Positives include: 1) an 80% uplift in FCF and operating earnings from full production post CY29; 2) a larger footprint to tie in with satellite ore bodies; 3) greater leverage to long-term copper prices; and d) ultimately, the project should keep OZ Minerals as a producer of at least 100,000 tonnes (t) of copper per annum for 20 years.
The block cave expansion proposal implies higher production and lower costs, but would need a further $1–1.3bn in capital expenditure to implement. We estimate an IRR of 16% for the full project, or 23% from CY29 onwards. Our NPV for Carrapateena would rise to $2.2bn, or 30c per share, from $2.1bn. First ore is scheduled for CY26 with a three-year ramp up and an unchanged 20-year mine life.
Once the block cave is fully ramped up by CY29, we estimate an 80% increase in annual operating earnings and an 85% increase in FCF. The expanded scope of the plant would also provide more flexibility to integrate satellite ore bodies from the wider province. The forecast growth in earnings is long-dated, however, and likely to benefit the next generation of shareholders. In the near term, the project detracts from FCF prior to CY30, and adds technical and project risk.
We have incorporated OZ Minerals’ guidance for higher spending on studies and drilling of $75–80m in CY19. We can see the long-term investment appeal of Carrapateena, but we view the stock as fairly valued, leading us to maintain our Hold recommendation and target price of $10.50.