On balance, it was probably only a matter of time before Oz Minerals (OZL) finally revealed some bad news in a quarterly production and exploration update this year. There’s been enough hints so far in 2013 that not all was right at the miner in a succession of statements, from previous quarterly reports to the AGM and then to the half year earnings release.
The company’s Prominent Hill mine in South Australia seems to be the company’s weak point, and coupled with falling gold prices and the weak price of copper, OZ Minerals was exposed to a bit of a double whammy of falling production and rising costs, on top of those weak prices.
Which it delivered yesterday with the release yesterday of the September quarter production and exploration report.
Despite mining a record amount of material at Prominent Hill, the miner said that copper grades were lower than hoped during the period.
As a result, copper production will slide by as much as 14% to somewhere between 70,000 tonnes and 78,000 tonnes in 2013, compared with the previous forecast for annual production of between 82,000 tonnes and 88,000 tonnes.
The disclosure sent Oz shares down more than 10% in early trading. They recovered slightly to end a weak day’s trading off more than 9% at $3.99.
OZL 1Y – Fate catches up with OZ Minerals in new downgrade
It wouldn’t surprise if the shares continue to weaken in coming days.
Existing guidance for gold production remains in place, but the company said the poor quarter has forced up full year cost estimates.
Oz was hoping to keep costs within a range of $US1.65c per pound of copper to as much as $US1.80c per pound of copper.
But those costs will rise to US1.90c to US2.05c per pound, which doesn’t leave much headroom with global copper prices around $US3.26 a pound.
Yesterday’s news adds to the sense that the company is losing its way at Prominent Hill.
Managing director Terry Burgess previously warned shareholders that 2013 would be a tough year because so much waste material had to be moved out of the Prominent Hill open pit to set up a new phase of life for the mine.
"Despite achieving record tonnes mined, the required face advancement was not achieved," the company said in yesterday’s report.
"The remediation of the south wall overburden slip remained the priority in the early part of the quarter and in addition mining was in areas at the eastern periphery of the orebody where lower than expected grades have been returned. This saw production lower than expected with 17,390t of copper and 28,177oz of gold produced.
"In order to ensure the most efficient and cost effective mining operations in the pit, a decision has been taken to adjust the current 2013 production target in favour of mining in the long-term interests of the pit.
"In addition, according to this plan, mining is to continue in the areas with lower grade while we progress to the most efficient mine plan rather than attempting to mine ore in advance of plan," Oz said.
And looking to 2014, there was nothing positive at the moment, Mr Burgess told the market.
"Production guidance for 2014 will be reported after the 2013 Reserve and Resource Statement is completed in December and the 2014 mine plan developed.
"Results continued to be as expected from resource development drilling beneath the Malu open pit where work to investigate the development of a third mine continued.
"Work continued on a pre-feasibility study at Carrapateena due for completion in the first half of 2014 and significant mineralised intercepts continued to be returned from the Khamsin copper discovery located 10 kilometres to the northwest."
Yesterday’s report firmly underlined the fact that that Prominent Hill is an ageing mine, whose grades not only continue to disappoint, but are increasingly hard to access economically.
Mr Burgess said, "I cannot pretend I’m not very disappointed to report this guidance to you today".
The sharemarket reaction shows that investors share his pain, and more.
Yesterday’s news made it hard to understand that recent story that Glencore had been eying a bid for Oz. Given the problems at Prominent Hill, Glencore would be unlikely to buy a headache like Oz is at the moment.
