OZ Minerals shares edged higher yesterday as the company maintained confidence it would meet its full year copper and gold production targets.
The June quarterly report revealed that copper and gold production rose in the three months, while costs eased a little.
But its priority for increasingly profitable copper may dampen future gold production.
Chief executive Terry Burgess said OZ Minerals was on target to produce 100,000 to 110,000 tonnes of copper in calendar 2011, and would aim for its forecast of 185,000 and 205,000 ounces of gold.
But the company indicated that the priority for the rest of the year will be to treat copper ore mined from its huge Prominent Hill operation in South Australia’s remote outback.
The market liked this sort of talk, boosting the shares 36c or more than 2.7% to $13.32.
"Good copper production, which was up on the previous quarter, was achieved and is on track to meet annual guidance," the company said in yesterday’s report.
"Gold production was also higher than the previous quarter.
"The focus remains on maximising copper production levels as revenue generated from treatment of copper ore is approximately four times that generated from the treatment of gold ore at current commodity prices.
"As a result, on occasions during the quarter, copper ore was treated in preference to gold ore and therefore gold production was below the current guidance level on an annualised basis.
"C1 cash costs of production were US56.1c/lb. These unit costs were lower than the previous quarter mainly due to higher payable copper metal and higher gold by-product credits partially offset by a higher Australian dollar.
"Costs measured in $A/tonne milled, (which excludes the effect of by-product credits and translation to US$) was $A34/tonne milled; up slightly from $A33/tonne milled in the first quarter.
"Overall mining rates were higher than previous quarters with greater volumes of waste material mined as planned. Ore mined during the quarter was at scheduled levels," OZ said.
The company is holding about $750 million in cash for potential takeovers and Mr Burgess said the company was busy looking for prospects that could add value for shareholders.
That’s cash left over from buying the Carrapateena deposit in South Australia for $US250 million earlier this year.
OZ also has a $200 million share buyback about to start.
The company said it does not believe it will be hit by any direct costs from the federal government’s proposed carbon tax, with its emissions coming only from fuel used by trucks and excavators.
But it expects indirect cost increases of between $7 million and $10 million annually if the proposal comes in next June, because of higher fuel and freight costs.
OZ Minerals made a net profit of $586.9 million in calendar 2010.
But buried in the report was news the market seems to have ignored: surprise cost rise of around $170 million on a couple of important expansion projects.
The first is an "acceptable" cost increase as it could very well lower future costs by spending extra money now in the Ankata project.
OZ said the development of the Ankata underground decline which "is on schedule for reaching the orebody in the third quarter this year and for first production from the first quarter of calendar 2012, as forecast."
"In May, the OZ Minerals’ Board approved continuation of the underground decline, after the Ankata orebody has been accessed.
"The extended decline will veer back towards the east and will be used to facilitate further exploration drilling and could allow timely access to potential underground mining areas should studies prove positive.
"This development is anticipated to cost $25-30 million and funding for this will be taken from the existing exploration budgets during 2011. This exploration decline is expected to be completed by mid 2012, " OZ said.
The Ankata underground mine is expected to be delivering higher grade ore at the full production rate of 1.2 million tonnes from the third quarter of next year.
And on the other major project, the Malu open pit, there’s an extra $150 million ( over the next five years) in development costs because of the findings of geotechnical studies, which were initiated after movement of the north wall of the pit on two occasions during 2010.
"The design includes a cut-back to the north wall to prevent further movements and enable sustained production from the mine for the life of the open pit, increasing the overall stability factor, with wall slopes flatter than the original designs.
"The re-optimisation of the pit, undertaken using the new slope parameters, results in essentially unchanged optimum pit depth and reserves. The pit design is generally insensitive to the copper price with a larger pit unlikely to generate material additional net value.
"The final pit design optimisation indicates the requirement to mine an additional 30 Mbcm of waste to extract the mineable reserves. This will see the remaining life of mine strip ratio increase from 4.6 to 5.5.
"The extra mining will be undertaken over a period of around five years commencing later in 2011.
"The cost of this extra mining will be in the order of $150 million in 2011 net present value terms based upon current unit mining costs.<
