Ground Breakers: Does OZ Minerals believe a $1.7bn nickel mine will really make it BHP proof?
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Copper miner OZ Minerals (ASX:OZL) has dominated the chatter in the dark corridors of investment bank and fundie offices since it rebuffed an $8.4 billion, $25 per share cash bid from the world’s biggest miner BHP (ASX:BHP) in August.
Part of BHP’s failed argument to an unswayed OZL Board – which has been determined to build its own battery metals (nickel and copper) profile – was the idea OZ would struggle with the massive West Musgrave nickel-copper mine in the remote Ngaanyatjarra Lands off its own bat.
But today OZL boss Andrew Cole laid out a pathway to do just that, approving the construction of a $1.7 billion operation of what could be the largest standalone nickel sulphide mine in Australia.
At its peak in its first five years West Musgrave, consisting of the Nebo and Babel nickel and copper deposits, will produce 35,000t of nickel in concentrate and 41,000t of copper in concentrate each year, with production of 27,000t of nickel and 33,000t per annum over its 24 year mine life.
Its capital cost has increased from around $1.1 billion to $1.7 billion including contingencies due to labour market and supply chain inflation, but the $8.8 billion market cap miner, which produces over 120,000tpa and 230,000ozpa of gold from its Prominent Hill and Carrapateena mines in South Australia and a network of Brazilian copper-gold mines, believes it can fund the development itself without BHP’s help.
With the signing of a native title deal with the Ngaanyatjarra people yesterday, OZ approved the construction of the project, expected to deliver its first concentrate in the second half of 2025 at a lowest quartile operating C1 cost of US$0.50/lb nickel, with more than 80% of its power to be provided by renewables.
The impetus for the project’s development is the bullish outlook companies like OZ have for battery metals needed for decarbonisation and electrification, with OZ expected to deliver a study on producing a downstream mixed hydroxide product for electric vehicle batteries before the end of 2022.
OZ says the mine will have a post tax IRR of 18-22% and NPV of $1.5-2.2bn, up from around $1b in its PFS.
While OZ has so far rebuffed BHP’s advances, with many onlookers surprised the big miner has yet to up its bid, it is still looking for support to develop the giant project, which contains the largest nickel sulphide resource in Australia.
OZ is looking to sell off a minority stake in the mine to a “strategic partner” with OZ also getting support from banks for a $1.2 billion credit facility.
Strategy executive Brian Quinn said OZ has received interest from upstream and downstream companies looking to invest in the project and secure offtake.
“All recognise this project provides a long life clean nickel opportunity that can translate into very clean battery inputs that will eventually support an increasing market for car manufacturing EVs,” he said.
The mine, which will employ 1500 people in its three year construction period and 400 once operating, is a big bet from OZ on the future of the EV thematic and its plan to expand in minerals critical to the energy transition, with the mine expected to hit net zero scope 1 emissions in 2038.
The first changeout of its mining fleet is expected to replace diesel vehicles with electric haulage.
OZ boss Andrew Cole said on a conference call the company was looking to diversify not just past copper to nickel, but to other metals linked to the electrification narrative if opportunities emerged.
RBC Capital Markets analyst Kaan Peker said it was unsurprising that OZ had approved the West Musgrave development, which it acquired via a farm-in and subsequent takeover of junior Cassini Resources.
“We view the update today as neutral, as while the NPV of the project has increased, it is the result mainly of higher metal prices (and discount rate) as operating and capital costs have actually increased,” he said.
“Importantly, we see today’s announcement as a way forward for West Musgrave.
“We already incorporate West Musgrave in our base case, and FID is as expected (guidance 2HCY22). We value West Musgrave at $1.2bn, which assumes capex of A$1.3b and first production at 1QCY26.”
Meanwhile news Evergrande had restarted the vast majority of its more than 700 stalled property developments in China delivered a boost for iron ore, with BHP (ASX:BHP), Rio Tinto (ASX:RIO) and Fortescue (ASX:FMG) all green, while OZ lifted 1%.