Monsters of Rock: OZ Minerals getting to pointy end of West Musgrave nickel study
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Copper miner OZ Minerals (ASX:OZL) is inching towards a decision on whether to develop one of Australia’s last giant nickel sulphide deposits.
OZ has held an interest in the West Musgrave project for several years since it muscled in on junior Cassini Resources.
The project was renowned as one of the best nickel and copper discoveries in decades when it was made in the last 1990s by Western Mining Corporation, but was eventually flogged off by BHP (ASX:BHP) for a pittance during the nickel downturn.
$8.2 billion capped OZ could finally help the region fulfil its potential, with nickel prices now at historically high levels of ~US$34,000/t.
A key DFS due in late 2022 is now back on the cards after WA opened its borders to workers from interstate.
But inflation could catch up with OZ, which says it will only develop West Musgrave — one of Australia’s most remote mining projects in the Ngaanyatjarra Lands on the border of WA and South Australia — if it will be in the lower half of the cost curve.
“For us, it’s about value and risk,” MD Andrew Cole said on a conference call today.
“And when I say value, of course we look at things like NPV, we look at IRR, payback periods.
“And we look across a range of assumptions both commodity pricing assumptions, FX assumptions and capital escalation, inflation assumptions et cetera. So we’re looking at a range of possible scenarios.
“We’re also looking at risks, both the things that could be a threat to building it on time and on budget and operating it well, but also the opportunities that it creates.”
A PFS in 2020 placed a $1.1 billion price tag on constructing the mine, which would produce 32,000tpa of copper and 26,000tpa of nickel in concentrate over a 26 year mine life just using the main Nebo-Babel resource.
But OZ says there are up to six priority satellite deposits including the higher grade Succoth copper resource.
“NPV is notorious for looking at the first decade of the mine and ignores everything else,” Cole said.
“But when you’re building a 25 year mine life that has got half a dozen satellite projects potentially sitting around, we’re talking about decades of mine life and opportunity that’s not captured into NPV.
“We also need to look at the operating costs. So we would only build a mind that operated in the bottom half of the cost curve to ensure its resilience.”
OZ also revealed it is studying downstream production of a mixed hydroxide product for battery makers at West Musgrave outside the scope of its current DFS, a type of nickel currently sold by mines like Glencore’s Murrin Murrin and First Quantum’s Ravensthorpe.
OZ shares dipped over 6% lower after its production hit (literal) roadblocks from weather and Covid in South Australia.
The company has kept guidance of 127,000-149,000t of copper and 208,000-230,000oz of gold at its Carrapateena and Prominent Hill mines in SA and its projects in Brazil.
But it produced just 30,322t of copper and 48,773t of gold in the first quarter of 2022 at higher costs of US$1.744/lb (above its US$1.35-1.55/lb guidance) on lower output.
“The first quarter, as previously flagged, saw a softer start to the year with elevated COVID related workforce and supply challenges as we transitioned to “living with COVID” across Australia,” Cole said.
“Our South Australian assets were also impacted by a rainfall event in January resulting in highway and rail closures and subsequent supply disruption, in particular at Prominent Hill which had no site access via road for ~3 days and limited access for 12 days.
“COVID and weather related issues had a combined production interruption of circa 370kt ore mined across Carrapateena and Prominent Hill.
“Workforce absenteeism due to COVID remains elevated particularly at Prominent Hill and remains a risk to operational productivity. The assets continue to actively manage resources to maintain safe and productive operations and to minimise disruption.
“Despite the slower start to the year, group production and costs guidance remain on track for 2022 with a stronger operational performance expected over the balance of the year as COVID diminishes in the community.”
OZ finished the quarter with $210 million in cash.
Mincor Resources’ (ASX:MCR) return to producer status is very close.
The company is continuing to build its stockpile at BHP’s Kambalda Nickel Concentrator, with the company aiming to become a nickel producer for the first time since 2016.
While nickel briefly touched US$100,000/t on an unusual short squeeze in March, Mincor MD David Southam is cautious on the nickel price.
But he said it is double the number used in the DFS that convinced the company to return to production a couple years ago, painting a rosy picture for the start of concentrate supply from its Kambalda mines.
“While the recent ‘short squeeze’ which drove the LME nickel price to over US$100,000/t in March has grabbed headlines around the world, the nickel price has in fact been trending in an upward direction for some time given surging global EV battery demand and diminishing stockpiles,” he said.
“While a degree of volatility will always be a characteristic of the nickel sector, the underlying forces driving the market bode well for the long term.
“The current nickel price of around A$44,000/t, which is nearly double the price assumed in our March 2020 DFS, puts Mincor in a very strong position as we start production.”
Mincor appears to have avoided the Covid issues that some companies, including its partner in BHP’s Nickel West, have blamed for poor production numbers in the March quarter.
“Development at both Cassini and the Northern Operations has forged ahead, despite the current highly competitive environment for people and resources in the WA resources sector,” Southam said.
“At the same time, mitigation strategies implemented last quarter to manage COVID outbreaks have worked well, with no transmission detected at any of our operations.”