OZ Mins expects development of West Musgrave to be one the world's largest and low-cost copper-nickel projects

Fri 23 Sep 22, 1:01pm (AEST)
Source: Unsplash

Key Points

  • Oz Mins approves the development of its $1bn-plus West Musgrave copper-nickel mine in WA
  • West Musgrave boasts a 390Mt resource focused on its famous Nebo-Babel deposit
  • Management expects average annual production of 28,000 tonnes of nickel and 35,000 tonnes of copper over its operating life

Six weeks after OZ Minerals (ASX: OZL) rejected a $8.4bn bid by BHP (ASX: BHP), the copper producer has given the green light on its $1bn-plus West Musgrave copper-nickel mine in remote central WA.

Originally discovered in 2000, West Musgrave is said to boast a 390Mt resource focused on its famous Nebo-Babel deposit.

Today’s announcement puts paid to suggestions that the project would be put on ice due to concerns over spiralling inflation and a development bill which is now $600m more than originally envisaged.

To cover the higher-than-expected costs the project’s processing capacity has increased from 12m tonnes a year to 13.5Mtpa.

Better strategy

The company’s CEO Andrew Cole also reassured the market that the company’s project execution strategy would help to offset fears over labour shortages and cost blowouts.

“An increase in direct project capital to approximately $1.7 billion is offset by a substantial increase in project value and results in stronger cash flow generation of circa $1.9bn during the first five years of production,” Cole noted.

“To further manage inflationary pressures, we have increased our contingency allowance to ~$190 million and our construction schedule allows for first concentrate in the second half of 2025.”

News that the board had approved the development of its fourth operating asset saw the share price up around 1% at the open, while the All Ords was down around -1.3%.

To fund the investment, the company has entered into a $1.2bn 18-month syndicated debt facility.

Mine expectations

All key regulatory approvals are in place for what the company expects to be one the world's largest, lowest cost and lowest emissions copper-nickel projects.

Costs are expected in the bottom "C1" quartile of US50c a pound with the mine powered by 80% renewables.

Management expects annual production of 35,000 tonnes of nickel and 41,000 tonnes of copper in the first five years and average annual production of 28,000 tonnes of nickel and 35,000 tonnes of copper over its operating life.

This is expected to deliver average post tax net cash flow of $280m to $340m a year.

Over the 24-year operating life of the mine, management expects to earn $9.8bn in undiscounted cashflow.

Strategic partner may follow

Commenting on today’s announcement,  management told investors that after receiving significant in-bound expressions of interest from parties - with a strategic interest in modern minerals - over the last six months, the company is exploring a potential strategic partnership through a minority interest.

“The Board’s approval of West Musgrave is a fundamental step towards realising OZ Minerals’ strategy to evolve into a modern minerals producer set to supply global copper and nickel markets as the world moves into the de-carbonisation and electrification era,” noted OZ Minerals chair, Rebecca McGrath.

What brokers think

Oz Mins share price is up around 15% over 12 months.

Consensus on Oz Mins is Moderate Buy.

Based on Morningstar’s fair value of $30.82 the stock appears to be undervalued.

Goldman Sachs has a Neutral rating and a target price of $18.90.

Based on the seven stocks that cover Oz Mins (as reported on by FN Arena) the stock is currently trading with -3.6% downside to the target price of $25.46.

Morgan Stanley which has an Equal-Weight rating on Oz Mins, has raised the target price to $23.10 from $17.20 on long-term price forecasts rises for copper and gold.

At a target price of $26.50, UBS estimates the market is pricing in a US$3.77/lb copper price.

The broker recently downgraded Oz Mins to Neutral from Buy but suspects higher commodity price assumptions, and valuing the unmodeled growth pipeline and any synergies, could justify a higher bid.

Oz Minerals share price over 12 months.


Written By

Mark Story


Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. 

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