OZ Minerals Ltd

ASX:OZL

Earnings Call Transcript 2022-Q1

[Andrew Cole, executive]

Good morning, everybody, and thanks for joining us on our first quarterly report for 2022. I'm talking with you today from our Adelaide office, and I'm on Ghana land today. I want to pay my respects to elders past, present and emerging. I recognize and respect the Ghana people's cultural heritage, beliefs and relationship with the land, and I'd like to acknowledge that they are of continuing importance to the Ghana people living today. I'd also like to acknowledge and pay my respects to the traditional owners of the lands on which we work.

I'm joined by Warrick Ranson, our CFO; and our operations executive, Matt Reed, who is joining us for the first time on our call today.

We're going to keep our introductory comments as brief as we can to allow more time for Q&A. The first couple of slides in our deck are our usual disclaimer and compliance statements, and these are available on our website which you can review at your leisure.

When we last spoke at the full year results in February and our quarterly call in January, we flagged an expected slower first quarter due to a combination of extreme rainfall and COVID absenteeism affecting our South Australian mines. That has, in fact, played out. However, despite the slower start to the year, we are retaining our annual guidance as we expect production to pick up during the course of the year as COVID passes through the community, and we continue to implement corrective actions.

Pedra Branca, pleasingly, is ramping up towards full production levels with Brazil not being affected by COVID to the same extent. During the quarter, we made good progress on our major growth projects. At Prom Hill, the extensive preparatory work is on track for sharp sinking to begin later in the second quarter. And good progress is being made on the Carrapateena expansion with the access declines underway.

West Musgrave study continues to progress towards an investment decision in the second half of the year, although some of the personal interaction with the Ngaanyatjarra has been delayed due to COVID restrictions. We are seeing some inflationary pressures on project costs, which we'll touch on shortly.

To the positive, a key environmental approval has just been received from the WA government that we think the Ngaanyatjarra people working with us throughout this process.

We released our Decarbonisation Roadmap, which sets an ambitious but achievable pathway towards halving our Scope 1 emissions by 2027 and an interim target of net zero emissions by 2030. This is something we are both proud of and excited about. Our people have embraced the opportunity to make a real contribution towards lowering emissions.

We finished the quarter in a strong cash position of $215 million after investing in our growth projects.

You should be familiar with the OZWay slide by now as we provide each quarter. So you can see how we manage and govern the company. At the center of our strategy, in the middle of this diagram, is value creation, value creation for all our stakeholders, shareholders, employees, community, government and suppliers. Value creation is embedded across the OZWay in our governance processes, our performance standards and our policies. And we believe that only when we are creating value for all our stakeholders will we be a successful and sustainable company.

This company snapshot gives an overview of where our assets are located and their key products. We speak a lot about our province approach, where we can utilize existing infrastructure to progressively grow our operations, helping keep costs low and our footprint conditions. We also seek to maintain a healthy exploration pipeline to create opportunities for future organic growth. We look to create quality assets in quality jurisdictions, and we're going to touch on some specifics shortly.

On the next slide, you can see what each province offers in terms of production, costs, resources, reserves and growth. Our organic growth projects at both Carra and Prom Hill are effectively creating multigenerational, low operating cost finding provinces, excellent examples of value of our provincial approach.

As mentioned in February, we released our Decarbonisation Roadmap. The roadmap represents the 18 months of work to build it from the ground up, what we consider to be ambitious but achievable targets. Much of the first element of the roadmap, the halving of Scope 1 emissions by '27, involves the electrification of the material handling systems of both Prom Hill with the installation of the electric hoisting shaft now under construction and the extensive underground conveyor system at Carra. These projects are already committed and in development. However we are also working to electrify other equipment.

To that end, we announced during the quarter that we have partnered with 2 Australian companies, Janus Electric and Qube, on an ambitious trial to use battery electric trucks for heavy haulage across the long distances of the Australian outback. It's a self-funded trial and it's at its early stage. It'll be phased over 12 months beginning in the latter part of 2022. It's one of the number of trials we have underway across the business.

At the conclusion of our Annual General Meeting last month, we hold a Q&A session with management on decarbonization activities. And if you're interested, it's available for viewing on our website.

Before handing over to Warrick, this slide provides a summary of our metal production and our costs. And to my initial comments, we had a slower start to the year with an extreme rainfall event, which caused flooding and affected road and rail access and COVID absenteeism. COVID absenteeism has continued to interrupt production of Prom Hill into the second quarter, but we expect that to work through over the next couple of weeks, in line with the broader South Australian experience. COVID absenteeism and weather-related issues had a combined impact of a reduction in ore mine about 370,000 tonnes across Carra and Prom Hill. Stronger operational performance is expected over the remainder of the year as we expect both COVID absenteeism to reduce and our corrective action plans to take hold.

Over to you, Warrick, please?

[Warrick Ranson, executive]

Thanks, Andrew, and good morning, everyone.

So copper has continued its upward momentum, although did underperform a number of other commodities this quarter. Supply risks, load, visible inventories and long-term demand optimism, have been primary drivers of price formation and have offset shorter-term demand softness from events such as China's COVID response, real estate weakness and industrial disruption.

Market fundamentals also remain influenced by the supply side risks we're seeing out of Chile and Peru and current spikes in fuel prices maintaining that upward pressure on EV rollout as countries work on reducing fossil fuel dependency. Although Russian copper production represents only around 3% to 5% of global supply, risk premiums continued to be factored into copper prices in the near term due to the potential disruption in copper flows.

The outlook for copper remains extremely positive, though, as a result, but rising TCRCs reflect the status of the concentrate market in the short term, and we maintain a watching brief on the potential for further disruption to manufacturing activity in China.

The Australian dollar has generally been supported by commodity prices. However, we expect the RBA's indication of a now sooner rather than later rate hike and an aggressive Fed tightening with elevated geopolitical uncertainty or limited its upside over the balance of the year. Collectively, pricing has enabled another strong revenue and subsequent operating cash flow performance for us this quarter. We completed the period with no draw on our revolver, have continued our current brownfield investment program into the ongoing growth and development of the business.

Moving to cash generation. And as noted, we had another strong quarter of cash from operating cash flows with net cash inflows before investing activity of $267 million. Despite the lower production levels, we maintained EBITDA operating margins in excess of 50%, supported by the robust pricing environment but also by solid cost management across our operations.

Working capital levels remained steady quarter-on-quarter with lower trade receivables, offset by higher closing concentrate inventory, reflecting shipment timing. We paid our final dividend for 2021 of $0.18 per share with a 14% uptake recorded on the DRP.

During the quarter, we invested a further $176 million into growing the business. Underground mine development activities continued across all operations. We invested $28 million into the shaft infrastructure at Prominent Hill, with fabrication and surface works well underway. We continued the Stage 2 tailings lift, vertical development and Crusher 2 projects at Carrapateena, and transitioned the deposition of tailings for Carajás East into the old pit, whilst completing the final raise on the existing dam now.

Exploration expenditure increased slightly over the previous quarter, though field activities were somewhat impacted by adverse weather across regional Australia.

Moving to Slide 12 now on costs. We had a number of factors flow into our operating cost performance for the quarter, including the impacts of both COVID and weather-related events, as Andrew has already highlighted. At Prominent Hill, resulting cruise shortages impacted low motor availability, whilst delays in emulsion delivery due to the closure of the Stuart Highway reduced charging activity impacting available stope volumes and ultimately [indiscernible]. This contributed to a 30% shortfall in underground ore mined, lower feed grades and ultimately, the copper production as we increased mill feed from the lower-grade surface stockpiles that we're currently drawing from.

Whilst absolute costs for the quarter were only marginally above expected levels, unit costs on a per pound basis remained comparatively high as a result. We saw similar COVID-related production issues at Carrapateena with reduced personnel numbers impacting volume [indiscernible] availability and the heavy rains damaging the new Western access road. This also resulted in a temporary disruptions in milling rates as we maxed our on-site concentrate storage and reduced throughput rates as a result. This was offset, though, by strong grade and recovery rates maintained overall copper production levels. Our focus on current production levels resulted in a higher allocation of mining costs to operating expenses and contributed principally to Carra's C1 performance.

In the Carajás, we continued to uplift our production rates out of Pedra Branca and progressively increased copper production, reducing comparative C1 costs at the same time as we improved production efficiencies there. We also continued the transition to our owner-operator fleet underground. While C1 costs for the quarter, to a large extent, reflect the overall grade and production impact from these factors, we did see a marginal uplift in COVID management costs and continued to experience higher freight-related costs. Inbound freight was, of course, also impacted by road closures. And collectively, we added about $0.12 to our unit cost from these factors with the lower metal production levels contributing another $0.25 or so.

All-in sustaining costs followed the C1 trend with the majority of our sustaining capital spend focused on ongoing mine development activities, including the exhilaration of our horizontal development program of work at Pedra Branca. Andrew?

[Andrew Cole, executive]

Thanks, Warrick. Now I'd like to introduce Matt Reed to cover our operations. So Matt is our operations executive and accountable for all our operating assets. So those include Prom, Carra in Brazil and also setting up all potential operations at West Musgrave. He joined us last year and has now spent time at all of our assets. So over to you, Matt, please.

[Matthew Reed, executive]

Thanks, Andrew, and good morning, everyone. Very nice to be talking to you. Given it is the first time I've joined the call, I thought I would briefly introduce myself.

As Andrew stated, I joined OZ just over 12 months ago now and took on the ops executive role in September. I've spent most of my career in mining and minerals processing. And that includes nearly 20 years now in operational leadership, and the last 6 or 7 years in executive roles. I worked across a range of commodities, but primarily iron ore, coking coal, copper and gold, and most recently led time at mining with responsibility there from exploration through to business development, operations and marketing.

Moving on to Slide 13 in Prominent Hill. Underground operations delivered just over 800,000 tonnes of ore at just under 1.2% copper. As Andrew and Warrick have explained, ore mines in the quarter was impacted by operator absenteeism due to COVID and also the January heavy rainfall event and that rainfall did force highway closures that impacted supply. It also had lingering impacts through February and March with the unseasonal humidity, compromising our ventilation systems and reducing productivity underground.

So closing did have the effect of slowing of recovery in ore during that period where we redeployed underground resources to Carrapateena's prioritized material movement there. And we also saw development was lower due to the same factors through the quarter.

If I move on to Slide 14 -- sorry, actually, before I do that, I might just come back a step and give a little bit more color, I suppose, to the impacts of those weather and COVID issues. Probably around 230,000 tonnes of ore mined during the quarter combined back there. I think we are still seeing some COVID-19 operator interruptions through the early part of April. But notwithstanding that, we're expecting to return to normal rates later in Q2. Copper and gold metal production remains on track to meet annual guidance. And through the quarter, we also continued our work around ventilation upgrades, completed an additional ventilation raise bore. Development's on track to support shaft sinking activities and the plants, although low our grades are very little low that impact on our recovery.

On Slide 14, we have made good progress on the shaft expansion, as mentioned by Warrick and Andrew. During the quarter, also as part of our Agile approach to project development, the opportunity was identified to increase hoisting capacity from 6 million to 6.5 million tonnes per annum for around about an additional $2 million in capital, which we'll absorb into the budget. So we're underway now with the work to assess whether mining rates cannot be increased to fully utilize that capacity. We'll provide an update to that assessment, including any operating cost benefits around half 2 of this year.

We've also formed a studies team to evaluate mine-life extension scenarios, involving Walawuru and Papa. Those targets are closer to surface, potentially accessible acquired these existing trucking infrastructure, and we've also completed around 5.8 kilometers of infill drilling through the quarter and scheduled to continue to do that throughout 2022 to continue to inform that study.

I'll move on to Carrapateena, Slide 15. Like Prominent Hill, Carra was impacted by workforce absences due to COVID, also the heavy rainfall event in January. Around about 140,000 tonnes of ore mined impact there. We also had some damage to the portal conveyor in a separate event. That's impacted production. That's now been fully repaired. Pleasingly, we're seeing copper grade at 1.54% above now the reserve grade. And we also continued to see development of the cave towards breakthrough to surface.

Process Park continued its strong performance, more than 1.1 million tonnes milled. Copper and gold recoveries remain strong at 94% and 86%, respectively. And we reached a milestone at 100,000 tonnes of copper-containing concentrate during -- at the start of April.

We also completed the first internal ore pass to assist with movement of production ore, and that also unlocks the potential for greater efficiencies underground. Our Block Cave Decline development continued, and we've commenced to work on 3 now out of the 4 accesses for the Crusher 2 excavation.

As mentioned, I think, by Warrick, construction in the second stage of the TSF has progressed well during the quarter. We're on track to complete that in the fourth quarter. We did experience some damage to the western access road due to the -- a heavy rain in January. Repairs and improvement to that access road are well advanced, and we expect to complete those in the second quarter. And we also saw the South Australian government announced funding the Northern water supply projects during the quarter. So that's funding through its final investment decision. And OZ Minerals is in partnership with government and other proponents on that potential infrastructure investment to create a new sustainable water supply for the far North and [indiscernible] region in South Australia.

Moving now on to Carajás and Gurupi. In Brazil, the Carajás East Province Pedra Branca ramp-up is on track. We achieved a mine monthly ore production record of just over 50,000 tonnes in March. We're progressing towards full capacity there, slightly ahead of plan. We commissioned the mines, West exhaust raise and exhaust system during the month of March. And as Warrick said, we're now using the Antas open pit for tailings storage. We are also accelerating the next potential satellite mine, Santa Lucia, with a pre-feasibility study now underway, planned to be delivered in the final quarter of the year, which replaces the scoping study that had been initially contemplated in Q3. The inclusion of additional drilling to commence in quarter 2, along with accelerated engineering and license and work helps inform that project study and provide an increased level of confidence.

We've also been drilling geochemical and geophysical targets within a 20 kilometer radius to the Carajás East processing hub, and we've intersected copper mineralization in Lines 21 across 2 targets, Tapuia and Grota Rica.

Drilling program commenced at Pantera during the quarter. We've included a mineral resource estimate to help inform the study there. And in the Gurupi Province, we continued towards progressing the injunction removing with the relocation plan now submitted to INCRA for review.

And with that, I'll hand back to Andrew.

[Andrew Cole, executive]

Great. Thanks very much, Matt. Really good to see the Carajás East Hub works accelerated both at Pedra Branca and Santa Lucia.

Let me move on to West Musgrave. The study is progressing well, and we're staying on track towards investment decision in the second half of this year. An important milestone was achieved earlier this week with the key environmental approval, that being the path for in a stereo statement being received for the project. That is very good news. Many aspects of the project study are well advanced and technically derisked as detailed recommendations be completion on a scope, value and cost items.

In considering further value opportunities for inclusion in the base case, the team has progressed optimization of the production rate. The renewable energy composition and delivery approach -- is finalizing the approach to mining operations as well as maturing the automation and technology that enables remote operations and site's modern mine operating philosophy.

Capital and cost escalation does remain a key project risk in the current operating environment and is being balanced against stakeholder value optimization. Key activities over the coming months include cost and value optimization works, consolidation of engineering design and estimates as well as peer review and working with the traditional owners of the land on the land access agreement. So progress towards finalizing regulatory approvals is progressing very well.

In addition to the base case, the West Musgrave project scope, the team is now investigating life province opportunities. So as I've mentioned before, the intent is to understand the scope and value of these opportunities that include potential construction of a downstream nickel processing plant to MHP as well as near-mine expansion at Succoth. It also now includes other exploration targets.

So the West Musgrave Province has seen relatively little exploration in the last 30 years. Our current project base case does not include circuit copper deposit and several other prospects that have historically returned ore grade with nickel and copper drill interceptions. And within -- so within 20 kilometers of the proposed West Province -- West Musgrave mine infrastructure and stretched probably over a strike length of about 40 kilometers, there are multiple fertile nickel copper systems that have been identified. And you can see these on the slide with some very healthy grade intersections, including at Yappsu, One Tree Hill and Esagila. I consider West Musgrave had considerable provincial upside above and beyond the immediate Nebo-Babel base case that we're progressing to a decision in the second half.

Here is a picture of our core pipeline of our operations and growth opportunities at their various stages of development. I want to give a few updates on specific exploration projects here also. Processing of data from an airborne EM program completed in late 2021, identified targets warranting further work at the Yarri joint venture project with Red Metal in the Paterson region of Western Australia. Work underway now includes gaining relevant approvals prior to drill testing of targets, which we expect to happen in the second half of this year.

Our Peake and Denison project, approximately 150 kilometers northeast of the Prominent Hill mine, preparations continued for the drilling of up to 3 large IOCG targets with Demetallica Minerals and Demetallica is formerly known as Minotaur, drilling is scheduled to commence this quarter.

Optimization of the exploration portfolio continued during the quarter with OZ Minerals withdrawing from the 3-way project in Queensland.

7 diamond drill holes were completed in Sweden at the Lannavaara project, in affecting variable amounts of sulfide mineralization. All analytical results are pending. SI results from 2 diamond drill holes completed in late '21 at the Painirova project in Northern Sweden returned results consistent with the mineralization observed. Based on the results, OZ Minerals has elected to move to the earnings stage, whereby we can earn a 51% interest in the project by spending $5 million over a full year period.

Drilling on the Parezo-IOCG prospect in Southern Peru commenced during the quarter and is ongoing.

On the asset timeline slide, the information on our different assets projects, stages of development and resources and reserves information are presented as a ready reference view to track the estimated delivery of different assets or projects in each province.

On the milestone slide, the only thing really to call out is the movement of the Carajás Hub study update quarter 4. So we are now working on an accelerated schedule to produce a pre-feasibility study with underpinning reserve at Santa Lucia in Q4 instead of a scoping study, which was previously expected in Q3.

So let me just summarize and wrap up. We finished the quarter in a strong cash position of $210 million, maintained after reinvesting in growth projects. 2022 group production and cost guidance remains on track despite Q1 weather and COVID production interruptions as we expect direct COVID impacts to slow and our mine acceleration action plans to take hold.

We are advancing our growth projects across the portfolio. The Prominent Hill Wira shaft mine expansions will progress, a shaft hoisting capacity is to be increased to 6.5 million tonnes per annum. The Carrapateena TFF Stage 2 lift is on the schedule for Q4 completions, and the team reached the milestone of producing 100,000 tonnes of copper from the mine.

West Musgrave remains on track for an investment decision in the second half of this year with the key environmental approval now received. We are accelerating exploration on a number of major projects around the world, including a few key East Carajás satellite opportunities. And finally, our Decarbonisation Roadmap was announced, setting out a pathway to net zero by 2030 and a target of halving our Scope 1 emissions by 2027.

Thanks very much for giving us time to give you an overview. Operator, can you please remind people how to ask questions.

[Operator]

[Operator Instructions] First question comes from the line of Rahul Anand from Morgan Stanley.

[Rahul Anand, analyst]

First one, if I may, was related to the shaft hoisting expansion, 6 million to 6.5 million tonnes per annum from Prom Hill. Look, I just wanted, perhaps, to understand the type of constraints or bottlenecks that you see now. So you've obviously done some optimization and added that throughput rate. Is the asset now going to be constrained from a mine perspective? Or is that going to be the max capacity that the hoisting shafts can do and that becomes the bottleneck? I might have a follow-up on that.

[Andrew Cole, executive]

Yes. Thanks very much, Rahul. Let me make a couple of opening comments, and I'll see if Matt's got anything to add. As I've mentioned, when we announced the project, 6 million tonne hosting capacity was defined by the resource shape and size and the mine capacity so that we originally got to 6 million tonnes by the amount of ore we bought or the number of stopes that the mine geometry could actually handle. So we've now increased the 6 million tonne capacity to 6.5 million. So this is very simple engineering and design improvements, if you like. So we've increased the capacity of the hoisting system above and beyond what we originally thought the ore body could sustain.

I might just ask Matt to talk a bit about what we're doing on the resource and drilling, et cetera, and what possibilities are to potentially utilize that 6.5 million tonnes.

[Matthew Reed, executive]

Yes. Thanks, Andrew. So we are continuing, as I said, to do work to understand to what extent we can utilize that extra capacity that work ongoing through the year. We do have, of course, the confidence that with results from our recent drilling and ongoing drilling that we'll have more material to be able to bring in and, therefore, utilize that capacity, but as I said work needs to still be done.

[Rahul Anand, analyst]

Okay. And then I guess in terms of the flexibility, if we were to see perhaps drilling, expanding the footprint or allowing ore engineering perhaps, allowing more stopes to come in, would you be able to then think about that shaft beyond the 6.5 million? Or is that like the limit that you can have the shaft to operate at?

[Matthew Reed, executive]

Yes, good question. We think there may be some further opportunity as we get that operating to driving a higher level of utilization, but that's still work to be done.

[Rahul Anand, analyst]

Okay. Perfect. Second question is on West Musgrave perhaps for Andrew. So you identified that the further value opportunity is being progressed to help offset capital and cost escalation. I was just curious to understand in your progressing studies, what type of inflation are you seeing in the market at the moment? And what level of -- or any deflation from current levels of CapEx inflation, are you assuming the project might be able to see?

[Andrew Cole, executive]

Yes. Sure. Let me answer the first part. I might ask Warrick to make some commentary on the macro and just inflationary environment more generally.

So on West Musgrave, there's 2 different types of work underway. There are -- there's value optimization work in the current Nebo-Babel base case scope. So we're looking at anything and everything that we can do to derisk the project and improve the value of the project. And there's always tension there in that stage between reducing capital, for example, and increasing operating costs, or increasing capital and decreasing operating costs quite often they go hand-in-hand. So we're working through every part of the project with some external groups at the moment to help us value engineer the project. So that's 1 piece of work that's underway at the moment.

What we're also doing is repricing a number of contracts in the market as we speak. So we can't really give you any data or indication of the capital cost project yet because we're actively repricing at the moment.

The second set of projects we're running though are above and beyond the base case of the project. So we're looking at MHP, so post processing copper -- nickel concentrate into an MHP. So that's not in the base case, but clearly may have a value enhancement to the project. We're also looking at Succoth, which is currently not in the base case. And we've now turned our attention to start looking at a number of the satellite exploration projects around base case, of which have got, in some cases, better grades than Nebo Babel, but are also not in our base case. So there's 2 different types of value enhancement works underway at the moment.

Warrick, do you want to talk a bit about inflation, background environment?

[Warrick Ranson, executive]

Yes, I can sort of touch on that. I mean, it does vary by the input item. I also -- you're sort of seeing -- and particularly, it's also varying between states. So obviously, there's a lot of pressure within the Western Australian environment. So one of the options that we have is thinking about where we're actually sourcing some of those items from. I mean you're sort of seeing uplifts, I think, across the board of around about sort of that between 10% and 15%. But on some of the things like structural steel, for example, in WA, they've gone up over 100% concrete sort of around about the 10% level. And interestingly, the labor rates in WA are quite different to what we're seeing here in South Australia. So one of the benefits we have being in South Australia has been we're not seeing that same sort of level of labor pressure. So -- and those rates are really sort of varying between the levels of where the labor is in the structure. So trades in WA, for example, are up sort of 30%, 35%.

So yes, there's a fair bit of a pressure that's still happening across the board. I think generally, the sort of net of all that is around about sort of 10% to 15%.

[Operator]

We would like to proceed to the next question from Kaan Peker from RBC Capital Markets. [Operator Instructions]

[Kaan Peker, analyst]

Can you hear me?

[Andrew Cole, executive]

Yes.

[Kaan Peker, analyst]

Just 2 questions from me. On Prominent Hill, I think the pre-sink equipment was expected to be shipped and arrive on site in 1Q. I think they quietly indicated 2Q. Can you maybe talk through how that ties near the shaft development time frame? And maybe remind us of what the critical path items are? And I'll circle back with the second one.

[Andrew Cole, executive]

Yes, sure we can. Do you want to talk a little bit about the shaft-sinking equipment? And so Matt -- just before Matt sort of talks about that very specifically, I think we need to remember a Prominent Hill schedule is not necessarily the biggest value driver of the shaft construction here, given we've got stockpiles and we're ramping underground up to 5 million or close to 5 million tonnes at the moment anyway. It's not to say that it's not important. Maintaining schedule is really important, of course, for project controls, but it's not the biggest leap we've got for value of Prominent Hill. That said, Matt, do you want to talk about shaft-sinking equipment?

[Matthew Reed, executive]

Yes, no problems. So we have seen some delays in the arrival of that shaft-sinking equipment. It is in Adelaide now and in fact, [indiscernible] on site in the next couple of days. So we have been impacted by those shipping issues globally. The team has been working pretty hard on how we can mitigate the impact of that, and we're pretty confident that we've got a new sequence, let's say, of work that will allow us to recover the time we're going to move on that initial phase.

[Kaan Peker, analyst]

Sorry. That -- the shaft sinking will be obviously a critical path item then?

[Matthew Reed, executive]

Underground development is really the critical path. So this delay, we don't expect to impact critical path. And then as I say, we expect to recover this component in the schedule anyway.

[Kaan Peker, analyst]

Sure. Understood. And just one broader question. It might be hard to sort of get to the bottom of it. But excluding the impact of weather and absenteeism on sort of unit cost, what do you see cost inflation running at. Over to Warrick.

[Warrick Ranson, executive]

I'm not going to say we're immune because I think we're sort of seeing some catch-up. But to date, in South Australia, we're traveling, I'd say, quite well in terms of cost impact from an escalation point of view. We, obviously, have seen some sort of volatility around certain inputs. We've talked about cement before. We saw obviously into last year, increases in steel costs, et cetera. But a lot of those have settled back down a little bit.

I think we would still say, though, that there's -- obviously, the largest area is that -- at the moment has been in terms of trade. And the flow on impact of that. So as I said, I wouldn't say we're immune from it. We're certainly active in terms of managing our cost base and looking for those increases, which I think will flow into us. But I think generally, at the sort of unit levels that we're operating at, we're still quite comfortable around that.

[Kaan Peker, analyst]

So will that be double digit? Or low single digits? mid-single digits, maybe?

[Warrick Ranson, executive]

Yes. So for the quarter, I think we sort of saw an uplift of around about $5 million to $6 million in sort of that -- sort of -- sort of, right, sort of component above what we would normally expect within our operating costs.

[Kaan Peker, analyst]

Sure. I'll circle back for the other questions.

[Operator]

Next question comes from the line of Paul Young of Goldman Sachs.

[Paul Young, analyst]

Just touching on, first of all, the COVID impacts. Everyone is being impacted by COVID, and the Olympic Dam is just down the road, of course, as well. Can you talk on what percentage of the workforce was actually out from COVID in the quarter? And also just touch on -- are you seeing any impacts on availability from maintenance crews and doing maintenance in South Australia? And also just on the time frame and schedule on the underground crusher and the breakthrough to surface at Carra?

[Matthew Reed, executive]

Yes, no problem, Paul. So starting with the COVID absenteeism. I think if we talk about perhaps a couple of peaks, maybe that's helpful. So we peaked 20% to 25% absences in January. And then we're seeing another peak particularly impacting Prominent Hill at the moment. A little bit less, probably about 20%, and improving over the last week.

I think the other thing to contemplate with respect to COVID absenteeism is also where those absences occurred. And we've seen at different times that they impact some of our critical skills. So jumbo operators, maintenance crews. So it's a bit of a combination of total absences and then in which part of the operation they occurred.

Yes, we are also seeing at times, some tightness around general contracting maintenance labors. And for the same reason, we've executed successfully some major shutdown work over the last quarter. So we're reasonably confident around our ability to manage around that.

[Andrew Cole, executive]

I think probably the other thing to add, Matt, is that actually, the government is -- team is meeting today to look at quarantine -- quarantining restrictions and aligning with the recent changes in Victoria and New South Wales so.

[Paul Young, analyst]

Yes, great. Okay. I mean you're not alone there. So maybe just turning then to West Musgrave and a question for Andrew. Andrew, I mean, this project is a little bit different from some other projects from a contractor perspective. It's more in the [indiscernible] heating zone because it's milling at flood plant, et cetera. But obviously, you still got the civil contractors, which is pretty common across most projects.

But the question is, I guess, a bit around West Musgrave. What prevents you from approving this project in the second half. Is it availability of contractors? Or is it -- or is the fact that you -- the CapEx inflation rather you're prepared to potentially take on the holding cost and the owners cost for a period of time and then try to time the CapEx to the perspective that maybe it's better to do it next year? I'm just trying to figure out what actually prevents you from FID-ing it in the second half?

[Andrew Cole, executive]

Yes. Paul, look, I think it's a great question. I'd say we're still working through that question ourselves. I still think this is a great project. The project is going to get built. And once this mine is built, it's going to be a fantastic operation to own. It's going to be such a low-cost operation with massive margins and huge provincial potential, and that's why we're starting to move our attention to the exploration results.

So the question is, for us, internally, is the project investable? Does it meet all our hurdles? When we commence construction, can we build it on time and on budget? Because if we commit to build a project, we want to be able to say we can do it on time and on budget. And the world is moving rapidly around us at the moment. There's a number of geopolitical challenges around the world. There are -- there's inflation challenges. And inflation, in itself, is not necessarily an issue. It's just understanding what the inflation is and accounting for it.

Labor is challenging, given WA has just opened its borders. And I think it's still settling down, and we're trying to understand what labor stability looks like, et cetera. And a lot of suppliers are still trying to come to terms with how they even price contracts. Up until recently, some suppliers in WA couldn't even get shipments into WA. So there's a [indiscernible] of moving parts right now which we are working through managing closely within the project.

I do still think that most of these things will have settled sufficiently for us to make a decision in the second half of this year. All the approval processes are on track. It has been challenging with the traditional owner group. And as I've said previously, we will not make a decision to go ahead with this project unless the CEOs were supporting -- they are very supportive, but we just can't get on the land and spend enough time with them to actually form or land our agreement with them. And that's entirely because of COVID and COVID restrictions, not because of a desire to do so.

So look, there's lots of moving pieces in here, Paul. I still think the project is going to build because it needs to be. It's going to be a very valuable project. It's just about making sure that when we get to the point to make a decision, we can commit to something that we are convinced ourselves that we can do it on time and on budget as we did with Carrapateena. That's not a reputation that we want to destroy. And we're just going through the final stages of derisking the project.

So I know that doesn't directly answer your question, but that question is a very question that we're grappling with internally.

[Paul Young, analyst]

Yes. No, that does help.

[Operator]

Next question will come from the line of Peter O'Connor of Shaw and Partners.

[Peter O'Connor, analyst]

Andrew, just on the West Musgrave angle. When does the project become uninvestable? What hurdle does the return fall below? Is it IRR? Is it the NPV of the project? Is it the payback period? Will you talk about the right time, which of those because it's obviously got very robust metrics at the moment. Which one of those metrics or all those metrics matter?

[Andrew Cole, executive]

Yes. Peter, I'll say they all matter plus a number of other metrics. So I'll say it's about value and risk. 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 and FX assumptions and capital escalation and inflation assumptions, et cetera. So we're looking at a range of possible scenarios. We're also looking at risks of both the things that could be a threat to building an on time and on budget and operating it well, but also the opportunities that it creates.

So as we know, NPV is notorious for looking at the first decade of a mine and ignores everything else. But when you're building a 25-year mine life that has got a half dozen satellite projects potentially sitting around it, we're talking about decades of mine life and opportunity that's not captured into an NPV.

We also need to look at the operating cost. So we would only build a mine that operate in the bottom half of the cost curve to ensure its resilience. That is valuable in itself.

So you have to look at all of these aspects. We don't have a hurdle on any one of them. You need to look at all of them collectively together. And that's the process we're going through now to try and understand what the collection of as new levers look like and the risk levels look like. And at the end of the day, it will be a judgment. And of course, I need to explain why we've taken a decision that we have and why the Board hasn't supported it and what the next steps look like.

[Peter O'Connor, analyst]

Okay. Just shifting gear to Prominent Hill. Something caught my eye in the commentary at operations and the heat that you're experiencing at the lower levels. Quite obviously, the case actually get deeper. Will that be resolved with the recent lease available? Or is that an issue of the shaft? Or will that be an ongoing issue that will constrain your ability to match production from mine shaft capacity?

[Matthew Reed, executive]

So really, what we're calling out there is that the combination of that heavy rain with summer temperatures and the stage of development of our ventilation system meant that we experienced temperatures underground higher than we had planned, and that impacts productivity.

We expect to complete the next stage of ventilation in the coming weeks. We're already experiencing reduced capital underground. So those issues have moved past. But as I say, next stage of ventilation in the next few weeks. And then at Prominent Hill, our refrigeration plant comes online before next summer. So we're confident that the worst of that is behind us.

[Operator]

Next question comes from the line of Lyndon Fagan from JPMorgan.

[Lyndon Fagan, analyst]

My first question is just on the cost guidance. When I look at where Q1 has come in with 45% above the midpoint for Prominent Hill and with 20-plus percent above the midpoint at Carrapateena. I'm just wondering what's giving you such confidence to retain that guidance? I guess we're going to have to be below the range for the rest of the year. I mean, are we just kicking the can down the road or on a revision? Or is there something else that unwinds there?

[Andrew Cole, executive]

Lyndon, I'm going to ask Warrick to answer this, but just at a philosophical level, we didn't think we could hit guidance for the year. We would be forced to change the guidance now. So we have a continuous disclosure obligation, obviously. And I know you know that already, but we felt we could not meet guidance for this year, we won't change it. But we do feel we can meet guidance I think will just explain the quarter.

[Warrick Ranson, executive]

Yes. I think, again, there's sort of 2 levels that we would look at. So first one is our absolute costs against plan and how we're tracking versus our overall activity, and we're actually comfortable with that. And as I mentioned in my narrative, we're actually just marginally above that even with some of the additional costs that we've actually incurred in the quarter from -- a lot of our unit costs are obviously driven by the actual production at the end of the day. So that volume production, as I said, really had that sort of $0.25 sort of hit to unit costs. So on the basis that we expect our production levels to return back to expected levels and come in with guidance, that sort of flows back into our thinking around unit costs.

I think the other thing is we've also -- with the lower underground production, we referenced, we supplemented that obviously with lower open pit feed and we're into the low-grade stockpiles there. So you'll see, again, greater -- with greater underground production, we get greater metal production and the spread over unit costs. So those sort of factors, I think, Lyndon, give us confidence.

[Lyndon Fagan, analyst]

Okay. That's good. The next question is back on West Musgrave. Obviously, it's shaping up to be a genuine province with some of these satellite ore bodies, and that's really positive. I'm wondering whether you can give a bit more color about the potential scope of the new study and the sequencing of some of these other projects? So are we looking at sockets being developed from the get-go along with Nebo-Babel as 1 scenario? Or where are we sort of heading as the most likely scenario with that?

And also the downstream plant, is that something that would be done again from the very beginning? Or is this something that would be done sort of further down the track? Just looking for a time a bit of color there, if it's possible.

[Andrew Cole, executive]

Yes, sure. Thanks for the question, Lyndon, and good question. Again, some questions that we have internally are working through. We're drilling Succoth at the moment and have been for a number of months. So we are trying to tighten up the understanding of that ore body, the geology, the mineralization styles such we can upgrade the confidence level of Succoth. No -- and I don't have the results of that yet. So I can't really make a definitive comment. The last resource that was published for Succoth was 150-odd million tonnes, 0.6% copper. So intuitively, that would suggest that Succoth would only be used to top up gaps in Nebo-Babel and/or come at the end of mine life, just given the grade differential between Nebo-Babel and Succoth.

We also don't have Succoth to a level of definition that could be included into a base case yet. It's still an inferred resource as of the last published results. So I can't answer your question on Succoth as to where it comes, but I seriously doubt it will be right at the beginning.

The other drill results that you see on that province map we've known about for some time, are at various levels of definition. Some are only a few drill holes, some are a little bit more than that. They all require additional work. It's more about how we allocate time, resources and money to a project. As we did at Carrapateena, our first priority to West Musgrave is to demonstrate a base -- an investable base case, which is what we're actively working on, and then turn our attention to the provincial potential. As you can see on that slide, there are some pretty good grade intersections along trend. So once we start drilling those out, which we haven't yet, but we're starting to turn our attention to, that will help us understand where they might come into a mining sequence if indeed they do. So I can't answer your question yet along the short.

But the question you've asked is, of course, the question that we're working on to understand. MHP itself, the study is progressing very well, both a technical study to understand what a flow sheet looks like also a commercial component to that to look for and identify a third party that we could partner with on MHP. So both of those are progressing well with a dedicated team in place. The scope of that work is still to be decided. We haven't decided yet whether we would take all of the nickel concentrate MHP or some of it or none of it. They're all options. And none of them need to be decided on a base case. So I suspect an MHP decision would come after a West Musgrave decision. There is no real critical path activity to actually link those 2 together.

So look, good question, Lyndon, and that's -- we'll keep you abrasive updates as we go. But there's a number of levers in there that can also fit together in different ways.

[Operator]

We have the next question from the line of Tim Hoff from Canaccord.

[Timothy Hoff, analyst]

I just wanted to ask a question around recoveries at Carrapateena. I see that they've been tracking higher. Is that just a function of grade? Or is the plant performing better than expected? And just also what that regrind mill might mean for the plant there?

[Andrew Cole, executive]

I'm going to ask Matt to talk a little bit about grade. We might need to take the regrind one on notice because we're still working on that one. But do you want to talk about grade, Matt, and recoveries?

[Matthew Reed, executive]

So yes, there's a bit of grade in that recovery performance. I think we're probably getting more confident around the longer-term higher recovery trend of gold. And I know we've spoken about that a couple of times in the last 2 updates. And we're at the point now where we will start to build more of that higher grade into our forward plans. So a bit of grade in the copper results. Our gold result has been consistent. And we're starting to factor that into our forward planning.

On the regrind, there's a level of optionality, I guess, that the regrind process [indiscernible] around concentrate quality as well as recovery. But as Andrew said, our market [indiscernible] take on those to give more detail.

[Timothy Hoff, analyst]

Fantastic. And perhaps just on Prominent Hill, where would you like to see underground mining rates get back to this year? Are we going to be able to achieve 1 million tonnes per quarter run rate?

[Matthew Reed, executive]

Yes, we think so. I think that, that will be a trajectory improvement over quarter 2. As we said earlier, we still are seeing some unplanned absences in April with respect to COVID. But we've got solid plans to ramp that performance up. We've got a good understanding of the productivity drivers at Prominent Hill. So yes, we're confident of that.

[Operator]

Our next question comes from the line of Daniel Morgan from Barrenjoey.

[Daniel Morgan, analyst]

Can I just expand a little bit on Warrick's comments regarding West Musgrave and labor in WA where it was said that it's more expensive in WA than South Australia, and that's an opportunity for that project maybe? Can I just ask now borders are open, does South Australian wages and costs lift to WA levels? And if not, why not?

[Warrick Ranson, executive]

It will be interesting to see. But I mean, I think one of the things, Dan, is that a lot of our direct employee base is locally based. So we're pulling out of Port Augusta, Whyalla areas, et cetera, and we're a very competitive rent structure in relation to that. So we do -- I think we'll have pressure though coming from both the West and the East, obviously, with housing construction requirements there after flooding, et cetera. So I think we will see peaks and troughs as we go through it. So I don't -- as I said, I don't think we're immune, but we do find ourselves -- and I think we traditionally have found ourselves in a slightly different position, given our location and our primary sources labor pool.

[Daniel Morgan, analyst]

And just last question. Has COVID impacts, which you've outlined in your operational business, has that impacted the critical path on any of your projects as it moved into something else? Can you just outline that?

[Andrew Cole, executive]

I don't think COVID has impacted any of the critical path of our projects, Dan. Matt referred earlier to shipping, which you could argue is a result of COVID macro level. But the -- that piece of equipment is now here. And we've got contingency plans on that. So I think the answer to that, just looking at everybody here is no, we haven't seen any critical path changes.

[Operator]

In the interest of time, we'll take the last 3 questions. Please limit your questions to 1 question at each time. Next question is from Kate McCutcheon from Citi.

[Kate McCutcheon, analyst]

At Carra, you mentioned how the top of the pile is progressing. Can you provide some more color on the preconditioning work that's happening and an update on when you're modeling shows that, that cave will likely break through to the surface?

[Andrew Cole, executive]

Yes, no problems. So we are continuing to do service preconditioning. We've got a couple of different hydro tracking programs running in parallel at the moment, one fairly traditional approach and one, which I guess does general preconditioning, let's say, and then one more specific localized preconditioning activity that's running.

We have -- we've been pretty pleased with the impact of that activity over the last -- let's say, the last quarter. And we've seen some decent movements in the case increased -- increasing [indiscernible] and certainly a reduction in the distance now to surface. We are also continuing to look to expand the cave footprint with the underground activities as well. So I think generally, pleased with the movement we have achieved in the last quarter. We've seen that movement continuing into this quarter. At this stage, we are still projecting breakthrough towards the end of this year.

[Operator]

Next question comes from the line of Matt Greene of Credit Suisse.

[Matthew Greene, analyst]

So one question for me. I guess just some of the miners have already flagged just quality control issues on the supply chain, particularly around steel fabrication. So my question is, have you been relying on a lot of prefabricated equipment? And I guess more generally, have you encountered any issues around quality control across the growth projects?

[Andrew Cole, executive]

We're doing a lot of fabrication in Australia. We've not seen quality issues either with steel or the quality of fabrication. I think an answering for both Carra and Prominent, the teams here have done some really good work late last year, into early this year in locking down local supply and locking in prices as well. So those activities are not only well advanced, but well controlled from a cost and quality perspective.

[Operator]

Last question will come from Mitch Ryan from Jefferies.

[Mitch Ryan, analyst]

Really quick, simple one on Carra. The undergoing conveyor belt, which was damaged in the last quarter, can you confirm that, that was resolved by the end of the quarter? Or if it wasn't, what time frame that was resolved on?

[Matthew Reed, executive]

So there are a couple of different impacts associated with that. There was some initial downtime heavy damage and then we had to run on a temporary location for a period of time. I think probably, the overall impact in -- if I understood your question correctly, the overall impact around about 90,000 tonnes to surface through the course of the quarter. That has been fully repaired, and we've returned to normal rates. My apologies if that was not the question.

[Andrew Cole, executive]

Okay. Look, I think we're now at time, in fact, we're just over time. So if there are follow-up questions, because I appreciate that there may have been a few more that we couldn't get to today, please give us a call. I'm happy to get in the room and try to answer. We will get the right people in the room to answer for you. Thanks, operator. We'll talk to you all again soon.