OZ Minerals Ltd

ASX:OZL

Earnings Call Transcript 2021-Q2

[Andrew Cole, MD, CEO & Director]

Good morning to everybody joining us from Australia today and those -- if you're up nice and early in Europe, and certainly good afternoon if you're joining us from North America today. I hope you and your families are all keeping safe and healthy as the latest outbreak of the COVID Delta variant sweeps across Australia and around the globe. Here in South Australia, we're looking forward to moving out of our lockdown this evening. In the meantime, as stay-at-home restrictions are still in place, we're all doing this call remotely. So our hearts certainly go out to those New South Wales, who are all working through a very unreal current challenge. Today, I'm joined by Warrick Ranson, our Chief Financial Officer. And we're both dialing in from different locations, so please bear with us if there are any minor technical issues. I'm sure that's going to go smoothly though. As with our previous calls, I'm just going to flag the highlights, so we have more time to spend on Q&As. I'll note as well that there are a few movements to guidance, and I'll talk to these collectively and in detail when we get to the slides in the presentation. Coming up is our usual disclaimer and compliance statement slides, which are available on our website for you to review at your leisure. Our team has been working safely through the various intermittent restrictions and that have been occurring over the last few months. It's been a very positive quarter that has seen us in the half in a strong cash position, supported by reliable operational performance and good metal prices. The second quarter saw a 22% uplift in copper production quarter-on-quarter. Performance from our assets in Q2 has gone fairly well and a few highlights let me reference here. So Prominent Hill delivered the highest recorded underground ore mined in its history. Grade increased at Carrapateena in line with its mine plan. The West Musgrave project study and reserve drilling continued in the last round and study. The last remaining ore at Antas was mined out, and we're now preparing for its future as a tailings storage facility. Development progress at Pedra Branca continued to be impacted by the direct and flowing effects of COVID-19 resulting in a lowering of the guidance for the Carajás. Having said that, full year group copper guidance remains on track. We continued progression of our growth pipeline, noting that we have a material milestone and decision points for some of our growth projects in the second half of this year, including a decision on a Prominent Hill shaft expansion. As a result of the strong operational performance, we finished the half in a robust financial position with a cash balance of $134 million on a first half net revenue of $986 million and our debt facility now fully repaid. We've also lowered group C1 cash cost guidance for the year primarily due to higher byproduct credits associated with expected higher gold production at Prominent Hill. I know most people on this call are familiar with our strategy. But as a quick recap, creating value for our stakeholders sits at the center of our strategy, and this is what we believe will help us deliver on our purpose of going beyond what's possible to make lives better. Importantly, each stakeholder, that's our employees, our shareholders, our communities, governments and our suppliers, is equally important to us. We look through the lens of value creation for all 5 stakeholder groups in our decision-making. On this company's snapshot slide is a summary of what differentiates OZ Minerals. We are a purpose-driven organization and are striving to have people be at the heart of our company, with our organizational culture our key enabler. Our people have built the assets we have, the growth options we're working through and have kept this business performing strongly irrespective of the macro challenges presented to us. It also includes an overview of our operating assets and projects at different stages of development and the type of product they produce or are expected to produce. Looking at the next level down, what we've done on this slide is to map out the different hubs and spokes of each of the provinces we are developing or looking to develop, their key stats and the potential growth projects. Our approach is to look for copper-rich provinces where initial or existing investments can serve as the launching platform or hub for other opportunities. This is an asset on a page summary for your ease of use. We have developed a set of stakeholder value creation metrics you see on screen to provide a tangible assessment of how and where we create value. Reporting on these metrics is aligned with the different elements of the OZ Way, which you saw on the earlier slide. During the quarter, there have been a number of value-creation initiatives across our operations. Notably, we continue to build resilience for our stakeholders and enhance community well-being in a COVID-19 environment through providing support for the procurement of fresh food and care packs and the implementation of corporate governance training and digital learning programs. We also held health checks with our traditional owner partners in South Australia on the status of our relationship and our commitments. In a joint arrangement with the South Australian state government, we are in the early stages of also establishing a not-for-profit, self-sustaining innovation center in the soon-to-be completed [indiscernible] underground mine. This will be a first in Australia. In this activity summary slide is our Q2 performance. We are on track to deliver group copper production guidance with the group cash costs lowered on increased gold production. We've also increased gold production guidance due to higher-than-expected gold grade in stockpiles at Prom Hill. While site absolute costs have been well controlled to date by the South Australian asset in the current cost inflationary environment, keeping us on the bottom half of the cost curve, we will need to keep a tight cost focus as inflationary pressure continues to emerge. Our growth pipeline continues to advance, demonstrating the quality of the organic growth options available to us. So Warrick, I'm going to hand over to you to take us through the financial performance on the next few slides, please.

[Warrick R. J. Ranson, Chief Financial Officer]

Okay. Thanks, Andrew, and good morning, everyone. As usual, let me touch briefly on capital management to begin with. So firstly, our strong revenue performance flowed through to operating cash flow and enabled us to repay the residual draw on our revolving credit facility in full, as Andrew mentioned. This resulted in a closing cash balance of $134 million at the end of June with no corporate debt and also supported our ongoing investment in both the operating portfolio and progressing our strong growth pipeline. Despite the robust pricing environment we're in, we continue to maintain our strong liquidity buffer focused on prudent working capital levels and ensure we have a strong balance sheet to enable our growth strategy going forward. As in quarter 1, we also continue to focus on our margin performance against the stronger Australian dollar and opportunities to reduce our unit costs through productivity initiatives and supply chain optimization. With the softening of the gold price during the quarter, we made the decision to effectively close out the residual hedge book by offsetting contracts and include these settlements from an earnings perspective in our first half results. If we move on to Slide 11. So operating cash was principally allocated to repaying debt, mine development activities and the payment of our residual tax obligation for 2020. Work on the Western Access Road continued at Carrapateena with the intention to complete this by the end of the year and enable all with the access to the site as well as better service our concentrate movements as production rates continue to increase there. At Prominent Hill, raise boards were commenced for ventilation upgrades. We extended the pace reticulation at Malu and, of course, continue with the extensive resource drilling program. Our spend in the Carajás was associated with the continued progression of the Pedra Branca underground mine as we approach first stope production later this quarter. And overall working capital levels remained largely unchanged, in line with our shipping activity and receipts. Moving to Slide 12 now. And just a reminder that we've again included a reconciliation of our C1 cash cost to operating costs in the appendix as we rapidly approach the presentation of our financial results for the first half. So hopefully, that will help with that reconciliation. As previously noted, we continue to manage our unit cost performance against the impact of the comparatively stronger Australian dollar, which has effectively rebased us for the coming year. The team has also performed extremely well in the context of ongoing COVID responses and restrictions. As we've just experienced, it certainly hasn't gone away. However, pleasingly, we have been able to maintain our unit costs relatively flat despite a significant pressure appearing in the industry across a number of production cost elements, particularly in the areas of steel, oil and ammonia-related items, which have all experienced primary price increases together with general freight cost increases. Whilst the labor market is definitely tightening, we continue to leverage the strong relationships we have with key contractors. And we've certainly seen a benefit from our move at the end of last year to restructure and uplift our RAM arrangements for the majority of our workforce. We -- importantly, we continue to perform well on our absolute costs across the group. Processing costs improved overall despite major maintenance shuts at Prominent Hill and the Carajás, with the Prominent Hill mill down this quarter for 15 days, whilst we changed out the girth gear on the sag. This followed higher maintenance costs at Carrapateena last quarter associated with its first major shut. We also saw an improvement in mining costs at Carrapateena following the maintenance hit we took in Q1 as part of our contractor transition and managing the backlog there. All-in sustaining costs continue to reflect the timing activities on sustaining capital. However, we have elected to continue prioritizing supporting mine development infrastructure at Carrapateena over lateral development in this early period, increasing our initial capital guidance in this area as well as seeing its impact in the quarter. And whilst gold production was in line with the previous quarter, the lower gold price offset a number of those operating gains which I've just talked about. Andrew?

[Andrew Cole, MD, CEO & Director]

Yes, thank you, Warrick. So in the following few slides, I'm going to cover a few of the highlights that we haven't previously touched on. Firstly, Prom Hill continued to reliably deliver during the quarter and recorded its highest underground ore movement to date. The annualized rates were sustained above 4 million tonnes per annum in the top-down sequence only, whilst work continues at the bottom of the current life of mine level to establish level infrastructure for starting the bottom-up mining sequence shortly. The bottom-up and top-down mining will enable an increase in mining rates from 2022 up to between 4 million and 5 million tonnes per annum. We are on track for the shaft expansion study investment decision in the next couple of months, which include -- and the work over the last couple of months has included some early shaft location preparatory works. So I'm not going to talk too much about the Prom Hill expansion study in this quarterly given the imminent decision. We started a trial at Prominent Hill to test the height driven direct injection system to improve engine combustion efficiency for surface area drill rigs. This system has potential to reduce emissions for greenhouse gas in particular as well as improve fuel consumption. The underground team has also started tally remoting the direct loading of trucks from some stopes, which cuts out the need from interim stockpiles and rehandle. So great to see these types of initiatives continue to improve the productivity in the operation. In terms of growth and exploration activity at Prom Hill, the resource drilling program has continued, and expansion-related drilling has been completed with the primary focus on infilling across the Malu and Kalaya mineralized zones. Results from the program are not part of the interim resource model being used to the expansion case, but they will be incorporated into future optimizations of the mine plan and schedule. At Carrapateena, copper grade increased to 1.39% for the quarter, as expected, and we are expecting to keep trending towards reserve grade over the course of this year. At Carrapateena, the team achieved a new monthly throughput record of 420,000 tonnes in June, and recovery continued to exceed our original assumptions. This is very pleasing, of course, which allows us to maintain focus on underground development and production rates. The cave is expected to propagate significantly towards the surface in the coming months, and we are closely monitoring it to ensure continued cave growth and maintaining production levels. In terms of growth, aside from progressing the construction of the Western Access Road, which will be completed later this year, several underground productivity improvement initiatives have also been completed. Feasibility study engineering and technical studies of Carrapateena Block Cave expansion were completed as well as supporting work to progress opportunities around green mine, ore sorting operational technology and future skills. These technical studies and the cost estimates of optimization and valuation will be peer reviewed before the blockade declines start later on this year. At West Musgrave, we completed the West Musgrave project Australian Industry Participation Plan, which was approved by the Department of Industry, Science, Energy and Resources. We also completed archaeological surveys for the proposed tailing storage facility and the power plant footprint. Resource infill and geotechnical drill programs at Nebo Babel continued. And reactive ground assessments concerned an insignificant risk with the results to further support an informed drill and blast optimization. So this project is progressing well and remains on track for an investment decision in 2022. Now on to Brazil. Mining at the Antas open pit was completed in June, and we're in the process of transitioning the open pit to a tailings storage facility from next year. At Pedra Branca, development was lower than expected due to the impact of COVID-19 and related delays in the ventilation infrastructure and low equipment availability. Additional mining equipment is arriving at site in June, and we expect the first underground stope production to start next month. This will be a significant milestone demonstrating that Brazil team can design, permit and build a new satellite mine in just a few years. We completed resource drilling at Santa Lucia and are on track to deliver a resource and study update later this quarter. In terms of growth, we completed a drilling program designed to test extensions of known mineralization on the Canaã West project 10 kilometers from Pedra Branca. The results confirmed the presence of low grade copper mineralization. The group progress on CentroGold was slow again due to COVID-19, and associated delays to the relocation plan development required for progressing the corning junction removal. However, we are continuing to work on environmental reporting and updating the pre-feasibility study, which is on track to be delivered in Q3. On to our growth pipeline with just a few key things to note. Together with Red Metal, we have started drilling at the Three Ways project in North Queensland. We've also started ground geophysics at Lawn Hill and Breena Plains project and results in all these activities are expected this quarter. Further overseas, we added an additional tenement to the Lannavarra project with our partner, MPS, in Sweden. And we are preparing for a drill program on the Paraiso IOCG project in Southern Peru, where the drill contract being awarded and drilled planned for the second half of this year. We've updated the time line slide, so you can easily see the different assets, project stages of development and MROR information at a glance. And we'll continue to maintain this slide for you in future updates. Moving to key milestones for 2021, noting a couple of changes with the Santa Lucia resource study update now to be delivered this quarter. Of note also is the change related to the CentroGold injunction removal. This milestone has been removed as a result of sustained and flow-on effect of the COVID-19 with most federal government departments closed or short staffed, which is constraining our ongoing work for progressing injunction removal. We're in the process of reviewing the associated time line and expect to be in a position to provide an update on this later this year. All other milestones remain the same, as we have shared earlier this year. Finally, closing up with the guidance. Full year group copper production guidance remains on track, notwithstanding our lowering of annual guidance in the Carajás, which has been impacted by direct and lower effect of COVID-19. We've increased group gold production guidance due to higher-than-expected gold grade in stockpiles at Prominent Hill. Full year group C1 cost guidance was lowered to $0.65 to $0.75 per pound, which previously was $0.70 to $0.80 primarily due to higher byproduct credits. At Carrapateena, annual production remains in line with guidance for the full year. Availability and reliability of the mining fleet has improved post the transition of the underground mining contractor, albeit at a higher cost per meter, as the team continues to focus on the effective formation of the cave and prioritizing supporting mine development infrastructure over lateral development in this early period. Initial capital guidance in this area has increased as a result. Annual guidance for Pedra Branca has been reduced to 7,000 to 10,000 tonnes of copper and 5,000 to 8,000 ounces of gold, while growth capital guidance is being reduced by $10 million down to $15 million to $20 million for the full year. So finally, to summarize before we open it up for questions and answers, we've had a very positive first half operationally. When combined with the strong metal prices, we finished the half with $134 million of cash, and we've repaid our revolving debt facility. We're keeping a tight cost control focus as inflationary pressures continue to emerge. Our growth pipeline of quality brownfields project is advancing well with several big milestones coming up in the second half, including a decision on the Prominent Hill shaft expansion. So it's going to be a busy second half. So look, let's move on to Q&As. Both Warrick and myself are on the line today. So operator, can you please remind people how to ask questions, please?

[Operator]

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

[Rahul Anand, Equity Analyst]

Can we start with Carra, please? I just wanted to touch upon that $30 million CapEx increase, if you can walk me through some of that. And perhaps, you also mentioned in the release today that you're looking at estimates being peer reviewed pre the decline for the block cave. Just wanted to understand, is that something that you were doing anyway? Or is there any risk here in terms of CapEx? That's the first one. I'll come back with the rest.

[Andrew Cole, MD, CEO & Director]

Yes, sure. Okay. So there are 2 questions. I'll take the second one and then start on the first, then I'll hand it to Warrick to talk about the cost piece. We peer review all of our projects as they go, so a peer review of the next phase of the block cave design and surface infrastructure is a standard course for us. We try to do that sort of in an agile way, so we have constant peer reviews to keep us aligned as we go, if you like. So if there's anything material that comes out of that, we will, of course, share that with yourself. But I wouldn't read anything into it other than that's something we do with all projects frequently. In terms of the extra capital, we have had some cost increases over the past few months as a result of [indiscernible] of the underground mining contractor and more effort and costs going into getting our fleet availability up and resource income. But in parallel to that, we've also favored the vertical development, underground development over lateral development of future sublevels, which does change the cost between operating and capital. Warrick, do you just want to touch on that piece, please?

[Warrick R. J. Ranson, Chief Financial Officer]

Yes. I think a couple of things there, Andrew. One is -- and Rahul, the first thing is, generally, our contractor rates are pretty much in line with our previous contract. So we're not sort of seeing -- we haven't seen an increase in that. It's really transitional costs which have come in there a little bit. And then certainly, that shift from the lateral development to the more permanent mine infrastructure has seen a lowering of -- a slight reduction in development rates, which obviously carries a higher fixed cost sort of base. So some of those factors are flowing into that sustaining capital area, but it's really just a timing issue in terms of our prioritization of that work.

[Rahul Anand, Equity Analyst]

Okay. Perfect. Look, next one is on Prom Hill. I mean mining rates, 4.6 million tonnes per annum at the moment. Calendar year '22, you're still guiding for that 5 million tonne per annum target. I wanted to understand, can you outline perhaps some of the key things that can see you outperform that mining rate?

[Andrew Cole, MD, CEO & Director]

Yes. Look, so Rahul, as we mentioned in this release, we've been entirely mining top-down effectively at the moment. So that's got us to, I think, sustainably at or just above the 4 million tonne per annum rate. As you know, we had initiated a project last year. It was a little early last year, where we started a dedicated decline down to connect a bottom-up mining sequence. That bottom-up mining sequence is now under development, but we haven't actually started to draw on that. So as we start to draw on the bottom-up sequence, the supplement, the top-down mining sequence, that's what will allow us to get from 4 million to 5 million tonnes per annum. Look, I think in due course, we will tighten that range. I think the -- it's probably a little bit premature because we need to get stopes in place, understand how they're going to perform, understand how we're going to manage the fleet interaction between the lower and upper levels. But I'd say to date, that's going exceptionally well. And in due course, we'll tighten that range to be able to give you more clarity on that. But it's all about how these stopes are going to perform now because the development rates to get to that lower level have been above what we originally expected. So I can't give you a tighter frame, but it's all about productivity from those stopes and making sure we manage the truck interactions from between the lower and upper levels.

[Rahul Anand, Equity Analyst]

Okay. Perfect. And there's no sort of congestion, so to speak, at the terminal point is there? Or is that something that needs to be looked at as well in terms of sort of going beyond?

[Andrew Cole, MD, CEO & Director]

Look, not so much. One of the luxuries we have at Prominent Hill is the multiple entry and exit routes. And we now dump most ore into the bottom of the open pit, so they're not having to tram ore to the surface, and then we use heavier fleet to truck it up. So that actually decongests the mine really well for the underground team.

[Rahul Anand, Equity Analyst]

Perfect. Okay. Look, last one for me. In terms of Carra recoveries for gold, sitting at 82 versus feasibility now, we've asked this question several times before. Obviously, you're still coming up the curve with the plant and you're optimizing. I guess to ask the question a different way, when would be the right time for us to be comfortable in being able to use higher numbers for future years?

[Andrew Cole, MD, CEO & Director]

Yes. Look, I do appreciate this is a recurring question. I probably have to come back to you in terms of timing, but my gut feels we need another couple of levels yet. So we need to be well and truly outside any of the surface oxidization that's come down into some of the surface fractures and [indiscernible], et cetera. So I think it's probably at least another level or 2, so it will be next year, I would say, where we can probably be clearer about what we think the life of mine recovery might be.

[Rahul Anand, Equity Analyst]

Okay. That's fair. That's very helpful.

[Operator]

Your next question comes from the line of Sophie Spartalis from Bank of America.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Andrew, Warrick, just in terms of capital cost pressures, you talked in the release around capital cost pressures for the growth pipeline of projects. I'm particularly interested in the West Musgrave project given that it is in WA. Is the level of cost pressure enough to see the economics suffer? Or are we now looking at a potential but being deferred? Can you just talk to that?

[Andrew Cole, MD, CEO & Director]

Yes. Sophie, so Warrick touched a little bit on this. I might ask you, Warrick, just maybe before I answer the high-level question, if you just want to talk a bit on the cost pressures we are seeing in the industry.

[Warrick R. J. Ranson, Chief Financial Officer]

Yes. I mean I suppose we're starting to see the pickup in the flow-through of -- particularly in steel prices, they're sort of coming through at about a sort of 10%, 12% sort of increase. I mean, where they're sort of impacting us mainly at the moment is around consumables, which is about 1/3 of our OpEx. But the teams are doing really well in terms of actually managing that supply chain and looking for opportunities around that. And I think like in terms of West Musgrave itself, I mean, that's still going through the process of capital estimation and finalization of scope, et cetera. So it's probably a little bit early to talk about the sort of impact in that side on that part.

[Andrew Cole, MD, CEO & Director]

Yes, let me add a couple of things, Sophie. So just to go to the high-level question, we're repricing scopes and contracts frequently in the market to understand the dynamic of the project. I don't think the escalation environment that we're seeing is going to change the investability of the West Musgrave project. Anytime costs go up, of course, that does damage economics, but I don't think they're material enough to change whether this project is investable or not. That's not the materiality we're seeing. And we are working to try and derisk that position, of course. And I think the example with Loesche out of Germany is a good example of this, where we are effectively risk sharing an investment because the value proposition for us is we can derisk our value chain and actually disconnect crushing from flotation and give us the crushing system to run off [indiscernible] free renewable power for Loesche if they can demonstrate in the hard rock mining environment that these vertical roller mills work exceptionally well. So there's a real value proposition for us to both make this work at an acceptable capital operating cost position. They are the types of partnerships that we are working on forming with key suppliers, and that helps derisk to a degree the inflationary environment.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Okay. So if I have a look at the PFS update that you put out last December, you've got contingency there of around $115 million as either out of a $1.1 billion CapEx number. I'm assuming that's probably insufficient to absorb the type of capital cost increases you're seeing at the moment and likely to see come through.

[Andrew Cole, MD, CEO & Director]

We can't answer that because there's 2 dimensions in that number. Remember, one is accuracy, which comes to scope clarity and accuracy of the scope itself. Then the second piece is any of the other piece of the inflationary environment, et cetera. So yes, the inflation environment is changing, but also the scope is narrowing and the accuracy of the numbers, and that's the work we're doing at the moment, Sophie, so I probably can't answer that yet until we finish the build-up of these things.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Okay. No, that's fine. But if we were to, say, get an investment decision by mid-'22, when should we expect a likely timing of it coming into production?

[Andrew Cole, MD, CEO & Director]

I think we've said '24.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Okay. Great. Okay. Just want to quickly change gears, if I can, and ask one more question. Just in terms of Carra, for the remaining part of the year, the second half, you talked about grades needing to increase. Can you just talk through the grade reconciliation you saw in the second Q, please?

[Andrew Cole, MD, CEO & Director]

Yes, sure. Grade reconciliation has been very good. So I'm not so worried about the reconciliation of metal from the reserve model through the processing plant. That was something that we had to work on early on in Carrapateena's life because we didn't have a lot of horizontal drilling, but we've now got a lot of horizontal drilling and horizontal development, of course. So our understanding of the grade model of the upper levels of Carrapateena is very good. So I'm not so worried about reconciliation. And based on that, we're comfortable restating that we expect to see grade -- recovered grade increase through the rest of the year.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Okay. And then just given that clarity then that you've got through that lateral development and drilling, the grade variability going forward, is it relatively stable?

[Andrew Cole, MD, CEO & Director]

It's relative -- we expect it to be stable, but it does have a periodicity to it. So I think on the last call, I've explained previously Carrapateena is a zoned ore body, so it tends to -- high grade in the center and low -- and it progressively gets to low grade issue on outlooks. Now in the sublevel cave mining method, you start on the outside and you pull inside. So the grade recovered is more about the production advancement than it is now about the ore body. So as we develop and produce, that dictates the grade profile, which will be variable through time. But what you'll see is a trend upwards through the end of this year and into next year.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Okay. That's great.

[Operator]

Your next question comes from the line of Hayden Bairstow from Macquarie.

[Hayden Bairstow, Analyst]

Just a couple for me. Just Andrew, just on the Prominent Hill comments on the gold stockpiles, is that variability something that you can sort of get control of? Or is there just not enough data and we're just going to see -- And do you think it's more upside than downside on sort of the future sort of gold stockpile tonnes coming through? And just back on West Musgrave, I mean you -- obviously, you acquired 100% of thing about a year ago. But commodity prices of about 50% since then, I mean is there still anything being considered in terms of a partner here or is likely to remain 100% an OZ Minerals project?

[Andrew Cole, MD, CEO & Director]

Firstly, on Prom Hill, look, we could do some work to better predict the grade of the stockpiles, but that would, of course, would require stockpile drilling, which is not simple itself. So we've actually -- and we know that there's some variability in the stockpiles given they were built 10, 12, 15 years ago. So we're just effectively accepting the variability in the grade that's coming through and pleasing that we've seen that skew to the upside because we were conservative in our assumptions going into this. I don't think, Hayden, we'd plan to do any work to really nail that down. We're just going to accept the volatility because the work you'd have to do to get grade protection of the stockpile is just not worth the effort. So we're quite happy with that variability. And hopefully, we'll continue to see the positive variation, but I don't think it will be safe to bank that, if you like. In terms of West Musgrave, the project is going really well. I should say, the market is moving in our favor. We've now got 50% percent of project. We're halfway through the last round of study. The projects continuing to look very positive. I've also said previously that we don't need a partner for this project from a balance sheet perspective or a risk perspective. We are looking at downstream options, though. We'd love to be able to see a clean nickel concentrate, make it all the way through the value chain to actually get into a battery to a vehicle so we can capture that in the market, if you like, because we are building West Musgrave to be as close possible as an emission-free product -- set of products. So we are putting some energy into downstream partnerships, but that's the extent of it, Hayden.

[Hayden Bairstow, Analyst]

Okay. Great. And just on Brazil, I mean a couple of questions there. I mean, CentroGold, I presume, we sort of can't readvance that at all. But also, given all these COVID issues, is that actually opening up some opportunities, with others having similar issues in targeting done and potentially more assets become available for sale?

[Andrew Cole, MD, CEO & Director]

Interesting question. Look, I'm not seeing that. But we're also not necessarily looking at that area either at the moment. It's really about inward focus on the Brazilian current assets. It is disappointing that it's very difficult to get these things moving, but we have to recognize they're in a very difficult environment as well. There are new strains of COVID in Brazil which are also causing some grief. So I take my hat off to them if they're able to advance these projects, but they're certainly slower than we had originally envisaged. So in summary, we're not looking at the moment at rapidly expanding into Brazil. It's really about getting the focus on the primary assets.

[Operator]

Your next question comes from the line of Paul Young from Goldman Sachs.

[Paul Young, Equity Analyst]

Andrew and Warrick, can I revisit the increased CapEx at Carrapateena, please? Andrew, just to clarify, the increase in CapEx for the year is really around the type of development meters, i.e., putting infrastructure, et cetera, rather than an increase in life of shop rate rock bolts and labor costs.

[Andrew Cole, MD, CEO & Director]

Yes, that's pretty much right. So as you recall, in January this year, we made the decision to approve the block cave. So what we've been doing over the course of this year is integrating the operating plan we've got currently with the block cave plan. And what is very clear to us is the faster we can get to crusher chamber 2 and build that crusher chamber 2 and get the crusher installed, the quicker we can get upwards of the 5 million tonne per year run rate from the sublevel cave mine. And then quickly, we can get to the block cave and have those development levels out quickly, we can get to 12 million tonnes per year. So that's the real material value lever for Carrapateena, if you like. So we're sufficiently in front of the production levels already, so we're prioritizing our development leaders to the bottom effectively. So that does have an impact on the mix between operating and capital costs.

[Warrick R. J. Ranson, Chief Financial Officer]

Yes. Sorry, I was just going to add to that, Paul, that I mean we are -- we're certainly seeing an increase in ground for costs, but it's not the major driver, as Andrew said. Just to be clear that there is certainly an increase in some of those consumables.

[Paul Young, Equity Analyst]

Yes. Okay. And then on development meters, Andrew, I mean how far behind or ahead are you relative to expectations exiting the quarter? It sounds like you're a little bit ahead maybe 6 months ago, and the change in contract you've lost a few meters, but where are you versus plan on development meters as we stand today?

[Andrew Cole, MD, CEO & Director]

Yes. Look, we're pretty close to plan at the moment. So last quarter, we were down a bit. So we do publish a chart in our development leaders in our quarterly, so you can see where they're trending. With the change over last year, the change over underground contractors last quarter, we did have some challenges with equipment availability. And I think Byrnecut has done a great job at actually coming in here, helping get our equipment maintenance strategies in place. That has required a bit more money to get equipment back to scratch, get some more people into the team, build the skills and capability in the systems there. And you'll note that in the quarterly, the development for the quarter is actually going back up, so that quarter turned again. So we're pretty much on plan now. We need to see that number increase again probably by the same amount in the next quarter.

[Paul Young, Equity Analyst]

Okay. That's helpful. Andrew, maybe just switching over to Prominent Hill quickly. As far as access to contractors and shaft sinking contracts, is there any 2 or 3 that can actually sink shafts in Australia? So just curious about getting workforce into South Australia that doesn't seem to be an issue, but are you comfortable you can get the crews in, in 3Q and 4Q?

[Andrew Cole, MD, CEO & Director]

At the moment, we're comfortable. It's a pretty dynamic environment, of course. But certainly, the operations have done very well to date. About 80 -- yes, I think it's about 85% of our Prominent Hill and Carrapateena operating teams are resident in South Australia, so that makes it a bit easier. We do have some critical skills into state, but they've been incredibly flexible in the way they work. They often come and stay here where they need to and stay for longer rotations if they need to. So at this stage, we're comfortable and we're confident we can resource the operating environment. But I think, like all of us in Australia, we probably need to see the vaccination rates coming up more quickly than we currently are to provide an environment for all of us to actually operate well.

[Paul Young, Equity Analyst]

Okay. Last question for me, please, is for you, Warrick, on some accounting questions. Can you just help me out with respect to what the provisional pricing impact on revenue was in the half, if any, and also, just the accounting treatment of closing out the hedge book?

[Warrick R. J. Ranson, Chief Financial Officer]

Yes. So in terms of the second question, so we booked the loss in the first half on the hedge book on closing that out. Those contracts are basically just back to back through the rest of the year. So you'll see us pick up that mark-to-market loss for the half. I suppose we -- our view was that we were pretty much seeing the bottom of the current cycle at least in terms of the gold price. So it's very much stayed around that level. I'd have to come back to you, Paul, in terms of the additional revenue on the provisional pricing just in the quarter. So we'll come back to you on that one.

[Paul Young, Equity Analyst]

Al right. I'll run back to -- appreciate it.

[Operator]

Your next question comes from the line of Kaan Peker from Royal Bank of Canada.

[Kaan Peker, Analyst]

Andrew, Mark, just a group couple of questions on Carra, it's really following up on Paul and Sophie's question. Just trying to understand, Carra was targeting, I think, 3,500 to 4,000 meters per quarter. And over the last 3 quarters, you've been running significantly below this. But you suggested that your progress into plan. So maybe just trying to understand that. And I think with Sophie's question, Andrew, you mentioned that grade is more around production advancements. So can you just please talk around this to CY '22 if there is any?

[Andrew Cole, MD, CEO & Director]

Yes. I don't think the developer has been significantly below plan. So in Q4 last year, I can't remember the number exactly, but it was over 3.5, it was 3.6 or 3.7, something like that. Last quarter was definitely down through the transition. And as we -- as I've already answered, and this quarter, it's picking back up. So I don't think it's significantly below plan, but we are working to get that number back up to the 3.5 to 4. And as I've said, with Carrapateena, the single most important metric at Carrapateena is development. That is what will -- this will drive this project. It's now not the plant. We've demonstrated the plant can effectively do 5 million tonnes per annum over the last quarter. So it's all about development rates. So I'm comfortable with where the development rate is. But there certainly is challenges in there. We still got to get the equipment building the liability up. We've still got to get our sequence right. We still need to see that cave break through to surface because we haven't done that yet. So there are still some key drivers here that we're comfortable with the path where we've got in place. And we certainly think uncovers our primary partner is going to help us get there. Byrnecut cut, as you know, are also our underground mining contract at Prom Hill and doing exceptional job there. So we're comfortable with the selection in our partner.

[Kaan Peker, Analyst]

Sure. And also just one on Prominent Hill, I think in the prior quarter, flagged maintenance backlog. Just wondering how this was tracking.

[Andrew Cole, MD, CEO & Director]

Yes. Look, it's fairly minor in its impacted Prominent Hill. So I'm not too worried about it. There's no real -- there is backlog in a couple of areas, but it's not causing us any hard acres, not causing any slowing of the buildout of the bottom-up sequence.

[Operator]

Your next question comes from the line of Lyndon Fagan from JPMorgan.

[Lyndon Fagan, Analyst]

Andrew, I just wanted to pick up on a few points regarding West Musgrave. I was interested in your comment around looking at downstream options. I'm just wondering if you can maybe elaborate on that and whether you're talking specifically about downstream options on site and sort of what that might entail. And then I guess a related question. I'm wondering if you could maybe give us a refresher on how the socket deposits could actually create some upside at West Musgrave. I mean at 156 million tonnes, it seems like a pretty material size of resource and a 0.6% copper with an existing bit of infrastructure, certainly, at these prices, it could look attractive. But I can't quite remember if you've articulated how that upside could look.

[Andrew Cole, MD, CEO & Director]

Yes, sure. So maybe I'll talk about Succoth first, and then I'll come back to the downstream. So as you've said, Lyndon, Succoth is 150-odd million tonnes of our 0.6 copper open pit, it's very close to surface. We've got a reasonable geological understanding, although there's a couple of interpretations we need to test at the moment. And we have put a drill budget in place to drill, start that resource further. Succoth is currently not in any of our base cases for the Nebo Babel, the West Musgrave project. So the 2 primary drivers for it being excluded from our base case at the moment. One is just knowledge. We don't have enough drill hole information to give us an indicated resource. It's all still pretty much in inferred. So we can't get into production targets. The second reason is the average grade at Succoth is about 0.6, whereas the average grade of Nebo Babel runs about 1% copper equivalent. So it's a lower quality, if you like, than Nebo Babel. But you're dead right, 150 million tonnes of 0.6% copper and open pit environment as a stand-alone mine in its own right. And it runs the global average of copper deposits around the world. So it's a deposit that I'm sure will get exploited. The question for us is when will it get exploited. So should it have a stand-alone facility? Should it bleed into the Nebo Babel production profile at some point in the future? Or should it just come at the end of the mine life and turn a 26-year mine life into a 36- or 40-year mine life? That question remains unanswered at the moment. But Lyndon, you're right in that there is a real option that is sitting there that we haven't really got to yet. And that's why we've allocated some drilling money to it. We're just going through the heritage clearance process at the moment to understand whether the traditional owners are comfortable with us working in that area. So that's where we're up to in the drill program. In terms of your first question, downstream, at the moment, in our base case at West Musgrave, we produce a clean copper concentrate and a separate clean nickel concentrate. So from a copper concentrate perspective, we're comfortable with that, of course, and we're happy to sell it through our current customer base or new customers in our smelting pool. For the nickel concentrate, we are looking at downstream options, notwithstanding our base case is to sell nickel concentrate to a few different nickel smelting groups. One of the benefits of moving somewhat downstream is to potentially leverage a clean nickel product, so we don't just lose it into the smelter pool. We can actually track it all the way through to a clean green product to end consumers. Producing a nickel concentrate is a high-volume exercise. So if, for example, you take it to MHP, you can really shrink the overall volume because you upgrade the nickel in process. And that has flow-on benefits, the carbon reduction, operating cost reduction, transport risk, et cetera. So we're looking at anything and everything when it comes to downstream options. Ideally, we would like to partner with a third party to do this though we don't particularly want to get into chemical processing or the like. So that's the area that we're more exploring. It's what can you take nickel concentrate into and who could you work with to actually do that. So that's the question we're posing and we're testing the market at the moment.

[Lyndon Fagan, Analyst]

That's a great overview. And just a quick follow-up. I mean with the 20% IRR on the project when you put the study out last year and commodities clearly much stronger, is there any early work you can do to actually get going on this or none of the approvals through yet? I'm just sort of wondering, given the attractiveness of fast tracking at, is there anything you can do.

[Andrew Cole, MD, CEO & Director]

Yes. Look, Lyndon, would love to. The key critical path activity for us at the moment is working with the traditional owners on developing land access agreement. And unfortunately, with COVID, we're not prepared to put any of the community at risk, so we are trying to work around the COVID lockdowns and constraints, make sure that [indiscernible] is comfortable before we send our teams in to work through heritage clearances, understand the project work on the land access agreement. So that's the critical path activity for us, but we're not going to put pressure on the TOs on this. So we want to make sure that they feel safe and comfortable with the process. And that process will go as fast as it can. But -- and once we've got an agreement with traditional owners and they tell us they're comfortable with this project going ahead and all of the conditions that we're putting on it, that I think will enable us to take the next big step for the project. But there are certainly early things we could be doing in procurement, [indiscernible], heights and [ procurement ], et cetera, but it really hinges off that process. It is going very well with the Noden dara people. It's just difficult to get into the field sometimes at all.

[Operator]

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

[Daniel Morgan, Analyst]

I take your point earlier that the West Musgrave project, you don't necessarily need outside capital to do it. I'm just wondering if given the current anxiety around some of these battery materials, particularly from automakers and battery producers, whether you could enhance the returns by selling a small tech and rolling that up with offtake. Just wondering if that's something under consideration.

[Andrew Cole, MD, CEO & Director]

Warrick, do you want to talk a bit about the process we use or that you run in terms of looking at the portfolio and capital allocation when it comes time to assess the project?

[Warrick R. J. Ranson, Chief Financial Officer]

Yes, I certainly can do. And Daniel, the -- yes, I think first point is probably that we still probably got around about a year to run in terms of West Musgrave going through to FID. So there's certainly a number of scenarios that we are currently looking at and considering as the project develops. I think certainly, those opportunities around offtake, et cetera, are certainly there. What we want to do, though, is continue to maintain our flexibility around the project, as Andrew has already indicated. So -- and I think we're continuing to see evolution of battery technology, et cetera. So that's also something that we're very cognizant of. So locking ourselves in too early, and it might have some upside, but it may also have some downside. So it's just a case of balancing through those as we think about West Musgrave itself and then obviously the broader portfolio impact.

[Daniel Morgan, Analyst]

So I know you've got a lot of growth projects in the portfolio, and we've talked a bit about lots of those. But just wondering if you wanted to highlight anything in your exploration portfolio that's ahead of others or anything that's a key highlight but beyond the core operating assets in West Musgrave, we've been talking about.

[Andrew Cole, MD, CEO & Director]

Look, the key focal exploration areas, if you like, are actually in our provinces. So we've talked about Succoth, for example, at West Musgrave, which is then captured or underlined value at the moment. We are doing some peripheral drilling at Prominent Hill into satellite historic drilling dissections, which will be encouraging. And we've, of course, got satellite ore bodies at Carrapateena in Brazil. We've got satellite resources which are drilling out of [indiscernible], so we're on track to produce the first resource statement for that later this quarter. Drilling at Pantera, we're on track to produce a resource statement for that later this year; and drilling at Pedra Branca West. So the key levers -- value levers for this company are in those provinces, there are other exploration projects, as I mentioned previously, in Peru and Sweden. They both look technically really encouraging as to a couple of the projects we've got with Red Metals in Queensland, but they're just early stages. So I don't particularly want to call any 1 of them out as yet above the others. But the key value levers are the brownfield within the provinces we've currently got.

[Daniel Morgan, Analyst]

And last question is on the external environment. Clearly, COVID, border closures, cost inflation, a lot of activity in the industry are placing pressure on everyone. Just wondering if there's some risks that aren't obvious to the market, that are needing to be dealt with from border closures or people or what are some of the things that are concerning in the industry at the moment.

[Andrew Cole, MD, CEO & Director]

I'm sure it's a similar situation to all of you on this call. Look, I'd say dealing with COVID, we effectively got operationalized. So this is part and parcel of how we operate now. We've all been dealing with this for 18 months, and it goes up and it goes down, gets hard, comes easy. Our teams know what to do. They know how to deal with it. The people are responding exceptionally well. So I'm sure there will be more challenges ahead for all of us. So I think that part is going relatively smoothly. I do, at every type opportunity I get, encourage people to get vaccinated and help us actually build a resilience as a country. I think that's something that's really important, that we all need to play our part in that. Unfortunately, Australian vaccination rates are a bit too low, I think, at the moment. So that's certainly one area. The cost inflationary environment we've talked about a lot, there are things that we can do to keep our cost pipe. And I think we've demonstrated that in the last 1.5 years, but we can keep our costs tight through environments like this. So look, there are always things have come up. But I think in a way, that's why we spend so much time on our organizational culture. It's organizational culture that lets you see the threat coming and turn them into opportunity. And I'd say some of the things we've done over the last 18 months were a result of turning the COVID threat into an opportunity for this company. It's actually helped us in many regards.

[Operator]

Your next question comes from the line of Trent Allen from CLSA.

[Trent C. Allen, Research Analyst]

You've covered everything. I think it's been very comprehensive. I guess I'm still just curious about that little increase in the copper production guidance from Prom Hill. Is that because of the higher grades or is the increase or the higher development rates? I guess also, I'm asking how is it reconciling to the reserve. Can it still surprise you after all these years, that ore body?

[Andrew Cole, MD, CEO & Director]

Look, I'd say on the last point, that will be full of surprises, and they're usually to the positive. That's usually the -- it's a good example of a good mine, I think, is when you get positive surprises. But this ore body has generally positively reconciled on a metal basis quarter-on-quarter, year-on-year. Most of the uptick in metal that we are seeing at Prom Hill was a result of production and development efficiencies, so slightly ahead on production, slightly ahead on development rates, and the plant is performing well. So I think the operation is going well. It's sort of been becoming known, I guess, for its reliability and predictability. And I think we've got a really good team there and it's done well.

[Operator]

There are no further questions at this time. I would like to hand the conference back to Mr. Andrew Cole for any closing remarks. Please continue.

[Andrew Cole, MD, CEO & Director]

Okay. Thank you very much, operator. Thanks, everybody, for dialing in today. Stay safe. Please go and get vaccinated if you haven't already. And we'll talk again at the half year, I suspect. So cheers.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.