OZ Minerals Ltd

ASX:OZL

Earnings Call Transcript 2021-Q3

[Andrew Cole, MD, CEO & Director]

Good morning, everybody, and thanks for joining me on our call today. I'm speaking to you today from Kaurna land, and I'd like to pay my respects to the elders past, present and emerging I recognize and respect the Kaurna people's cultural heritage, their beliefs and the relationship with the land and acknowledge that they are continuing their importance to the Kaurna people living today. Today, I'm joined by Warrick Ranson, our CFO. And on today's call, we will take you through the highlights for the quarter before moving to Q&A. Before we start though, I'd like to also take a moment to acknowledge the passing of 1 of our Prominent hill mine team members [indiscernible] employee in September. I'm deeply sad by this strategic event in now, and we share and I share our condolences with his family and friends. We and [indiscernible] are conducting our own investigations and are supporting authorities on this as we learn how we can further improve our site safety. The well-being of all our workforce is critically important to us, and we are making sure they continue to be supported. Now on to the rest of our Q3 results. The next few slides are our usual disclaimer and compliance statements, which are available on our website for you to review at your leisure. Since our last update, there have been some additional modest lifting of COVID restrictions and progress on vaccination rates. There are more milestones that need to be reached and we know we are now transitioning in Australia to a different phase on the national road map. So this is something that we'll continue to carefully monitor. The OZ Minerals team has kept pace with the evolving requirements and managed to deliver a strong operating performance with full year copper production tracking in line with guidance. Annual gold production guidance has been raised predominantly due to higher grades in the Prominent Hill stockpiles and cost guidance has been lowered. To ensure we continue to maintain a safe workplace for our people and to minimize the risk of interruptions to operations. We have encouraged and requested our workforce to get vaccinated as soon as possible if they are medically able. In Brazil, 100% of our workforce has received their first dose of vaccination and circa 30% have received their second dose. We are in the process of identifying the vaccination rate of our Australian workforce. In the quarter, we started work on the Prominent Hill Wira Shaft mine expansion with critical work packages being awarded, and the shaft collar construction has now commenced. Progress was made on the West Musgrave study, and we are evaluating further low-carbon and modern mining opportunities. West Musgrave team is in Jameson as we speak, and they will be holding an open day tomorrow to update the community on progress. Infill drilling has started at the West Musgrave satellite Succoth copper deposit. The Carajás East Hub is taking shape with Pedra Branca transitioning from development to production. We've also released a maiden mineral resource for Santa Lucia. And with project activity advancing and commencement of the Succoth drilling program earlier than anticipated, 2021 project study cost guidance has increased in line with this progress. Our financial position remains strong with $188 million in cash at the end of the quarter with a significant liquidity available. Many of you on this call will be familiar with our strategy. As a quick recap, our strategy is centered around creating value for our stakeholders, and this is what we believe will help us deliver on our purpose of going beyond what's possible to make lives better. Each stakeholder, that's our employees, our shareholders, our communities, our governments and suppliers are equally important to us. We look through the lens of value creation for all 5 stakeholder groups in our decision making. On our usual company's snapshot slide is an overview of our operating assets and projects at different stages of development and the type of products they produce or are expected to produce. A more interactive version of this snapshot will be available on our refreshed website that we expect to go live next month. Moving on to a more detailed level. What's mapped out on this slide are the different hubs and spokes of each of the provinces we are developing or looking to develop, their key steps and potential growth projects. Our approach is to look for copper-rich provinces, where initial or existing investments can serve as a launching platform, or HUB for other opportunities. On stakeholder value creation metrics, we introduced these metrics earlier this year to provide a tangible assessment of how and where we can create value, reporting on these metrics is aligned with the different elements of the OZWay. A few of our value creation initiatives continue to be driven by the transition towards a COVID safe Australia with, for example, COVID-19 vaccination hubs now operating in our Carrapateena and Prominent Hill mines, and we continue to encourage our workforce to be vaccinated by our voluntary vaccination reward and incentive program. Others include on-country meetings with the Ngaanyatjarra Council, local Jameson community and the West Australian Environmental Protection Authority to increase understanding of the West Musgrave project and progress development of these agreements. We are also now well progressed on our decarbonization road map to meet our company aspiration of 0 emissions, which we expect to be able to release early next year. Our quarter 3 performance is summarized on this next slide. The team at Prominent Hill was saddened and upset by the fatal injury during the quarter, Our investigation with Byrnecut and those of the authorities are continuing, and this has overshadowed the strong operating performance for this quarter. As a result of the performance year-to-date, we have increased the annual gold production guidance, and I'll speak more to this in the guidance section. We started work on the first production stopes at Pedra Branca with a team in Brazil having now taken Pedra Branca from a concept study to being permitted, built and into production in just a few years. Finally, we've kept costs well controlled. And I'll ask Warrick to speak to this in a bit more detail.

[Warrick R. J. Ranson, Finance & Governance Executive]

Thanks, Andrew, and good morning, everyone. As usual, let me touch briefly on capital management to begin with. It's certainly an interesting time in copper as the price continues to reflect a confluence of dynamic supply and demand factors, such as the auto industry's production constraints and the impact of COVID on economic activity. Copper has extended its more recent gains following reductions in LME and Chinese warehouse stocks and concerns over energy constraints impacting metal availability. Whilst the refined metal market is extremely tight, concentrate is less low and has partly contributed to arrive in TCRCs as smelters also are prepare for annual benchmark negotiations. We do expect to see volatility continue over the balance of the year as China's construction section undergoes a period of deleveraging and with global economic activity forecast to be lower. We expect some softening of the price, albeit with the retention at the higher end of historical trends given the current demand drivers. Over the quarter, these pricing levels continue to contribute to another strong revenue and subsequent operating cash flow performance. This enabled us to again close the period with no draw on our revolver and invest $166 million back into the ongoing growth and development of the business. We will begin to add to this investment in the fourth quarter with the commencement of development activities on the Prominent Hill shaft following the Board's approval of that project in August and the continued ramp-up of activity at West Musgrave. We ended the quarter with $188 million in closing cash, as Andrew mentioned, after base tax and dividend payments, which -- by the interim dividend declared under our sustainable dividend policy and the Board's determination of a special dividend following the strong half year results. We had another solid take-up of our dividend reinvestment option at 28% and continue to approach funding the growth pipeline at our existing operations from operating cash flow. Moving on to Slide 11. And as mentioned, a further $166 million of operating cash was reinvested into the business. Underground mine development activities continued across all operations, and the team at Carrapateena further advanced construction of the Western Access Road with a view to now completing this by the end of the year, increasing our transport capacity and flexibility. At [indiscernible], we progressed the installation of additional ventilation raise bores for the underground and advance the refurbishment of our general and office facilities continuing to improve our flexible work environment. We remain focused on proactively addressing current market contributors to escalation in relation to capital as well as operating costs with no material impact on our current operating activities experienced in the quarter. In the Carajás, we saw the arrival of the first of our own mining fleet in conjunction with the transition into production stopes at Pedra Branca and made a stage-gate payment for the South [indiscernible] project as part of our exploration activities following the delivery of successful drilling results. Activity at West Musgrave also continued to advance as we progress more on-site work. We paid the cash component of both interim and special dividends, as mentioned, and our strong revenue position flowed through the trade receivables [indiscernible] in line with shipping schedules, but also resulted in an uplift in our progressive tax installment obligations. Moving on to costs. And gold production continued to overperform on both feed grade and recoveries, lowering C1 costs. At Prominent Hill, overall mining productivity was impacted by a number of operational pauses following the fatality we have on site and lower than preferred levels of broken stocks underground. Forces acting on the Aussie dollar were largely China-related whilst the U.S. dollar also fluctuated around policy comments by the Fed. This saw a 3% weakening on average rates in the quarter, providing an additional benefit to U.S. dollar C1 costs. On an absolute basis, tightness from skilled labor continued in the market and COVID control measures also impacted some labor movements, particularly around maintenance though did not materially change our productivity profile for the quarter. Freight costs though continue to surge with current BDI levels, reflecting a 12-year high. Whilst we don't see these levels as sustainable, alleviating congestion and rebalancing value chains is likely to take some time. Asian manufacturing disruptions have also increased this quarter with extended COVID restrictions. Whilst overall mining costs at Carrapateena were relatively consistent with the prior quarter, our planned maintenance shut and our proactive cave management strategy impacted mine grades and increased the cost per pound. We saw a trend towards higher fee grades in the later part of the quarter following that activity and excellent recovery rates from the teams throughout the quarter. In the Carajás, we began to extract production ore from our first stope at Pedra Branca from mid-August, which will see a progressive increase in mine grade in the fourth quarter, offsetting higher underground mining costs. Back to you, Andrew.

[Andrew Cole, MD, CEO & Director]

Thanks very much, Warrick. I'll now touch on a few more details around Prominent Hill's performance. The flow on effect, as you can imagine, from the fatal incident and the [indiscernible] operations impacted underground material movement for the quarter. A thorough review of our safety controls was undertaken before we allowed work to resume on the site. Grades from the underground production and long-term surface stockpiles continued to exceed expectations with copper production on track to meet guidance. Gold production is tracking towards the upper end of the updated guidance range and we saw a corresponding reduction in unit costs due to higher gold byproduct credits. Finally, together with the [indiscernible] secondary school, [indiscernible] employment group, [indiscernible] Foundation, our traditional owners and the Department for Education. The team is providing indigenous students with training and resource infrastructure work preparation with 12 students nearing completion of the course and reviewing work opportunities with OZ Minerals. In terms of the Wira Shaft line expansion, we awarded a number of key contracts following board approval in August, including awarding the shaft's sinking contract to Byrnecut, which is the underground mining service contractor at both Prom Hill and Carrapateena. The shaft construction site work has already started and is due for completion in January 2022. The designs for the shaft sinking equipment are progressing well and orders have been placed on the mill runs for the headframe steel with delivery scheduled for this year. We also restarted drill testing exploration targets identified through the crowdsourcing program a couple of years back. This program will continue through year-end, with the results expected early in 2022. On to Carrapateena, where mine development and total wall mining performance improved during the quarter as anticipated. However, we did prioritize lower grade areas in the upper levels of the ore body during the quarter to speed up cave propagation. This did impact the overall head grade delivered to the plant, but has helped with cave propagation. We still expect grades to trend towards reserve grade over the coming quarters. I wanted to acknowledge the team for the great work they've done in continuing to enhance Carrapateena's processing performance. They milled a monthly record of 448,000 tonnes in September which includes a planned maintenance outage, demonstrating the capacity of the processing plant to achieve a 5.3 million tonne per annum annualized throughput rate. It was also pleasing to see a multiyear freight service contract to Carrapateena awarded to a local business, energy logistics as it will bring more potential work opportunities for businesses in Spencer Gulf as well as the -- and full-time role opportunities. We have made provision to fund projects at the Carrapateena mine and processing plant to support the increase in sublevel cave production rates to circa 4.7 million to 5 million tonnes per annum from 2023 along with optionality to maximize sublevel cave production and accelerate ramp-up towards the blockade production rate of 12 million tonnes per annum. Work on the Western Access Road construction is nearing completion and is expected to be operational in December this year, which will give us year-round access at a safer and lower cost coal route to the highway. Acceleration activities for the block cave are underway with the rapid development of the decline progressing well, with monthly development rates now on plan following the underground contractor change out earlier this year. The block cave decline is on track to start later this year. The block cave will allow us to fully capitalize on the value opportunity beyond the existing sublevel cave operation and unlock Carrapateena's potential to be a multigenerational lowest-quartile cash cost producing province. On to other highlights from West Musgrave. I briefly mentioned the open pit at Jameson, that is taking place tomorrow. Aside from this, we continue to advance the project with several of the environmental approvals underway. The EPA Part IV public consultation has been completed, and we have submitted the EPA Part 5 application. The infill drilling program was completed at [indiscernible] With the results in line with expectations. We continue with the engineering design of the mineral processing plant, the hybrid renewable power plant, the village [indiscernible] and NPI to derisk the project from a technical perspective. The project remains on track for an investment decision in the second half of 2022. In the Carajás East province, processing a production ore from the first production stopes of Pedra Branca commenced in August. This was a significant milestone for our Carajás East hub strategy, which was progressed further with the main mineral resource released to the Santa Lucia also during the quarter. At Antas, we started civil works with mechanical assembly to support the transition of the open pit to a tailings storage facility from next year onwards. In the Carajás West Province, resource drilling continued at Pantera, that has been completed now with the resource and study update now expected to be delivered later this year or early next. On to our growth pipeline, where I'm going to call out just a few things, drill results from the 3 holes at the 3 ways project in North Queensland revealed no significant mineralization, ground-based geophysical surveys at the Breena Plains project was completed successfully, and that's identified a 4-kilometer [indiscernible], which we will follow up. We entered into a new project in the Northern Territory with Resolution Minerals, where we are targeting sedimentary-hosted copper deposits in the [indiscernible] basin. A third project with our partner, MPS in Sweden, was added to the pipeline. It's located in Northern Sweden along strike to the south of known copper and gold deposits. We continue to prepare for drilling on the Paraiso IOCG prospect in Southern Peru. And on the people front, very pleased to welcome Suzanne Hunt as our new Head of Exploration. Suzanne has global experience in mining, oil and gas and academic sectors will be joining us starting next week. On the time line side, this is the information on our different assets projects, their stages of development and resource and reserve information at a glance. I hope that providing this quick reference will make it easier to track the estimated delivery of different assets and projects in each province, especially as we build on our growth pipeline. Moving to our key milestones for 2021, I'm just going to call out 2 notable changes. We've previously removed the milestone for the centric coding junction due to COVID and other delays. We are working on setting up a new milestone. And we are expecting an update to the Santa Lucia study now mid-2022, together with an updated mineral resource that will incorporate additional drilling mostly, which is complete. Moving now to the guidance. Full year copper production is tracking in line with guidance. At Prominent Hill, copper and gold production is expected to be at the top end of our updated guided range with higher-than-expected coal grades in stockpiles resulting in a further increase to annual gold production guidance. At Carrapateena, gold production is expected to be at the top end of the range. However, annual copper production is now expected to be at the lower end of our guidance range as we grew from lower grade areas during Q3 to encourage cave propagation. We have now returned to drawing from the higher grade areas at the lower sublevels and expect to see grade to continue to trend to reserve over the coming months. 2021 project studies cost guidance has increased by $30 million as studies have progressed through milestones, and full year group C1 cost guidance has lowered to USD 0.60 to USD 0.70 per pound previously was $0.65 to $0.75 per pound. This is mainly due to higher byproduct grades associated with the expected higher gold production at Prom Hill. So finally, to close out there a few key takeaways before we move to Q&A. I feel we had a quite a very positive third quarter from a group production cost perspective. Group copper production is tracking in line with annual guidance. Annual gold production is set to increase and cash cost guidance has now been lowered. Growth projects, including the Prom Hill mine expansion, West Musgrave study and project studies are advancing. Our financial position remains strong with $188 million cash balance at the end of the quarter, and our debt facility is undrawn. And lastly, our capital management framework provides a strong platform for allocating capital to the right projects and accessing finance shouldn't be required to fund our considerable growth pipeline. So we're now going to move on to Q&A. As a reminder, I've got both Warrick and myself here. So operator, could you please remind people how to ask questions. Thank you.

[Operator]

[Operator Instructions]Our first question comes from Rahul Anand at Morgan Stanley.

[Rahul Anand, Equity Analyst]

Andrew and Warrick, if I can start with the Prom Hill, please, on the grade. So the stockpile grade, I just wanted to perhaps retouch base on that and sort of see -- how are you seeing the grades here? I mean is there an element of bringing the grades forward, which might impact production in future periods? Or is this genuine positive reconciliation that you're continuing to see? And in terms of the mining reserve grades, a bit of a drop there as well at site. Is that now where the grade is expected to be for the rest of life, considering it reverted back to that reserve grade? That's the first one. I'll come back with the second.

[Andrew Cole, MD, CEO & Director]

Yes. Thanks for your questions. Firstly, the grades that we're seeing coming out of the stockpile is more about positive reconciliation. So we're not sequencing the stockpiles to try and take higher grade and lower grade. It's these stockpiles were built over a decade ago. We haven't done any drilling of these stockpiles to try and understand the grade distribution in them, if you like. So it's -- there is an element of high variability expected from these stockpiles. And at the moment, we're seeing positive reconciliation coming from it. So we don't see the [indiscernible] drilling the stockpiles, if you like, to try and tighten that up. So it's more about reconciliation than it is timing. On the second question, Rahul, in terms of underground grade coming through, you'll notice on the chart that we produced you will have seen higher grades coming through in Q1, Q2 this year. So we were prioritizing some higher-grade areas of the mining sequence through the first half, and that came at there or the cost of that is the lower grade material coming through now. But over time, you will see Prominent Hill merge to reserve grade, but of course, we will be prioritizing high grade areas as much as we possibly can when they present when those opportunities present themselves.

[Rahul Anand, Equity Analyst]

Okay. All right. Perfect. Look, I know there will be some questions on Cara today. So I might ask 1 on West Musgrave. Look, in terms of that third mill that you're talking about to expand throughput further, I just wanted to understand if you can provide a bit more color on how that sort of leads to better energy management and emissions reduction. And then also, if you've done any metallurgical test work for the combination of Nebo Babel and Succoth combined? Or is the idea still that it stays at the end of mine life? That's for Succoth.

[Andrew Cole, MD, CEO & Director]

Yes. Okay. No, thank you. So maybe I'll answer your second one first. We've done a lot of metallurgical test work on Nebo and Babel, and we've done pilot crushing tests using the vertical roll. So we are very comfortable and confident that we've got the data to support an investment decision for Nebo and Babel. We don't yet have metallurgical test work for Succoth. So part of the program of work that we have already started is to drill Succoth or complete an infill drilling at the Succoth resource and collect some of that material for metallurgical testing that will then help inform how Succoth may or may not combine with Nebo Babel or in the plant. So that's the Succoth component still to be done, and that will be done over the next 6 or so months, Rahul. In terms of the third vertical roller mill. So our current base case has 2 VRMs in it. Those 2 VRMs are close to full capacity at the 12 million tonne run rate for the mine. The renewable energy that we have scoped up that at West Musgrave will run obviously at full capacity, but we also then need quite a bit of thermal energy to supplement the renewable energy to run those VRMs full capacity. So when we don't have sun and we don't have wind, we don't have a lot of spare capacity to switch those VRMs off. We'll have to run them on thermal energy, either diesel or LNG. By adding a third VRM, which is purely an opportunity at the moment, what it would allow us to do is to switch the VRMs off if we don't have solar or wind available. So we can actually utilize them more in campaign mode. That brings down, obviously, your operating cost, it brings down your emissions materially, it increases your capital to build. It increases the working capital, you potentially carry at any one point in time. So they are the trade-offs that we're working through at the moment.

[Operator]

Our next question comes from Paul Young at Goldman Sachs.

[Paul Young, Equity Analyst]

Andrew and Warrick, I start with Carrapateena and the head grades. Andrew, obviously, a lot of discussion over the past couple of quarters on the grade. Can you just confirm that the lower head grades during the period were due to mining lower grade ore rather than dilution. And can you give us a sense of at all so far in the October quarter only 20 days in, if grades actually have improved?

[Andrew Cole, MD, CEO & Director]

Yes, for sure. No, I understand the question. So look, what we've done just to summarize this for others as well. So what we've done is Carrapateena is going to be mine constrained. It's going to be mine constrained for many years. And that's as a result of the processing plant performing exceptionally well. So one of the constraining factors for Carrapateena is the cave propagation to surface. So we want to get the cave through the surface as quickly as we can, as efficiently as we can. So what we've done in this last quarter to stimulate cave growth will go back to the upper levels of the Carrapateena sub level and start expanding the footprint. And by expanding the footprint, it means we have to take some lower-grade material. It's still poor. It's still got met liner, but it's lower grade that actually increases the diameter of the cave footprint, which has actually helped us successfully help stimulate cave growth. We've now stopped that work. We're now back in sequence, and we've seen the grades start to revert or go the other way back up towards reserve grade. So the impact that we're seeing on the grade in this quarter is only a result of us going to the upper levels and the more peripheral on the peripheries of the sublevel cave itself. So I'm very comfortable and confident to say when I say the grades will return to a reserve grade over the coming quarter or 2. We're seeing very good reconciliation to the reserve through the plant. We're seeing no dilution coming through the [ cover ]. So this is only about getting the case through the surface as quickly as we can.

[Paul Young, Equity Analyst]

Yes. Just a follow-up. If you are [indiscernible] diameter, will that not bring in mineralization ore outside of the reserve. I mean, it's probably economic at these prices. But is there any impact on the overall potential reserve as a result?

[Andrew Cole, MD, CEO & Director]

No. Look, these are fairly small numbers we're talking about, Paul. So no, there's no impact to reserve resource. And I guess -- the thing to remember is the material that we're mining as part of expanding the sublevel cave footprint is the same material that eventually in 20, 30, 40 years' time of what cave we'll actualluy take. So it's still ore from a caving perspective. It's just not the most valuable ore today, given we've got higher grade in so little.

[Paul Young, Equity Analyst]

Yes, I understand. Okay. Just keeping on Carrapateena. Thinking about the plant, I mean, it performed very well during the period. And a couple of questions here. First of all, the gold recoveries continue to surprise. Is there anything you can put that down to? Whether it's mineralogy sort of impact and minerals. And also, I see you've got some planned maintenance in the fourth quarter. Can you just run through, I guess, the duration of that and what's involved.

[Andrew Cole, MD, CEO & Director]

Yes, [indiscernible] in the fourth quarter.

[Warrick R. J. Ranson, Finance & Governance Executive]

No, I can't remember how long it is, but I can let you know later if you like. What the length of the [indiscernible] it's obviously built into the guidance into the guidance numbers. And sorry, what was the first question?

[Andrew Cole, MD, CEO & Director]

Gold recovery.

[Warrick R. J. Ranson, Finance & Governance Executive]

Gold recovery, yes. Look, this question comes up quite a bit, Paul. I would -- we need a few more months, I guess, to see what the gold recovery is going to do. But at some point, we're going to have to decide whether we're prepared to bake that increase above average recoveries into our forward plan. We haven't done that to date. And the reason we haven't done that to date is because in the upper levels, we're still in that [indiscernible]weathering zone or the on the historical [ paleo ] weathering of the orebody itself. So -- we don't want to do it just yet, but I'd say next year, we're going to have to make a decision on whether we're confident and comfortable carrying increased recoveries of gold through our mine plan. So I'd say we'll start to talk more about that in January when we issue guidance going forward.

[Paul Young, Equity Analyst]

Last 1 for me, if I may. Just on West Musgrave. And I guess the pause and the value optimization work which is going on at the moment. The 12 million tonne base case throughput, what are you now looking at conceptually? Is it 13? Is it 14? And is this I guess the optimization [indiscernible ]regulatory process for OZ Minerals and all companies to be honest. But is this pause and optimization as a result of the fact that contractors are hard to find in WA. And of course, CapEx inflation is stepping up.

[Andrew Cole, MD, CEO & Director]

Yes. No. So I wouldn't say we're pausing for any reason other than value and risk optimizing the project, and that's just the way that we work, using sort of the agile methodologies, if you like. So we are looking at opportunities to improve the project. And there are strong tensions in some of the things we're looking at between capital and operating costs, risk and optionality. So some of the things I talked about with Rahul, for example, they are real value-adding opportunities similar to the opportunity of looking at going to MHP as opposed to producing nickel concentrate. That potentially is a real value-accretive opportunity. It's just not -- we don't have enough definition to incorporate into our base case yet. So these are real opportunities to optimize the project. We just need to work through all the tensions that come with those optimizations. In terms of the environment in Western Australia, we feel that we're on track to make a decision in mid next year, second half of next year. We are spending a lot of time with the community. That's probably been the limiting factor just being able to get into the work area into the community to help them understand project, what it's going to look like, make sure that when they sign an agreement to support us building this mine, they completely understand what they're agreeing to, and that just takes time, and COVID has made that a little bit difficult, of course, to being able to get into the field. But as I said earlier, our team is in the field now this week and taking a very large contingent of community through the project site and walking them through every element of the project, what it looks like, how it's going to feel to make sure I do understand that. Just to go back to your other question, I think it's 4 days. So the shut in the fourth quarter is 4 days, Paul, so that's pretty...

[Paul Young, Equity Analyst]

Yes, modest. And Andrew, so just on the throughput on West Musgrave, do you have a number for us as far as what you're looking at beyond the above as well?

[Andrew Cole, MD, CEO & Director]

No. Still -- look, the base case is still 12%. There are some combinations of permutations with some of the opportunities we're looking at, but I still hold to 12 million tonnes, that's our view at the moment.

[Operator]

Our next question comes from David Radclyffe at Global Mining Research.

[David Radclyffe, Managing Director]

So my question is more a high level one, and it really goes to how the strategy of the business does or doesn't sort of evolve here with a $470 copper price and $26 share price. So I was thinking what are the opportunities maybe to make changes to the operational growth plans? How you sort of think about plans to finance growth? Do you perhaps think about some price protection given Warrick's comments on the copper price? And then on M&A, are you more likely buyers or sellers today? And then when you think about partnerships, are you more or less likely to think about them in this market?

[Andrew Cole, MD, CEO & Director]

Yes. Sure, David. Look, I'll ask Warwick to add some commentary on our -- on the capital management plan, our balance sheet, et cetera. But by and large, our company strategy is continuing to mature, not -- we're not making radical changes to it. Our strategy is to find and build and operate high-quality, low-cost copper assets and copper comes with nickel, it comes with gold, it comes with other byproducts. And that strategy, by and large, hasn't changed. Our strategy is also mostly about how we go about doing that as opposed to what we focus on. So we spent a lot of time on organizational culture, building a value proposition that is different and highly attractive to different people, not just from within our sector, but from outside our sector to bring diversity of thinking, views, opinions in the company. And I'd say we're only partway through execution of that strategy. I think we've got Prominent Hill into a good space now with a nice future. Then we've got Carrapateena in a good space now with a very promising future. We're working on getting West Musgrave into the same place. Brazil is an early option, but we're working on that to get to the same place. We are also now actively looking for new early phase projects to add to our pipeline. So mid-stage, late-stage, early study, [indiscernible] study phase projects, which we can turn into or acquire to optimize and look to follow the path that we've done with Prom, Cara and now West Musgrave. So that's still very much our stated strategy. Clearly, with COVID restrictions internationally, it lets doing that internationally very challenging. So we're putting more time and energy into Australia at the moment than we are overseas, but that's just reflective of the current situation, and I'm sure we'll pivot back once we can get access to international travel more favorably. In terms of the probability of us buying an operating asset right now, I think, is very low. Everybody is looking to sell assets. There are d a lot of great assets in the marketplace, and we're not looking to get big. We're not looking just to add tonnes. We're looking to create value. So simply buying assets at the top of the price cycle, we don't think is a great idea unless you can bring real value to them in some way, shape or form. So that's why we're largely focused on looking at earlier-stage projects. Do you want to talk a bit about the balance sheet or capital allocation?

[Warrick R. J. Ranson, Finance & Governance Executive]

Yes. I think the other thing to add there, Andrew, is really around, we'd like -- we've always said that everything is always -- you always have a circumstance when something is for sale, if you get the right price for it and it created value to do other things. But I think for us, our current portfolio is certainly in our core foundation for how we want to continue to grow the business. So again, we're not looking to sell down. That's for sure in today's to market given that foundation. And I think on hedging, obviously, $11,500 a tonne, it becomes a little bit tempting, I suppose. But then you sort of see the volatility that exists. And I think there's still some way to go in terms of seeing how the market actually plays out in terms of price. So I think our preference continues to be to make sure that we're operating as efficiently and productively as we can, and continue to maintain our flexibility to maintain strong margins as we have this quarter through the cycle.

[Operator]

Our next question comes from Matt Greene at Credit Suisse.

[Matthew Greene, Research Analyst]

Andrew and Warrick, I just have first question is just on the stockpiles at Prominent Hill. The positive reconciliation has clearly been a very great thing over the last couple of quarters. But does this potentially change your thinking on other stockpiles you may have at Prominent Hill that you perhaps have deemed too low grade in the past?

[Andrew Cole, MD, CEO & Director]

No. Look, in essence, no. I think we've now incorporated all of our known mineralized stockpiles into our mine plans. So there are no other legacy stockpiles sitting at Prominent Hill that we might be able to pull into the future.

[Unknown Analyst]

Okay. That's great. And then just moving on to Brazil. You've got stoping starting at Pedra, and Santa Lucia is looking quite exciting. What's your sort of view on that private royalty that you inherited? Is there any option to acquire that at some point in the future? And what's your thinking on that?

[Andrew Cole, MD, CEO & Director]

Yes, there are some royalty ratings over our over the deposit and [indiscernible] and the mineralized systems there. I don't think we're looking to necessarily buy those out at any point in the short term. They're just the cost of us doing business there and the were factored in when we did this deal. So in short, no, not looking at anything out at the moment.

[Operator]

Our next question comes from Mitch Ryan from Jefferies.

[Mitch Ryan, Equity Analyst]

So I want to focus on Carrapateena, if I may. So my recollection is at your 2Q results, you were sort of very strong in your commentary that grade would trend up over the second half of this year, and you've reiterated it again now, but it did step down in September quarter, and you've given commentary as to why. I just wanted to understand, was there something in the propagation qualities that changed compared to your baseline that required you to step back up into the higher levels and focus on, I guess, receiving that propagation?

[Andrew Cole, MD, CEO & Director]

Well, yes and no. So the case has been propagating quite well at Carrapateena. So the [indiscernible] has been propagating quite well. It is a very unconsolidated or a layered unit above Carrapateena. So if there was a time there where it started to slow down a little bit then it's sped up a bit. So it's more about getting in front of this than actually waiting. So this -- we've got several months before we -- even if the cave stayed stationary, we've got several months before we'd have to take any action. But the limiting factor at Carrapateena is mining. So as the rest of the infrastructure, its capability moves. And as you can see, the processing plant now is effectively at a 5.3 million tonne per annum run rate. The faster we can get this cave put it through to surface, the faster we can ramp the sublevel cave up, the more ore tonnes we can get out to match plant capacity. So it's the cave that the limiting factor right now. So the quicker we can get us through the better which is why we want to sort of push it through to surface.

[Mitch Ryan, Equity Analyst]

And that, I assume that also then it relates -- you made a commentary that the air gap volume was increasing, I think, in the commentary. Just wanted to understand how you're managing the risk around that? And I guess that is potentially going into those upper levels, as you said.

[Andrew Cole, MD, CEO & Director]

So quite -- I didn't quite hear that. I think what you're asking about is kind of mining volumes at Carrapateena. I think that was the question.

[Mitch Ryan, Equity Analyst]

It was the air gap volume. Sorry, Andrew. The air gap volume, I think you talked about that. I just wanted -- given you [indiscernible] how you're managing the risk around that?

[Andrew Cole, MD, CEO & Director]

Yes. No, no, sorry. No problem. Yes. Look, we've got several monitoring systems at Carrapateena. So we can actually see the air gaps. We actually take visual measurements down monitoring holes themselves. We've also got a number of drill holes with various centers in. We also use seismic to monitor cave -- the cave's shape and the [indiscernible] - shape, and we've got various markets coming through. So there's actually -- I think it's 5, 6 different systems, I think it is at all overlay each other that we use to verify the shape of the cave and the size of the air gap above the [indiscernible]. So we're quite confident in its shape, which gives us the confidence to actually monitor it and allow us to accelerate it.

[Operator]

The next question comes from Peter O'Connor from Shaw and Partners.

[Peter O'Connor, Senior Analyst of Metals and Mining]

Andrew and Warrick. Just further on the caving, Andrew. You mentioned taking action. What does taking action and the cave look like in terms of time, dollars, people? How does it play out and how do we see that in the production over the next year or so, if that does occur? That's the first question.

[Andrew Cole, MD, CEO & Director]

Yes, Peter. Yes, so we are already taking action. So by taking action in the last quarter, it was mostly about coming up into the upper levels of the sub level, which we've already retreated out of and taking -- expanding the footprint effectively. So that's what we've already done. And that led to taking a lower grade ore that was out of sequence, which has led to the grade drop [indiscernible] Carrapateena . The other thing that we have done and are continuing to do is to perform monitoring hole surface and pulls in from surface that we could use in the future if we have to, which I don't think we'll have to, but there's a safety measure for fracking or anything like that. And I think our current estimate is that inflation breakthrough [indiscernible] thereabout. So that's the sort of the current in the action that we're taking, I think we've already just -- impact [indiscernible] into the results.

[Peter O'Connor, Senior Analyst of Metals and Mining]

Sorry, Andrew, you broke up when you mentioned the breakthrough timing when is that expected?

[Andrew Cole, MD, CEO & Director]

I think we're saying that middle of next year [indiscernible].

[Peter O'Connor, Senior Analyst of Metals and Mining]

Okay. Second question on guidance. Just to -- [indiscernible ], but you talked about meeting copper guidance for the year. And you can easily meet the bottom end of the range given your current run rate. So that's the way you're defining when you talk about meeting guidance, it's at the lower end of the range because to meet the midpoint would be quite a stretch for the fourth quarter?

[Andrew Cole, MD, CEO & Director]

No. Peter, I think what I've said here is we are on track to make copper guidance at the portfolio level, probably towards the upper end, the Carajas is going to be towards the lower end of copper guidance.

[Operator]

The next question comes from Lyndon Fagan at JPMorgan.

[Lyndon Fagan, Analyst]

Look, I won't ask any more about the cave, but are you able to maybe give a bit more clarity on the grade profile. I know I've asked this a few times, but can we -- other than just saying it's going to trend back towards reserve grade. Can we be a little more specific in the next few quarters and perhaps a range for next year that we can think about?

[Andrew Cole, MD, CEO & Director]

Lyndon, I know you've asked this question each time. I'm probably going to answer it the same way, so maybe a quick disappointment. But is going to trend back to reserve rate, and that's sort of what we flagged over the last few quarters. And it is trending back. If you look at the trend over the last year or so, it's trending to growth -- reserve growth, as we've said. But there will also be some short-term variability in there depending on what we're pulling from which part of the sub level. Where you do have the grade profile because you've got guidance. So the guidance numbers will give you the profile given the ore that we're mining and the rates we're mining. But look, we don't intend to start releasing grade profiles for these assets. We are only going to be giving guidance on the middle, we're going to produce for the volumes that we got to produce and then the cost of that to do that.

[Lyndon Fagan, Analyst]

Yes, that's fair enough. And look, -- Another question just more holistically. Are you able to remind us what your copper price is used in your reserve assumptions? And how mine plan could potentially change if you would then use a higher price. But what's the sensitivity on reserves to factoring in a higher copper price?

[Warrick R. J. Ranson, Finance & Governance Executive]

Yes. So we use a long-term price of 290 -- 291 at the moment, Lyndon. We have run some sensitivities. It's not that -- it doesn't really change that dramatically in terms of our reserve. But we constantly review our copper price as well. So that does feed in ultimately to our reserve and retail statements, but it's -- I couldn't tell you off the top of my head the exact sensitivity. But -- so I think probably the -- what we're more sensitive to is actually the FX rate. So that's another sort of key player in how we sort of think about our mineral reserves.

[Andrew Cole, MD, CEO & Director]

Yes. I think add to that, Lyndon, because of the types of resources we're mining and the grade of these resources, we sit quite a way below the inflection point on the grade tonne curves on our reserves now mining inventory. So it doesn't -- pricing doesn't impact our grade tonne curve, our mining inventory and our sequencing all that much, to be frank. So if we were to put spot price in, you wouldn't necessarily see a massive shift in our reserve and mining sequence.

[Lyndon Fagan, Analyst]

Okay. No worries. And just another one, if I may. Did you have a look at [indiscernible] and Sierra Gorda? Or based on your comments earlier, are you not interested in buying a producing asset right now?

[Andrew Cole, MD, CEO & Director]

Lyndon, look, we've been -- we still have a dedicated team looking at operating assets and companies around the world. So I think it's fair to say, we've looked at everything, and we do look at everything. We're just not prepared to pay spot pricing for copper or gold and we're not prepared to pay full value for inferred resources and exploration potential which is generally where companies are pitching asset sales at the moment.

[Operator]

Our next comes from Hayden Bairstow at Macquarie.

[Hayden Bairstow, Analyst]

Just a quick 1 on Brazil. I mean all these, I guess, study dates and targets continue to get pushed back, and there doesn't seem to be much joy on the gold project. Just sort of where you're at with the strategy there, particularly on the gold side and is it a point where when speaking of elevated prices for asset sales, et cetera, that there's potential to restructure some of the assets within the portfolio in Brazil specifically?

[Andrew Cole, MD, CEO & Director]

Yes. Hayden, yes, so maybe just break the question up into 2 pieces. So first, on CentroGold, just to remind everybody, when we bought [indiscernible] our primary target was the Carajas as for copper. That's our company strategy. That's our focus. With CentroGold, our primary purpose at the moment is to get rid of injunction removed. There are some things that we need to do to get the injunction removed. The last request from INCRA was to formalize a community relocation plan of [indiscernible], a small community that resides on the project itself. That community relocation plan has been done and built, and we have now submitted to INCRA. So if the ball's almost back in their court now to go through that process to approve or not the relocation plan, which would then allow us to launch an application and the injunction removed. That's, we think, the value maximizing strategy for that asset in the short term. In the Carajas, yes, there's a few -- there's a few different initiatives here. One is to get the foundation in the Carajas built. And I feel that we're pretty much getting to that point now. We've got a good team, we've got a good foundation. They've got good systems. We've audited the systems, we feel confident and comfortable the way they're operating. They've demonstrated they can build an asset in the Pedra Branca. We appreciate Pedra Branca itself is not material to OZ Minerals, but the concept potentially can be. So Santa Lucia would be the second spoke. So their main focus at the moment is to get Santa Lucia permitted, developed and producing so that we can see Pedra Branca and Santa Lucia ore into[indiscernible]. It does then start to become cash generating quite material. But if we can then leverage that foundation into other assets, that's where it potentially can become quite material to the company. The other sort of hidden value of Brazil for us is that it has actually helped us learn how to operate internationally, all the way from the forward through policy standards and our operating regime. So I think we would feel much more comfortable today stepping internationally into an asset than we would have 3 or 4 years ago. And that's the value that I appreciate the market doesn't see or recognize or need to, but it would give us a lot more confidence if we found an asset overseas to step into because stepping into an asset overseas first time [indiscernible] is a very big step, and I would assert that most organizations are not actually ready to do it when they do the work.

[Operator]

Our next question comes from Kaan Peker at Royal Bank of Canada.

[Kaan Peker, Analyst]

Andrew and Warrick, 2 questions for me. First, on Cara and I think it's, I suppose, in the same sort of line of questionig as Lyndon's, but just wanted to get an understanding there. The development rate is increasing, which is good to see, but still below that 4,000 meter rate that previously guided Cara. So that trajectory up to reserve or back to reserve grade, how much of that depends on that development rate being around that 4,000 meter mark on a quarterly basis?

[Andrew Cole, MD, CEO & Director]

Yes. I think with Carrapateena, we guided -- we said I think my commentary was 3,500 to 4,000 meters. So as long as it's within that range, that's the plan, which they are now within. So Carrapateena development rate is on plan. And I think that -- I don't have to chart in front of me right now, but I think each quarter is pretty much ramped up over the last few quarters now to hit this. We did see a dip in Q1 when we're changing over contractors [indiscernible] they're back on plan. So that as long as they hold it there, they'll be doing fine.

[Kaan Peker, Analyst]

Sure. And I suppose that trajectory, does that sort of move into through CY '22?

[Andrew Cole, MD, CEO & Director]

Yes. Yes, we want to see that trend continue. So from the end of this year, just as a reminder, the dedicated decline going to crusher 2 will continue. So that dedicated decline will go down continue from the end of this year. [indiscernible] the blockade. And of course, we've got all of the standard development ahead of production and sublevel cave production levels. So that rate needs to hold for a while yet.

[Kaan Peker, Analyst]

Sure. And just a second one. I think you talked about tax installment obligations. Just wondering if there's any tax catch-up payments relating to previous years in the last couple of [indiscernible].

[Warrick R. J. Ranson, Finance & Governance Executive]

We did settle our final return for last year. So there was a slight adjustment on that, Kaan. And then we pay our installments based on a percentage of revenue base, which gets adjusted after we launch our final return. So that was a natural sort of increase based on last year's results.

[Kaan Peker, Analyst]

So the rate stays the same or is there any catch-up payments or no?

[Warrick R. J. Ranson, Finance & Governance Executive]

So our effective tax rate hasn't changed. It's a percentage that we get charged on a revenue basis, which is the way in which the installment system works. So it's not our net earnings. It's on revenue. So that gets adjusted once you launch your final return.

[Operator]

Our final question comes from Paul Young at Goldman Sachs.

[Paul Young, Equity Analyst]

Few follow-up questions or additional questions, Andrew and Warwick. First of all, on Carrapateena on the block cave, the decline start in the fourth quarter. And we know, again, back on the CapEx inflation sort of angle, it's going up across the board and particularly in underground development. When do you do -- I know you probably do this on an ongoing basis. When will you do your next big refresh on the capital cost estimate on the Carrapateena blockade considering that a majority of the obviously, the underground lateral and vertical development?

[Andrew Cole, MD, CEO & Director]

So that study is actually continuing now. So we've been refreshing costs, et cetera, for the block cave development itself and infrastructure over the past several months. And of course, if we -- if something material came that would have to change or update the market given we've released the study results already. I think 1 of the key things to remember is the next capital -- big capital item underground is the second crusher chamber. So -- and that's basically procured. So we've derisked the second crusher chamber already. Then the next 2 years is underground development. So there's more underground mining rates and underground cost per liter than it is about large capital purchases per se. So the larger capital purchases for plant expansions, et cetera, don't come in for another 40 years, plus or minus. So still a way off, Paul. But if those numbers do materially change, we will update the market. But at this stage, we don't think that's going to be the case. What's actually helping us also, of course, is every increase we can get in the current processing plant throughput rate decreases the amount of capital we would have to spend to build a parallel processing train to get us to 12 million tonnes. So yes, there is an inflationary environment at the moment, how long that's going to last, who knows. But we're working hard to reduce the need to actually have to spend as much of that in the first place.

[Paul Young, Equity Analyst]

Yes. No, absolutely. Understood. Okay. Great. And then on -- back on to West Musgrave and the downstream nickel plant, the MHP, where are you with -- two things here. One, with the test work. Is it really just bench scale at the moment on the MHP it's relatively proven technology though many companies do it, particularly offshore, mostly laterites. But where are you with test work? And secondly, where are you with the interest from third parties? Is that -- what stage are you at?

[Andrew Cole, MD, CEO & Director]

Yes, sure. So we've commissioned the test work for MHP. And as you say, this is not R&D per se. It's more just testing this or this metallurgy through that process. So it's more specific to Nebo-Babel. So we've already done some bench top test work. We're moving to a pilot scale here shortly, just collecting the samples to actually put into the pilot test at the moment. In terms of the third-party, we've got a dedicated team formed here now internally, and we have reached out to a raft of different companies mostly following up their approaches to us. So there's a long list of rigs which we are now starting the process of talking about what they value, what we value, what they want from partnership and what we want from a partnership. So that piece is still early days. And these will both track in parallel over the next 9 or so months.

[Operator]

Thank you I'll hand back to Andrew for closing comments. Thank you.

[Andrew Cole, MD, CEO & Director]

Okay. Thank you, operator, and thanks, everybody, for joining the call today. Hope you all have a safe and healthy day. Thank you.

[Operator]

Thank you so much. This does conclude today's call. Thank you all, you may now disconnect.