OZ Minerals Ltd

ASX:OZL

Earnings Call Transcript 2017-Q4

[Andrew Cole, CEO, MD & Director]

Good morning, everyone. I hope you all had a good Christmas break. Welcome to 2018, and welcome to OZ Minerals' 2017 quarter 4 report. I'll be completely joined here today by Warrick Ranson, our new Chief Financial Officer. As you know, Warrick joined us in December last year. I can say that in the very short time that he's been with us, he's already become a very valuable addition to our management team.So we've got a lot to cover today. I'm going to start with an overview of our 2017 annual performance before I move on to the specifics of our quarter 4 performance, and then I'll fade on to some of the projects. But I'm then also going to finish off on our 2018 guidance.So I have a lot to cover, and I'm going to cover most of it at a fairly high level to make sure we give you time to answer questions. So please take a moment to note our usual disclaimers and compliance statements in the start of the pack.So in terms of delivering on our growth strategy. 2017 was another very successful year for OZ Minerals following a strong final quarter to 2017. We've made significant progress, I think, towards becoming a multi-asset and a modern mining company after launching our new strategy less than 3 years ago. The team has done a great job throughout the year beating or exceeding all of the guidance measures that we've set. They achieved copper guidance for the third consecutive year. They've exceeded the gold guidance for the year. We kept Prominent Hill operating costs at the bottom end of the guidance range. We extended Prominent Hill's underground life to 2029. We kept the new Carrapateena mine construction on budget and on schedule for commissioning in quarter 4 2019. We took the West Musgrave copper nickel projects to the pre-feasibility study stage. We added another exploration project immediately south of Carrapateena, increasing our Carra landholding to well above 4,000 square kilometers. And we increased our cash balance, despite this investment activity, up to $729 million on an unaudited revenue of over $1 billion whilst keeping ourselves debt-free. Looking forward, as a result of our strategy to run a lean and agile team with a strong focus on innovation, we are, today, also able to increase our Prominent Hill copper guidance for 2018 and 2019, which will continue to fuel our growth strategy.Our portfolio has continued to mature. In the last quarter of 2017, we exited the Intercept Hill exploration earn-in agreement with Red Tiger Resources after drilling 4 unsuccessful holes. We then entered into a new exploration earn-in agreement with Red Metal Limited on Punt Hill, which is located immediately south of Carrapateena. The addition of Punt Hill further consolidates our presence in this highly prospective Gawler Craton region.It consolidates our IOCG target footprint immediately south of Carrapateena, the Fremantle Doctor and the Khamsin complex, again consistent with our strategy. I'll talk a little bit more about this later in the presentation this morning. So the team is continuing to work to add to this pipeline, and I expect we'll see new additions through the course of the year.But now let me summarize our performance for 2017 and the fourth quarter specifically. Pleasingly, Prominent Hill achieved in the upper end of the copper guidance range for the third consecutive year, delivering 112,000 tonnes of copper with a strong Q4 finish. This, I think, really does embed their reputation for being reliable and predictable.We exceeded gold guidance for the year with Q4 gold production at over 39,000 ounces, exceeding Q3 by over 30%. Our cost performance was at the bottom end of our annual guidance range, which keeps us firmly in the bottom quartile of the cost curve globally. Prominent Hill's increased the underground reserves by 18%, which allowed us to push our annual mining rate to the upper end of the 3.5 million to 4 million tonne per annum for more years longer to the new life of mine of Prominent Hill, which is now 2029.We made good progress in Carrapateena with the first phase of surface construction well underway and over 4,200 meters decline now developed. West Musgrave progressed to pre-feasibility off the back of a robust scoping study and a great working relationship with Cassini Resources. Our strong performance at Prominent Hill yielded an unaudited 2,000 in net revenue of circa $1 billion with gold contributing about 20% of this. Despite our internal growth investments in Carra of nearly $70 million; a Prominent Hill ore inventory of about $11 million; West Musgrave scoping study, exploration, strategic projects, tax payment and a midyear dividend paid to shareholders, our end Q4 unaudited cash increased to $729 million, up some 14% from $639 million at the end of Q3.On safety, we are unfortunately saw our total recordable injury frequency rate increase 19% on the last quarter to 6.39. This was due to an increased number of low severity sprain and strain injuries mainly at Carrapateena as we ramped up underground operations. Pleasingly, the team has brought the trend to a halt with now a 50-day injury-free period having been recorded through our renewed approaches to safe work. At Prominent Hill, the safety program we implemented in late 2016 and through the early parts of 2017 resulted in a 40% reduction in the Total Recordable Injury Frequency Rate, mainly through improved underground performance, which I think is a real credit to the leadership at Prominent Hill.On people, we are rapidly building our sub-level caving experience with several new additions to the Carra team. A new office manager, for example, comes to us from the Cadia East block cave operation and our project [ tier ] tech engineer comes from [ tougher ] sub-level cave. The Carra team, I think, is now very well positioned with a wealth of experience to lead the development and ramp-up of the operation.As always, we look to support local communities and businesses neighboring our operations, and we prioritize sustainable local employment and procurement. At Carra, pastoralists, traditional owners and local businesses had all won contracts of fencing, earthworks and water casting services for example. A number of the Kokatha People and locals from the Upper Spencer Gulf, Port Augusta and Port Pirie type areas are currently employed by OZ Minerals and our contractor partners in various roles across the Carrapateena work site.I'm now going to ask Warrick to talk a little bit about our cash performance from a company perspective before I continue the presentation.

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

Thanks, Andrew, and hello, everyone. Just a few comments on the cash flow from me. It's certainly been a very strong year for OZ Minerals with the positive pricing environment and our robust production performance generating significant cash to the bottom line. We exceeded $1 billion in net revenue for the full year and added $90 million to our cash reserves in the fourth quarter despite the sale of substantial expenditure on Carrapateena and the continuation of the accelerated open pit mining campaign.These items have placed us in an extremely positive position throughout 2018 development capital as we now ramp up that expenditure on Carrapateena. We'll also see considerable flow-through benefit to cash this year as we begin to draw down on the accumulated stockpiles from the start of Q2.Andrew?

[Andrew Cole, CEO, MD & Director]

Thanks, Warrick. As I -- moving now onto Prominent Hill specifically. As I mentioned earlier, Prominent Hill's, I think, reinforced its credentials as a reliable, long-life, low-cost producer. As we know, the open pit is rapidly coming to an end and as we've indicated on this slide, with another excavator and truck fleet leaving site during this Q4.We have also very pleasingly, I think, to the -- to have the teams done this, have progressively rehabilitated the waste dumps. So we're well positioned to be ably -- to able to formally close the -- these deep waste dumps at the end of the open pit mining. Looking ahead the transition to underground, only operations continued into Q1 2018 as we work towards final pit production and setting things up for the underground mining activity post open pit closure.The underground had another record quarter with production and unit cost guidance delivered and record ore tonnes hauled over the quarter and the year. In November 2017, we announced an 18% increase in underground reserve, enabling our schedules to now push the upper end of 3.5 million to 4 million tonne per annum annual rate or longer now with a line of mine to 2029.A third short underground access decline from the bottom of the open pit into the underground is now also being designed, which we expect to break through in about April 2018. With our focus on underground performance and investments likely to further decline, we expect to see the underground ramp-up to 3.5 million to 4 million tonnes per annum to stay on track.The processing plant had another very strong quarter. And to the maintenance team's credit, 2017 plant availability was at a record high. We achieved guidance for copper metal in concentrate, and notwithstanding 2 separate production interruptions due to planned maintenance on the electricity transmission network, we milled similar tonnes in Q4 as we did in Q3.Once the open pit closes at the end of quarter 1 2018, the plant will start processing ore from underground and from open pit wall stockpiles to keep our plants at full capacity through 2023. Given we've already incurred costs of building our open pit ore stockpiles, we expect substantial cash flow to be realized during the upcoming period.I'm now going to hand back to Warrick to talk about Prominent Hill costs, please.

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

So Andrew has already touched on the strong cost performance for the quarter. Favorable C1 costs were assisted by the strong gold results, but importantly, we also saw net benefit of a number of operational improvements in the processing plant continue to flow through to production rates as they did in Q3. Those items, together with the timing benefit on maintenance activity offset some higher mining unit costs from the underground, which were impacted by the timing of stope fill and capital development activities. As we've highlighted, unit costs in Q1 will be influenced by the cessation of mining activity in the open pit.Just to note that we'll also be using this milestone as an opportunity to adopt a revision to our reported C1 cost methodology from 1 January. Just to touch on that a little bit further, our C1 costs are currently calculated using direct cash costs attributable to production rather than as incurred. Given the drawdown in stockpiles that will now occur through to 2023, in order that we continue to record a C1 cost that reflects the marginal cash cost of producing contained copper in concentrate, we'll be adopting the use of direct cash incurred expenditure going forward, which is more in line with the Wood Mackenzie reporting methodology that you may be used to.We've also provided some additional guidance on the impacts of this inventory drawdown on our likely depreciation and amortization numbers going forward as a supplementary slide at the back of the pack. And I'm more than happy to cover those aspects further offline, Andrew, if you require.

[Andrew Cole, CEO, MD & Director]

Thanks, Warrick. Okay, let's turn to Carrapateena, the next exciting project that we're working on now. I'm very pleased to say that we've been steadily improving the development rate since inception, and all the key underground milestones are progressing as planned. And I think the underground development chart on the top left of this slide really does tell the story. The team has steadily increased their development rates quarter-on-quarter, which has led to a total decline development of over 4.2 kilometers now with a vertical depth of nearly 300 meters. The profile being created that's seen in the photo on the bottom left to the extreme is very tight. The access road is clean and has been well maintained.The team's done very well in developing through the Woomera shale. If you recall, developing through the Woomera shale was one of the critical risks we flagged early on to this project. But I feel that the team has now largely mitigated this threat having successfully developed through the majority of it. The mining lease approval process is proceeding well and remains on track for completion this quarter. Once the mining lease and the management plan's been approved, we will commence construction of the second stage at Carrapateena surface infrastructure, which I'll describe shortly.Moving on to the development of above ground infrastructure. We've now spent about 10% of the capital budget for Carra. It is still early days, but the project's progressing very well. We've locked in an additional 40% of a forward capital spend with construction contracts for the airstrip village, a plant, surface non-processing infrastructure all now in place. The stage 1 construction, which is currently underway with the accommodation village and the airstrip, the village will be progressively commissioned with the first group of rooms available in late February. The airstrip is also under construction with commissioning due in the middle of this year.Near mine water drilling in the Radial Wellfield has been completed as planned, and we now have about 10 mega liters per day identified in both measured and indicated status. And we expect commissioning of the wellfield to commence this quarter also. Stage 2 construction, being the processing plant and non-processing infrastructure, western access road and the tailings storage facility, will commence in the second quarter after the mining lease has been approved.So Warrick, for the last time, can I ask you to take us through Carrapateena cost, please?

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

Yes. Again, just a small number of comments from me on this slide, Andrew. So 2018 is obviously a key development year for the Carra project as we substantially ramp up expenditure and site activity. In Q4, we awarded the development contract for the processing plant and associated infrastructure to the AD JV with Ausenco Downer. And our expenditure in the quarter includes initial mobilization and long lead item commitments associated with that contract.As noted, that contract has also enabled us to convert around 40% of our capital -- of our project capital upfront, which is a great outcome. Underground mine development will of course continue throughout and also contributes to our project management and owner costs for the project.

[Andrew Cole, CEO, MD & Director]

Yes. Thanks, Warrick. Just the last slide in this section is on our project schedule. This chart -- this schedule is the same schedule we produced in the FSU chart and we will use each quarter to keep you up-to-date. I'm not going to say too much on this other than to say all the major work packages are on track, and we'll report again on this in next quarterly.Let me turn now with Musgrave quickly. So in November last year, we announced with Cassini Resources that we'll take West Musgrave copper nickel-open pit project from a scoping study level into the pre-feasibility study stage. We think this project has a lot of potential not just in the scope outlined in the report from last year but also in the neighboring Succoth resource, which we haven't done any work on this yet and in the exploration potential of the district.The PFS we've scoped is now underway with individual 2018 work packages defined, some of which are already our for tender. We are also finalizing recruitment for the owner's team to take this project through study phase.In parallel to this, a $4 million exploration program will focus on district potential, including our One Tree Hill prospect and the Succoth copper resource. As an example of the work that will be done this year, we're currently out to tender for about a 35-kilometer drilling program that will help refine the resource, future reserve and ultimately, the mining inventory and also to help us with the metallurgical test work program. We're guiding expenditure in 2018 of between $20 million to $30 million, which will largely see the pre-feasibility study completed. This will also trigger our 51% ownership of project.Just a couple of comments on some of the other strategic projects we're working on. Firstly on power. There is a lot going on in the power space. We're on track to be able to give you a full update on our power strategy a little later this quarter, so I'm not going to be talking about power in too much depth because there are a few commercial agreements that have still yet to be executed that underpin this.The CTP remains a strategically important project for OZ Minerals. We are progressing along in the background. It is not dependent on Carrapateena or Prominent Hill, but to recap, the CTP, if we go ahead and build it, will produce a very desirable super copper-gold-silver concentrate. We've been quietly working on studies to verify the plant's technical liability for preferred construction location and specifically to reduce capital and operating costs for the facility.In December last year, we successfully completed the final pilot plant campaign. The picture on the slide shows the pilot plant, which we actually operated out of FIRB. In December, we successfully completed a number of location trade-off studies and confirmed that Port Augusta will remain our base case going forward. We anticipate reaching a final investment decision by the end of 2018, at which point we'll decide whether or not this project will in fact progress. And we've allocated up to $12 million for this -- in this year to complete all of these works to get it to a decision to construct or not.Turning to exploration and growth. In the interest of time, I'm going to speak to the summary side of this -- in this exploration section and not the individual slides. So I'm going to leave it to you to review the individual slides at your leisure after this call.As previously mentioned, we exited the Intercept Hill earn-in agreement with Red Tiger in the fourth quarter of '17 as we -- as no significant mineralization was returned from the 4 drill holes we drilled. We also entered a new earn-in agreement with Red Metal at Punt Hill. I'll give you a brief overview of this project in a moment.At Oaxaca project, we continued mapping and sampling. Surface copper mineralization was discovered during reconnaissance mapping, which is quite spectacular. We have further service work to do before we can actually design a drill program. At Alvito in Portugal, we completed target scale mapping and geological interpretation and have secured land access for drilling our priority targets. We expect to drill these targets in Q1 or Q2 depending on weather.At Eloise, late in 2017, we drilled 8 holes into Jericho target along with Minotaur, our partner. All of them intercepted strong mineralization as you may have read in Minotaur's report at the end of the year. We expect drilling to recommence in quarter 1 and quarter 2 depending on weather. The nice thing about the Eloise project is that we have seen no graphite in any of the drilling, and we have many conductors to follow up through to the program going into this year.At Mount Woods surrounding Prominent Hill, Minotaur drilled 4 electromagnetic targets on our behalf with mixed results. So we are reconsidering our approach to this ground in our plan going forward in the future. We'll come back to you with some of those details in the following quarterlies.Let me just touch on Punt Hill for a moment. So Punt Hill is about 50 kilometers south of our Carrapateena project and has a prospect -- or has a number of prospects with geophysical anomalies, which are very similar to Carrapateena's deposits. So when I come to the guidance slide, I'll give you an overview of the work we are going to undertake this year as part of our guidance.Okay. But let me a wrap up today's presentation by talking about 2018 guidance. These guidance numbers are contained in this presentation. They're also contained in the ASX release. We have listed our copper guidance by combined 15,000 tonnes over 2018 and 2019 compared to the guidance we provided last year for these same 2 years. Gold guidance increased for 2018 and came down slightly for 2019 as we prioritize higher-margin copper production. We obviously will report against each of these for each of the quarterly reports throughout the year.If we break this guidance down into components, this year, we're providing 2 years' production guidance, which is aligned to our improved internal planning processes of building 2-year detailed plans. You can see that we plan to increase copper guidance at Prominent Hill. This is a result of the team's focus on continuing to optimize resource and our mining efficiency. Copper guidance for 2018 increases up to 100,000 tonnes to 110,000 tonnes of copper, and in 2019, it increases up to 95,000 to 105,000 tonnes copper. Gold guidance for 2018 increases to 120,000 to 130,000 ounces, and in 2019, it decreases to 100,000 to 110,000 ounces as we prioritize copper.With regard to Prominent Hill operating costs, our underground unit cost guidance decreases to $45 to $55 per tonne, reflecting improved scale and efficiency. Our C1 cost guidance slightly decreases, reflecting use of stockpiled ore. Both will keep us well within the bottom quarter of the global cost curve in 2018.We have the Prominent Hill resource/reserve estimate released in November, an 18% increase in underground ore reserve to 39 million tonne has enabled us to push our life of mine to 2029. It has also allowed us to push annual throughput to the upper end of the 3.5 million to 4 million tonnes per annum for more years than previously planned.The capital outlined here is related to this building phase of the underground as we move toward 3.5 million to 4 million tonnes per year. It includes the ongoing development of the mine. It also sees a big step-up in resource development drilling to 15 kilometers scheduled for 2018. This is up from 6,000 meters in 2017, more than doubling our resource delineation drilling as we look to replace and increase reserves.And on infrastructure, we do need a paste plant, which will replace the current CHF plant, to enable the proposed production rates. Our aim is to continue extending Prominent Hill underground mine life year-on-year with an estimated 80 million tonnes for underground resource that has not yet been converted to reserve, so there is still significant potential of further extension as we move forward.On growth, we've carved our growth guidance into 5 areas. First one is Carrapateena capital construction. We expect to spend the bulk of the Carrapateena construction capital this year with an amount of circa $500 million to be sunk into this project. Number two on West Musgrave pre-feasibility study, we expect to spend between $20 million and $30 million to complete West Musgrave pre-feasibility studies. Our third area is a study that will look at the potential to expand on the Carrapateena district, which will include drilling Khamsin. It'll include drilling the Fremantle Doctor mineralization and a number of exploration targets at Carrapateena and in the Punt Hill area, all aimed at identifying the viability of Carrapateena's Phase 2 projects. This initial work will cost us between $8 million and $10 million and will help us decide whether we initiate a scoping study on a Carra Phase 2 project. The fourth one on CTP, as I've already mentioned, we'll spend up to $12 million to take that through to a final decision. And lastly, we will retain a $10 million to $15 million per annum operating expense for our exploration projects.So I'm going to wrap up and concluding on the growth slide for Carrapateena province. So I'm going to leave you with some final messages before we open up for questions.I think this last year has been very successful year for the company. It's another successful year after launching our strategy just under 3 years ago, also have made some really good progress to becoming a multi-asset and a modern mining company. The team has done a great job throughout the year, both beat or met all of the guidance on every measure. They achieved copper guidance for the third year. They exceeded gold guidance. They kept Prominent Hill operating costs in the bottom end the guidance. They expanded the Prominent Hill underground life to '29. We've kept the new Carrapateena mine construction on budget and on schedule for commissioning in the fourth quarter of 2019. We took the West Musgrave copper-nickel project to pre-feasibility study. We added another exploration project immediately south of Carrapateena; and on top of that, we increased our cash balance to $729 million.Looking forward, as a result of the improvements made at Prominent Hill, we've been able to increase our guidance for copper both 2018 and 2019. And we will continue to fuel our growth projects, including at Carrapateena, at Carrapateena's district, as pictured on this slide, West Musgrave PFS and our exploration projects. So I think it's going to be another big year for the company and the team. And as I previously confirmed, we can continue to invest as planned in our organic pipeline even while maintaining consistent shareholder returns from cash and cash flow without the need for debt. This leaves OZ Minerals in a very strong position.So operator, can I please now ask you to remind people how to ask questions. I would just like to remind people on the phone that we cannot obviously talk about end-of-year financials. We need to keep the questions focused on quarterly results and the physicals I've actually talked about today. Thank you.

[Operator]

[Operator Instructions] Your first question comes from Michael Slifirski from Crédit Suisse.

[Michael Slifirski, Managing Director]

I've got a few small questions. First of all, on the cash cost methodology you'll be using, just to make sure I've got that straight. So while today that's been -- the inventory build has been a deduction from cash costs, you're saying that from the stockpile recovery period, that comes through as that unwind. There's a depreciation figure shown in that last table. So the cash costs won't have any inventory adjustment in them from that stockpile recovery period?

[Andrew Cole, CEO, MD & Director]

Thanks for the question. I'll hand it to Warrick to answer.

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

Yes, Michael. Yes, that's correct. So methodology is to continue to report our C1 costs and replace marginal cash cost of producing copper so hence, the reason for the adjustment.

[Michael Slifirski, Managing Director]

Secondly, the low TCRC transport number for the December quarter, can help me understand was there anything specific in that, that's sort of one-off versus sustainable? How should we think about that in the go-forward basis? And how was it actually achieved for the December quarter and not previously?

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

Yes. It's Warrick again, Michael. So that number depends a lot of on our mix and in terms of our customers and how -- where we're actually shipping to. So I think I wouldn't necessarily see it as an ongoing position. It really does depend on our customer mix going forward.

[Michael Slifirski, Managing Director]

Right. So are we seeing something specific about what you produced during the December quarter that enabled you to get a more favorable consumer mix? Or is it just the way your contracts are aligned? I can't quite understand why the December quarter had such a benefit that an $11 million saving on a very similar quantum of concentrate seems quite material.

[Andrew Cole, CEO, MD & Director]

Yes. Michael, you can't read anything specific into this. It's highly variable, and it highly depends on our shipment schedule to which customer mix. So we don't ship a lot -- we don't have a lot of shipments each quarter as you know, so depending on what that mix is, you'll see that both those -- this line item go up and down significantly. So you can't use the quarterly to forward predict what the future is going to look like. You need to sort of take a long-run average to understand what it will look like going forward.

[Michael Slifirski, Managing Director]

Thirdly, with respect to the Prominent Hill capital guidance, $105 million for calendar year '18, I guess, you mentioned specifically the pace part and the accelerated development. Once the pace part is done and you get up to that normalized, perhaps, 4 million tonne per annum production rate, how should we think about that gross capital spend on the mine side?

[Andrew Cole, CEO, MD & Director]

Sure. So as I mentioned, Michael, in that growth line item, we've got a paste plant. We've also actually got some renewable energy in there, so got a holding amount to put a little bit of renewable energy, which we'll talk about later on. But I've got John Penhall here, the GM of Operations at Prominent Hill, so might ask him to talk a little bit about the current makeup -- the guidance for 2018 and what it can look like going forward.

[John Penhall]

Yes. Thanks, Andrew. Good morning, Michael. Michael, yes, we're obviously moving into that significant build phase for the underground so what you do see is that translating into that -- those 3 line items. The sustaining capital is pretty much similar year-on-year. And once we've sort of moved up and down, that really is for replacing elements that continue to be utilized that the assets maintain the production profile. And what we see in that growth, as Andrew mentioned, is primarily a larger chunk that's associated with implementations of paste plant, so that's obviously a short-term item of -- an upfront exposure for us that we then deal with. And we get the benefit of that across the entire life of the mine right out through 2029. In the investment grade capitalization area, there's really 2 components that move into that. One of those is our capital development and that profile. And obviously, as we're ramping up the underground and moving to that 3.5 million to 4 million tonnes, what we are expecting to see is, is that number going to stay only for a short period of time but this next couple of years, they're going to tail off as the mine matures. And the second line item associated with that is our resource drilling action drilling. What we are seeing is, obviously, with the local success we've had over the last 12 months, a continued focus on us looking to convert some of that lower confidence material to high confidence material and into the mine plan. So that also, in that particular line item, carries forth our measures for resource drilling, action drilling. And we are seeing an increase in that drilling, both the volume from 2017 to 2018 as we look into continuing to capitalize on the success of the past. So that's probably what we see in the near term and then that will tail off into the future.

[Michael Slifirski, Managing Director]

Okay. So we put all that together, the site sustaining stays around the same, the 10 to 20. The underground capital expenditure, there's some accelerated development but accelerated -- that increased activity going forward as you approach that 4 million tonnes so that maybe stays the same. And the growth capital becomes significantly less so overall it might be $20 million, $25 million less than the $105 million on a go-forward basis?

[Andrew Cole, CEO, MD & Director]

Certainly, we'd expect that, that underground capital number to continue to reduce for a period of time. And we'll obviously guide each year as we go forward in detail. But we don't expect to see that high number across the life of the mine. We expect that to tail off after the next year or 2.

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

Yes. So the growth capital would disappear like a one-off, and then by and large the cadence to all of this, Michael, is as we change our underground reserve and life of mine, we obviously have to renew our capital expenditure each year. And we have to go through the way up when we add more capital whether that make -- whether that creates value or not. But as we stand today in our base cut is I think the summary was pretty close with the exception of John's added statement that you'll start to see the underground development capital start to tail off in a couple of years.

[Michael Slifirski, Managing Director]

Yes, great. And then finally, with respect to the underground, 2 clean declines going to 4. Talking about getting towards that upper end of 3.5 million to 4 million tonnes underground production. What's the constraint? Is it the sort of geometry the -- of what's available to you? Is it how much you got drilled out? So why do you stop at that 4 million tonnes when, I guess, historically you're talking 3.5 million to 4 million from 2 declines, you got more -- if you debottleneck that tollage capacity and you've got mill capacity, what actually stops you at 4? Is it just that inventory available, the geometry? What's the constraint?

[John Penhall]

Yes, Michael, it's John again. And look, that's a very good question. The same question I'm challenging my team with, Michael to be fair. Look, there are some constraints in the context of location and the simple geometry of the ore body as well as some of those constraints around operating field geotechnical issues. But we are doing at the moment some parallel work as we do right through every year to see if we can optimize beyond the Carra mine plan. We saw that through that increase in reserve last year. We'll continue to challenge the team to say is there any potential that sits beyond that 3.5 million to 4 million tonnes at more of the sustained rates. So it's a good question, Michael. And I guess that we wind up with a lot to come back to the market is we can continue to have success in this space.

[Michael Slifirski, Managing Director]

That's great. And look maybe, I'll sneak in 1, a very final 1, on the CTP. If the studies are completed at the end of this year and you get a decision that says you should proceed, what do you sort of proceed with given that surprised statements have indicated that it's actually not really needed for Carrapateena for perhaps ever, and not really needed for Prominent Hill. So why could there be a decision to proceed if it's technically feasible?

[Andrew Cole, CEO, MD & Director]

Well, obviously, Michael, that's the case we need to make through the course of this year and towards the end of the year. And that's something that we'll talk about with you if we can actually sell off the case. But I think our initial vision or value proposition for the CTP still holds. The CTP technically is very viable and have worked we've demonstrated that now. And it does produce a concentrate which anybody in the world would want and probably pay a premium for it as copper concentrates globally get more challenging through -- with the impurities in them and the copper grade in those concentrates they choose. So what we have to demonstrate is that the operating capital cost and operating cost of a facility like this can be weighed up against, and this is having a super concentrate. That's the work this year. And the large component of the work that's seen this year is getting the cap on operating costs down so that we can actually justify it. And that's one of the reasons we've pulled this project out to be a standalone project because it needs to do -- we need to get out to spend the value proposition for the CTP. So the vision for CTP has not changed. It is getting harder to demonstrate value out of the CTP as our marketing programs have improved, as the work in consigning Carrapateena has demonstrated that we don't need it -- technically need CTP to sell the product to the market and as we've been very successful at Prominent Hill. So look, you're right in your sense that it's getting harder to justify CTP. But strategically, we would still very much like to have a CTP. So we're working hard to get capital and operating cost down so that we can make it fly.

[Operator]

Your next question comes from Sophie Spartalis, from Merrill Lynch.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Michael has asked a lot of my questions, so just one last one for me. The next shutdown at Prominent Hill, when is that scheduled?

[Andrew Cole, CEO, MD & Director]

Hi, Sophie. John, why don't you...

[John Penhall]

Sophie, so coming up towards the end of January, to I think February is our next shutdown.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

And how often are they, generally?

[John Penhall]

So we run what roughly works for about 3 on an annual basis, on a 17 week cycle.

[Operator]

Your next question comes from Dylan Kelly from CLSA.

[Dylan Kelly, Research Analyst]

Just wanted to ask 2 questions on Carrapateena. So just curious as to your commentary around how you manage to get through the bottom of the shales. Just want to understand how you mitigated the risk or managed getting through that part of the development. And just want to understand exactly what risks remain, exactly how much further you have to go through that over the coming months?

[Andrew Cole, CEO, MD & Director]

Sure. So Dylan, the charter itsef is in the webcast presentation shows you the development by quarter, if you like, so you can see a systematic increase of development quarter-by-quarter. We obviously, when we put the plans together for the decline, we assumed a progressive ramp-up. And I think the team have done a very good job at actually meeting that ramp-up. And look, it's basically come from very tightly managing the process on site. These are fairly large profile declines, so there were plenty of learnings that were taken by the team as they went. But they're now up above 400 meters per month on 2 hittings which is what we need for the development rates in the decline. And it's just come through time and motion studies, variance analysis, process control and just very tight management. The team in the Edmonton site knows what they need to be delivering. And I think they've done an excellent job. And what's really pleasing is that they're still improving. So their best performing month was in December, and it was better than November. And November was better than October. So it's just continually learning. In terms of going forward, the ground conditions we are expecting in Woomera shale to actually improve, so ground hardness, the material, the consolidation of the shale itself it's improving. So from what we've seen for the forward copper drilling, we're mostly beyond the most difficult ground we're anticipating. In terms of what risks are remaining, Dylan, are you asking about the risks generally for Carrapateena or just the declines?

[Dylan Kelly, Research Analyst]

Just the decline of the shales.

[Andrew Cole, CEO, MD & Director]

Look, as you know, there will always be surprises when you're developing new declines like this. So there will be standard risks that go with development. Unexpected faults, we've had a couple but I think that's spread many well through them so that managed to prevent fracking and getting that ground support in very quickly and keep the profile nice and tight. Any aquifers that come through, a couple of aquifers already, so making sure they manage that tightly and keep the water off the spaces, so make sure the pumping systems are really well managed. And then it's really just getting the development rates up and keep pushing down at a good development rate and making sure we don't hurt anybody in the process, of course. So again, more generic risks now for the decline development than they are specific project results.

[Dylan Kelly, Research Analyst]

Okay, fair enough. Just turning towards the CapEx spend. I'm interested in your commentary around locking in, say, 40% of the spend and the bulk of your expense being -- or capital budget being big this year. For the remaining -- say, remaining 60% of the spend, what have you got in place to manage potentially a cost inflation risk? I'm just trying to understand the commentary -- or sorry, observations around the industry that there is quite a lot of work going on, a lot of projects going ahead, the Olympic Dam going through 60 kilometers of development a year and a lot of action in Western Australia. Just trying to get a better handle on how you can limit any downside or inflation for your own capital spend.

[Andrew Cole, CEO, MD & Director]

Sure. So Dylan, the bulk of the unused capital is for the development -- further development of the declines and ramping up for production, so it's underground mining, if you like. So that's the bulk of the remainder of the 50% that's not locked in to fixed contracts. And that is based on a schedule of rates. Now we are currently contracted to PYBAR. PYBAR are doing a very good job with the declines, so those rates are locked in for a period of time here. So that helps us, I guess, derisk some of the exposure. But I think the market is heating up. You asked herein about more projects in Australia. Well, as I said most of those projects are infrastructure-type projects, not underground mining. There's a couple, Olympic Dam being one, but there are not that many new underground mine developments. So it's more in the infrastructure space, I would say, is where we're seeing and hearing cost pressure. And we've already locked in our biggest infrastructure project through the [ AV JV ] , they own a processing plant and are processing infrastructure. So look, I think, they're at a high level where there is some exposure, but we've locked in the highest exposure packages already.

[Dylan Kelly, Research Analyst]

Those are some -- ultimately, in terms of outlying risks here, is labor and retention of your contractors sort of the most relevant risk at this point? And where you are in having a contract to maintain the experienced crews through the next -- through the remainder of construction. Is it the way we should be thinking about potential downside?

[Andrew Cole, CEO, MD & Director]

Look, it certainly is a risk, I'd say it's always a risk, it's just how big is that challenge is. I think the team on the site has done a very good job of attracting and retaining some really good people. I've said this before. I think the single most important thing to get right in retention is the culture of the site. So -- and if you go to Carrapateena, I was there just after Christmas. And so we've got to clean things up there over Christmas, over the New Year period, working it through. The morale on the site was very positive. These are people that love being there, and they love being there because the work environment is pleasant. And it's pleasing to be there. People get on with each other really well, and I think that's the single most important thing you can do to keep people working productively at your site, plus most of the things you need to do, but that's the most important. But yes, it remains a risk for us, I mean, as our projects ramp up. But I think the culture with the Carrapateena site has -- is building, and I think the culture that the Prominent Hill site has built for some time actually holds pretty good stead.

[Operator]

Your next question comes from Matthew Frydman from Deutsche Bank.

[Matthew Frydman, Research Analyst]

A couple of questions for me, if I can. Firstly, you did just touch on this to a degree when answering Dylan's questions. But with regards to the CapEx spend rate so far at Carrapateena, obviously, you've indicated you've spent 10% so far, and you've locked in a further 40%. Wondering if your spend rate has been roughly in line with your expectations both for the December quarter and looking forward to 2018? And whether there've been any notable cost movements as you've been locking in these contracts. I mean, as you've just indicated, you've locked in most of the contracts for construction, the decline, has this varied versus your prior expectations?

[Andrew Cole, CEO, MD & Director]

In short, we've spent slightly more than we had on our FX use schedule, cost schedule for 2017, and that was bringing forward some of the spend. But at a high level, the answer is no, Matthew. We don't have any deep cost pressure on any of the packages that would cause me to worry or that cause me to tell you that we're going to hope to spend our $916 million capital allocation for Carrapateena. So it's been kept under control, and we have some -- we have processes inside the project that keep looking for new opportunities to improve that, to improve our cost position. So short answer is no. I'm quite comfortable we're going to come in under that.

[Matthew Frydman, Research Analyst]

Sure. So the higher rate of spend at the end of '17 was more about bringing some work forward.

[Andrew Cole, CEO, MD & Director]

Yes. The largest piece of this was the upfront payment we needed to make for [ AV JV ] for the processing plant and the non-processing infrastructure once we executed contract which we did late last year. So that was made in late December, if you like. So that sets us up well for the final engineering to be done and to then be on site in early Q2 start construction. That includes, obviously, a lot of long lead item procurement.

[Matthew Frydman, Research Analyst]

Sure. Secondly, maybe pivoting a bit just to the West Musgrave PFS. You guys have given some great detail on Page 39 of the slide pack. But wondering out of all those work programs that you've highlighted there, where you see the case for, I guess, a favorable outcome for this project? Is it contingent on further successful resource drilling? And I guess do you have an indicative time line that you'd like to see this [ PFS ] completed here?

[Andrew Cole, CEO, MD & Director]

Sure. So the scope of study we released late last year, you'd probably recall, we had an 8-year mine life based on a certain proportion of inferred resource that we wanted to maintain, I guess, in the release. Our view is that, for Nebo Babel open pit, mining inventory will have a 16, plus or minus, year mine life. So one of the key things we're going to be doing this year is to drill this resource to give us an increased level of confidence in the continuity of mineralization between the drill holes. So we can actually extend the life of the mine formally, if you like, in the value calculation. That's an important component of this work. Having said that, we've rebuilt our resources where we, I think, refined over the past years using different consultants and [ constant ] financial aid firms. So there's less confidence there, but we still need to obviously increase confidence from a job perspective. Second thing is metallurgical work. Some of this drilling will help inform our metallurgical tech work. Recovery of copper and nickel in separate column streams and keeping the copper and the nickel column streams clean from their counterpart element is really, really important and is one of the key levers of value. Now other mining operations do this around the world with a very smooth mineralization already. But we need to learn those lessons and work out how we design this plant to give us the best value levers for the project. They're probably the 2 biggest ones. The second order ones are about water, energy supply, and just being remote is the transport of concentrate materials into the site. They're probably the second order project that we'll be working on. So basically, they're probably the 5 levers that we're working on through each year. And our current schedules have us completing the vast majority of that work through 2018. So as we get to the end of 2018, we'll be pretty close to wrapping up the PFS.

[Matthew Frydman, Research Analyst]

Okay, that's very helpful. And maybe just quickly finally on Prominent Hill. As you mentioned the mill throughput was quite good in the quarter. It has been quite strong for the last 2 quarters. Is this the kind of runway we should be thinking about once the open pit finishes and I guess for the remainder of the life of the stockpiles? Or there -- has the mill really benefited in the last couple of quarters from limited maintenance or limited shutdowns?

[Andrew Cole, CEO, MD & Director]

John, do you want to answer that?

[John Penhall]

Yes, Matthew, look, what we've seen over the last half would be certainly have been some of the outcomes of the efforts that the engineering team and the processing team have been putting in to try and maintain that run rate upgrading at circa 10 million tonnes. What we are seeing in some full projections of our test work through some of our stockpiles is that we do expect that to moderate a little back towards that sort of 9 million tonne mark across that medium term as we work through some of those harder ores through the stockpile. But look, at this stage, we're certainly pushing hard to maintain that between that sort of 9 million to 10 million tonnes.

[Andrew Cole, CEO, MD & Director]

Yes, I think as John talked about -- I think as we've said before, Matthew, there's a difference in ore harvest between the gold ore stockpiles and the copper ore. So it depends on the proportion of mix we'd be feeding into the plant and that's sort of the range that John has given you.

[Operator]

[Operator Instructions] Your next question comes from Peter O'Connor from Shaw and Partners.

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

West Musgrave, you talked about wrapping Musgrave is up during the year, but can you give us a sense when we would expect that next step announcement? Is it -- sounds like it's more going to be first quarter '19. Just trying to get a sense for catalyst for West Musgrave.

[Andrew Cole, CEO, MD & Director]

Sure. Look, there's a couple of things in here. Somewhere through the course of this year, Peter, we will likely trigger our ownership of -- moving to 51% of the project. So that's purely a spend rate. And given we're spending $20 million to $30 million on this project this year, that triggers $19 million, I think, so somewhere through middle of Q3, it will take, we will see that trigger. We will obviously need to talk a bit about that obviously because we'll need to be comfortable and confident the work we're doing, that is proving that this is a viable project. Our schedule right now has -- appears that we're going right through 2018 into very early 2019, and I think it is. So we haven't actually locked a date down at least for the PFS. But it will probably be early next year, I would say. Having said that, we will continually push our teams as hard as we can towards some things that matter. Again, we are quicker than that, but I'm not going to commit to a date before that just yet. But given Cassini, our partner in all of this. Cassini has different levels of materiality, of course, better so Cassini is going to meet -- keep the market up to date on work and progress far more frequently than we are. So I suspect if you could monitor Cassini's news releases, you'll get a better line of sight on what's going on in the project than we will be giving you.

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

Good point. And another development project, CTP. Just trying to understand, so is it binary from a technical perspective or binary from a technical and commercial perspective? Or...

[Andrew Cole, CEO, MD & Director]

Yes, from a technical perspective, it's very simple, it works. We've demonstrated this many times, the process technically works. It removes all of the impurities and gives us a concentrate that -- look, it's the best in the world, literally, it will be 50% to 60% copper in column, keeps the gold, most of the silver and is very clean. So technically, that's not the question. The question is finally or commercially -- yes, when you get into a commercial conversation, sometimes we go back to the technical flow sheet to see if we can eliminate steps or reduce complexity in order to reduce capital or reduce operating cost. But that's why sometimes we go back to a technical step in order to try and improve the economics not because the technical process requires refinement.

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

Okay, got it. And just back to the decline issue on Prominent Hill. I'm just still not clear as to why the need for the third and fourth additional spend, growth spend. These things will keep coming at us potentially between now and 2029, why? And not why you're doing it but just exactly what triggers?

[Andrew Cole, CEO, MD & Director]

Sure. So let me give you a high-level answer. So when we put in the second decline, it was at late -- mid last year, can't remember. August or September, or something like that, we broke through the second decline. Now, hopefully this year we'll get everybody up to the site to actually have a look at the open pit. But the second -- the first and second declines are in the upper levels of the open pit, so you're still coming out fairly high in the resource. The third decline that we're proposing is much lower in the open pit and you effectively go almost through mineralization into the underground workings directly from the open pit. So this third decline is also not very long figure 300 meters, John, give or take? So the capital investment, if you like, is actually minor. And if you do sums, building a 300-meter decline at the bottom of the open pit gives you a much better outcome if you can get underground ore and waste out of the open pit hole to see the equipment as the example. So it actually makes sense to give us more access points lowered down into the resource than having to truck everything all the way up 300 pound workings to the top of the mine that will cause congestion. So having access to your underground resource from the bottom of the open pit gives us a lot of optionality, a lot of flexibility and removes trucking as a bottleneck, if you like. It also helps improve ventilation significantly which shortened reentry times and the like. So if you're building short declines like this, it makes perfect sense to do it. And if there are -- in the future, if we think that it makes sense to add more declines, we can do less tradeoff studies, we will because it makes sense to do that. It effectively allows -- removes trucking and ventilation as a bottleneck. And as John said earlier, it takes the bottleneck onto the geometry of the resource and just how you can effectively mine up the stopes.

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

And the fourth decline, where is that proposed or thought about?

[John Penhall]

So yes, it's John here. Just wanted to announce it's literally -- so 100 to 150 meters along the same base level in the pit and it lets us provide really what then becomes a third independent ventilated and accessible mining area. And that really does enable us to move up to those higher production rates. And that's all done as we go on the value proposition. So we do those trade-off studies, make sure it makes sense and then that's how we head and execute those in the plan. And we have redesigned some of the graphics that we've put out, it's on the website. There's few graphics of the mine as it develops and you can see some of those tucked into that graphic.

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

Given those benefits, which seem quite obvious, so we don't have the same details as you guys obviously have but, intuitively, it would seem that the capacity is higher, at the high end of that range, I mean, why is it still capping at 3.5 to 4 to Michael's point?

[Andrew Cole, CEO, MD & Director]

Yes. Look, so currently our base case is capped at 3.5 to 4. And as I've sort of alluded to but probably haven't specifically said, most of the years into 2029, we're actually in the upper levels of the 3.5 million to 4 million tonne range. So by doing these things, that actually helps us get more dirt out more quickly. The constraint currently to join this technical team is just about stope development, stope measurement and how many stopes you can actually pull to get these volumes. But having said that, Peter, John has a project that's running in parallel. And this is partly why we'll be spending more money on resource drilling to get a better understanding of the resource's extent. There's other work going on here that's looking at what other things we can do, whether it be different mining methods or haulage methods or combinations of those to take us well beyond 4 million tonnes per year. I think you need to remember, that a 4 million tonne per year sub level open stoping is a big underground mining operation. So there are some that are bigger but not in -- I don't think there is that many that are that much bigger than this with single sort of access routes underneath an open pit like this. So it's a pretty big operation in its current design.

[Operator]

Your next question comes from David Radclyffe from Global Mining Research.

[David Radclyffe]

Look, I was wondering if you can provide some more color on the Carrapateena province expansion program. And I guess the focus here on regional deposits versus that future potential to expand the Carra mine footprint. And you sort of mentioned some stoping work, so could you expand I guess on the timing there and what might be in such studies?

[Andrew Cole, CEO, MD & Director]

Yes, sure, David. So in the first half -- 3 quarters of this year, the work that we will do -- that sit under this package, if you like, would be to -- a little bit more drilling on Cannington, more drilling on the Fremantle Doctor mineralization, which is 2 kilometers East of Carrapateena. It will also include the drilling of exploration targets on the Carrapateena mine lease, exploration lease and the new Punt Hill exploration lease. It will also include a desktop study looking at the Carrapateena, 800-million tonne mineralized footprint. And then, between all of those and the results from those, we will look at what a Phase 2 Carrapateena district development could look like. Now I don't know what that would look like yet. But some of the things that we will be looking at would include should we expand sub-level caving at Carra as part of the Phase 2 or should we block-cave a part of Carrapateena as a Phase 2. And we need to take into account when we do that what a Cannington resource would look like and where that would fit in the sequence, whether there is a resource at Fremantle Doctor and if there is, where that would fit in the sequence. And of course, whether any of the other exploration targets yield any success. And then we also need to look at whether the processing -- the current elite stope processing plant at Carrapateena, which is 4.25 million tonnes per year, is optimal for all of that. And I suspect that many will start talking about block caves and other resources that maybe can be bigger than before. So this first phase work is really just to get a handle on what the resource footprint in and around Carrapateena looks like. To show, to come up with a concept that we then would firstly take into a scoping study level which would then look at what does Carrapateena itself Phase 2 look like, how much is 800-million tonne from the mine, how big does the processing plant need to look big to actually develop that, and how much of the Cannington and the Fremantle Doctor and anything else resource can be taken to it. So look, it's pretty broad to start with, and the reason we're doing this work at an initial stage is because it is so broad, it helps us refine what a scope would look like. So I'm expecting by the end of 2018, we will know whether we need to create a project at a scoping study level around the Carrapateena district for a Phase 2 project.Okay, well thanks, David. Appreciate everybody's time. We've sort of gotten past the allotted time there. So thank you for your time this morning. If there's any other questions you need to ask, please call us, get in touch with Tom, and do our best to answer them for you. Thanks very much.