OZ Minerals Ltd

ASX:OZL

Earnings Call Transcript 2022-Q4

[Operator]

Good day, and thank you for standing by. Welcome to OZ Minerals December 2022 Quarterly Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to turn the conference over to your first speaker today, Mr. Andrew Cole, Managing Director and Chief Executive Officer. Thank you. Please go ahead.

[Andrew Cole, MD, CEO and Director]

Good morning, and thank you all for joining us for our 2022 fourth quarter report call. I'm on Kaurna land today, and I'd like to pay my respects to the Kaurna's elders past, present and emerging. I'd also like to acknowledge and pay my respects to the traditional owners of all the lands on which we work.

But joining me today, I've got Warrick Ranson, our CFO; and our Operations Executive, Matt Reed. They are going to take us through the Q4 financial and operational performance, respectively, and then we'll then move on to Q&A.

The upcoming 2 slides are our usual disclaimer and compliance statements, which are available on our website for you to review at your leisure.

In Q4, we saw strong production improvements at our operating assets, which was very good to see, annual group production and cost guidance was met and significant progress achieved for our growth projects. Construction, as you know, commenced at our West Musgrave project, and our feasibility study into a downstream nickel processing plant, to produce mixed hydroxide precipitate, confirmed that technical and commercial viability, which enabled this opportunity to proceed. At Prominent Hill, we completed the shaft pre-sink with ramp-up moved from half 1 to half 2 in 2025. Copper guidance at Prom Hill was also met for the 8th consecutive year. The cave broke through the surface at Carrapateena and our Pedra Branca mine ramped up to full production ahead of schedule. Finally, exploration drilling commenced at our Kalkaroo project, hopefully adding further opportunities in our unique growth pipeline. OZ Minerals generated full year revenue of $1.9 billion.

As most of you will be across in December, we also entered into a Scheme Implementation Deed with BHP, under which BHP has agreed to acquire 100% of OZ Minerals by way of scheme of arrangement for a cash price of $28.25 per OZ Minerals share. This is a 49.3% premium to our [undisturbed] share price prior to BHP's initial proposal. OZ Minerals directors unanimously recommend that shareholders vote in favor of the scheme, subject to the independent expert concluding and continuing to conclude that is in the best interest of shareholders and absent a superior proposal. We are currently preparing the scheme booklet, which will include the opinion from the independent expert as to whether the scheme is in the best interest of shareholders. Once complete and approved by AFIC and the court, the book will be released and will include a timetable for the transaction. The scheme meeting is expected to be held in April.

I'm going to speak to our plans for 2023 in more detail a bit later. But in brief, our focus for this year is on the safe delivery of our operational and growth plans, progressing our exploration activities to continue to build our organic growth pipeline, implementing our decarbonization road map, strengthening our culture and, of course, moving towards realizing our strategic aspirations. Many of you will be familiar with the evolution of our strategy from a copper focused -- from copper focus to encompass the broader suite of modern minerals that are expected to face an unprecedented demand as we'll continue to decarbonize and electrify at a rapid rate. Our strategy is part of The OZWay, which above all prioritizes value-creation for all our stakeholders. We believe that only when we are creating value for all our stakeholders will we be a successful and sustainable company.

Moving on to the next slide, which shows our portfolio and the key provinces we are creating, along with their production, their costs, resources and reserves, and the growth outline. Each province is an opportunity for us to create something that is multigenerational with low operating costs. The substantial market opportunity for copper has been well commented on over the past 6 months. Oz Minerals has a suite of long-life, low-cost operating assets in low-risk jurisdictions, which produce the modern minerals needed to power this electrification transition.

So I'm going to move into a summary of our Q4 production and costs. As mentioned earlier, we saw strong production improvements achieved during the quarter with a 21% lift in copper production, providing a strong finish to 2022 and positive momentum coming into 2023. Q4 was our highest group quarterly copper production on record. We met revised 2022 group copper and gold production and cost guidance, including our Prominent Hill, which achieved its copper guidance now for the 8th consecutive year.

I'm now going to ask Warrick, and then Matt to talk through the results in more detail, please. So first, Warrick, over to you on the financials, please.

[Warrick Ranson, CFO and Finance & Governance Executive]

Thanks, Andrew, and good morning, everyone. So over the last quarter, the operating environment for the sector continued to be mixed with higher domestic inflation and slowing global growth countered by an improvement in our own performance. That enabled us to achieve our revised cost and production guidance for 2022. Our operations are now observing a regular improvement of performance indicators and we are entering 2023 with positive momentum, as Andrew mentioned.

Copper prices saw a positive movement over the quarter with renewed concerns about supply from countries observing political unrest, lower expected supply from Chile, and historically, low visible LME stocks of copper. We do see further upside potential for copper if China can manage it through opening smoothly, and the property sector begins to improve. Whilst global inflation remains high, it has now peaked in several countries as oil prices have declined and supply chain pressures eased. However, at this stage, we don't anticipate a major reversion in costs going forward. But supply is likely to retain at current pricing levels across a range of inputs, effectively maintaining the step-up in the cost curve the industry is experiencing. This reaffirms our margin focus and productivity drive and projects, such as the Wira Shaft and extension of the materials handling system at Carrapateena, remained critical success components for both this and, of course, our emissions reduction objectives. The Australian dollar saw downward pressure early in the quarter, which supported our U.S. dollar revenue before a shift in global sentiment caused upward momentum to build and close the quarter higher. In the short term, we expect and plan for an Australian dollar slightly higher than the current spot levels as we expect the U.S. dollar depreciation trend to continue and Australia's strong terms of trade to support a slightly stronger Australian dollar position.

Moving to cash generation. We continue to focus on cash generation to support both the business and progressed our brownfield expansion activity. Expenditure on West Musgrave is currently funded by the $1.2 billion syndicated term loan facility. Operating cash flow generation for the quarter was certainly lower than we would have preferred with a number of year-end working capital adjustments, but part of our logic for increasing our revolver in May last year was to cater for the inevitable variability in cash flow timing versus the extended brownfield capital investment profile we are currently operating within. This is reflected in a significant uplift in our trade receivables at the end of the quarter where we loaded nearly 24,000 tonnes of provisionally priced concentrate in the last few days of December. And we've also continued to experience higher cost outlays, particularly in our underground activities, which also contributed to our cash position. And as for every year-end period, we also incurred an acceleration in sustainable capital works to close out our projects before the year-end.

As noted, we invested a further $164 million into our brownfield capital growth projects, including underground mine and decline development. The Stage 2 TSF and crusher 2 and material handling system work at Carrapateena and, of course, the Shaft development at Prominent Hill. And it's forecast at the time of our half year results release, we received an income tax refund this quarter in relation to prior year corporate tax paid following an assessment of our eligibility for a deduction under the temporary full expensing provisions included in the 2021 federal budget.

On Slide 14, our operating cost performance for the quarter was impacted by a few factors: poor weather in October and a slow start to the production quarter, but pleasingly, this improved as the period progressed; our focus on recovering production from the interrupted first half and that we again capitalized less of our underground common cost base given the activity focus, while ensuring we did not sacrifice mid-term production development and, of course, we're continuing to manage against our cave management strategy at Carrapateena, which together with ventilation constraints limited of [indiscernible]. We also saw the regular variability in the timing of scheduled plant maintenance to unit costs this quarter, albeit also with the higher cost inputs across a number of drivers.

As mentioned earlier, we are still seeing pressure on a number of cost categories, although a level of stability has also started to emerge. Mechanical rock bolting, underground labor [rates], along with the process of diesel has kept C1 costs at prior quarter levels. We are continuing to work with our operating partners on driving further cost and productivity gains underground, whilst maintaining safe and reliable operations in what continues to be a very tight labor market. An area where we've seen improvement has been on freight costs with the BDI at its lowest level in 30 months.

On 2023 guidance, as I noted, we do see a continuing weakening of the U.S. dollar and I, therefore, used $0.72 exchange rate in our assumptions. We don't see a lot of inflationary relief in 2023 and have also assumed a 60% increase in power costs, given that we have now come off our fixed term -- fixed price rather contracts. Whilst we will see the benefit of additional volumes over the Carajas and Carrapateena, Prominent Hill's lower copper production, together with a lower available byproduct credit and higher underground production will add to its unit costs.

And with that, I'll hand over to Matt, who will take us through some more of the detail from the operations.

[Matthew Reed, Operations Executive Lead]

Thank you, Warrick, and good morning, everyone. As both Warrick and Andrew said, I'll talk to the details of our operational performance in Q4, starting with Prominent Hill, which delivered a record-breaking quarter and continues to confirm its reputation as a consistent and reliable operation.

Higher production rates throughout the quarter were enabled by schedule optimization, improved diversity of ore sources, excellent [indiscernible] and strong stope performance as well. We delivered 1.3 million tonnes at 1.3% copper at Prominent Hill, the highest quarterly underground production achieved at the site and a 32% increase over Q3. Copper production also increased in Q4 with higher grade reduction in mill feed rates, also improved our plant performance. We continued the extraction of remnant ore in Malu open pit, providing around about 183,000 tonnes of mill feed at just over 1% of copper. We continued diamond drilling in Papa, Malu and Kalaya Resource areas with these activities to transition to delineation and grade control drilling of stoping areas in 2023. We are continuing to progress well on the expansion of Prominent Hill. The shaft pre-sink was completed in December, and the site is preparing for Stage 1 raise-bore to a depth of 650 meters. At the surface, the headframe sheave deck preassembly and auxiliary crane structure were also completed civil works for the underground fan chambers are now complete with the installation of the associated overhead crane structures well advanced. All other aspects of the project continue to make timely progress. To offset the impacts of the challenging first half, resources were redirected during the year's production over development, which will now see the production ramp-up from the shaft move from the first half of 2025 to the second half.

Moving on to Carrapateena where we also delivered a good quarter. Ore mined from underground operations is just over 1 million tonnes of ore at just over 1.6% copper with production of 15,300 tonnes of copper and nearly 23,000 ounces of gold, a solid improvement when we compare that against Q3. Increased ore availability plus the reduction in unplanned downtime enabled record plant runtime of 93.5%. Really, though, the headline milestone for the quarter was the cave breakthrough. Throughout the quarter, we continued our cave propagation program accomplishing significant vertical cave growth of 90 meters in December and ultimately leading to breakthrough in the final days of 2022. This marks a significant moment in the life of Carrapateena, particularly because as we've discussed before, it's a critical derisking event for ongoing operations, and the cave now through the surface, we can reconfigure our ventilation systems and mine planning can now be optimized to production rather than prioritizing the development of the cave. And that compromised the managed propagation has been the primary focus over the first two years of the mine's life.

Another pleasing development, production commenced from the 8th sub-level cave during the quarter. Crusher 2 excavation commenced or progressed, and pilot drilling from the 2 of the ore passes which will feed that crusher, also commenced.

It's really important to reflect on what we're building at Carrapateena, this will be a world-class mine. Substantial upside given the significant mineral resources located outside the mine plant and that provides a pathway to substantially increasing mine's life. We also have the aim of doubling average production through the block cave conversion to approximately 110,000 to 120,000 tonnes of copper and about 110,000 to 120,000 ounces of gold, and we'll continue to explore for deposits in proximity to Carrapateena for further potential and options.

In terms of short-term progress and I've spoken to the continuing crusher chamber excavation. Now, I would also like to call out that substantial progress was made in Q4 on the materials handling systems, with a series of transfer station installations completed, the main switch rooms for the material handling system were also installed underground.

Now over to the Carajas and Gurupi provinces in Brazil. In the Carajas East province, operational performance continued to improve at Pedra Branca with increased grade and recoveries contributing to about 4% improvement in copper and gold produced during the quarter. Pleasingly, a record -- monthly copper production record was achieved in December with 1,300 tonnes copper produced. The OZ Minerals option to purchase the Santa Lucia project, Vale, was exercised in January to January 2023, and discussions with the Brazil National Economic Development Bank regarding the acquisition of its 50% interest in the project are well-progressed. Santa Lucia is a potential additional satellite mine for the Carajas East hub. Further acceleration plans for Santa Lucia continued during the quarter with progress on the mineral resources update and a pre-feasibility study well advanced. The Carajas West province, Pantera Mineral Resource estimate update was completed in December and a scoping study there is progressing. And then finally in Gurupi province, a significant milestone was made in December with the approval of the land use concession agreement that's required for progressing the court injunction removal. The request now to remove that injunction has been submitted to the court and it's progressing.

That's the conclusion around the operations. I'll hand back to Andrew.

[Andrew Cole, MD, CEO and Director]

Thanks very much, Warrick, and thank you, Matt. We still got West Musgrave. As we said when we announced the go-ahead on our final investment decision on West Musgrave, it reflects our strong conviction of this great copper, nickel project. It unlocks one of the largest undeveloped nickel resources in the world, and it's underpinned by robust project metrics with expected lowest quartile costs. In terms of progressing the project, efforts have been focused on the recruitment of the project execution and operations readiness personnel, procurement of additional long-lead items, execution of key contracts and critical path construction activity, including the expansion of site facilities. Pleasingly, the team has got off to a great start in 2023 with site activities, including the commencement of the bulk earthworks program and the establishment the footprint for enabling infrastructure such as the construction camp. The existing camp facilities have also been expanded with capacity now beyond 150 rooms. In a further development, after extensive engagement with potential suppliers during the quarter, the Living Hub is now expected to be delivered under a design and construct model as opposed to a third-party ownership model, resulting in an additional $110 million of capital with an offsetting reduction in operating costs for the project. The Living Hub is being funded through contingency for now, but we'll reassess the level of contingency in future as the project progresses.

Looking further afield, there are substantial growth opportunities at West Musgrave, and we hold the view that there is significant potential for new nickel and copper discoveries. The downstream nickel study reached completion confirming the technical and commercial potential of producing MHP for the battery value chain.

Now to touch on our Kalkaroo project, which we believe has the potential to be one of the largest undeveloped open pit copper deposits in Australia. And we hold an 18-month option to purchase the Kalkaroo project from Havilah. In the quarter, after some delays associated with severe weather events and heritage clearances, exploration drilling commenced. This drilling aims to identify new resources to help unlock the province and maximize the potential value of the Kalkaroo deposit. Further, some key contracts have been awarded with extensive core scanning programs now underway.

I'll touch now on our asset timeline, which illustrates we've been building a suite of assets and projects, which could present substantial growth opportunities. In terms of exploration update, during the quarter, work continued at the Yarrie project with Red Metals, which is located approximately 250 kilometers north northeast of Mt Isa in Western Queensland. Pending approvals, drill testing is scheduled for the second half of this year. At the Peake and Denison project, about 150 km northeast of the Prominent Hill mine, drilling was completed on the first 3 IOCG targets with Demetallica Minerals identifying copper mineralization at both the Mawson and Wills targets. I'm not going to dwell too long on the asset timeline slide, which shows the usual information on our different asset projects, stages of development and resources and reserves information. This was provided as an easy reference to track the estimated delivery of the different assets or projects in our provinces.

We've also now provided 2023 guidance, which will see group production broadly in line with 2022, with improving production at Carrapateena and the Carajas East being offset with lower production of Prominent Hill due to the processing of both lower grade and lower volume of stockpiles compared to 2022. As we continue to invest in our strong growth pipeline, we will see a high level of growth capital this year. Group all-in sustaining costs are expected to increase compared to 2022, primarily driven by the full year effect of cost inflation, a stronger Australian dollar assumption and higher electricity costs as Warrick pointed out, which have recently come off longer-term contracts and are now operating under market rates and subject to potential electricity price volatility. We've also provided an update to Carrapateena's guidance to 2025, which you can find in both the pre-production report and the appendix of our presentation.

So to summarize the quarter, as we head into 2023 with positive momentum following a strong financial quarter, thanks to the considerable production improvements across our sites. At Prom Hill, we've progressed construction of the Wira Shaft mine expansion and completed the pre-sink. The Carrapateena cave safely broke through to surface, which marks a significant milestone for the mine and an important derisking event in the ongoing operations. In Carajas East, Pedra Branca delivered strong operational performance with the mine ramping up ahead of schedule. We commenced construction on the West Musgrave project. The study and the site works are underway on the Kalkaroo project, which is a further compelling growth opportunity. Our focus for '23 is on the site delivery of our operational growth plans, continuing our exploration activities to build our unique growth pipeline, enhancing our cost control, implementing our decarbonization road map, strengthening our culture, and moving towards realizing our strategic aspirations, and advocating for a sustained focus on stakeholder value through the remaining BHP transaction process milestone. What we achieved this last quarter, and more broadly, has been driven by the tireless efforts and dedication of our team, and I'd like to thank them for this.

So thank you to Warrick and Matt. Thanks for listening in. We've got time now for Q&A. So, operator, can you please remind people how to ask questions? Thank you.

[Operator]

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

[Rahul Anand, Morgan Stanley]

Look, the first one is on the cost. You've talked a bit about it. I just wanted a bit more color, perhaps. Just wanted to understand the headwinds you're facing, the underlying sort of inflation rates that you're seeing across operations. Obviously, you had pretty strong gold production this quarter, but still, were -- that was just about enough to offset that inflation. You talked about power costs as well, if you can provide a bit more color. Was that 60% increase in the power cost? And have you entered into that as a contract now? Or is that still on spot and you wait for a better opportunity to go into a contract? I'll come back with a second.

[Warrick Ranson, CFO and Finance & Governance Executive]

It's Warrick. So, of course, just generally, our inflationary impact through the year has been around that sort of 10% to 12%, a little bit higher in some of the other areas. We -- as I said, that's sort of steady, so we're not really seeing any further uplift, [but it's] just prices aren't coming back down, so sort of living with those higher price levels now.

With power, yes, so as we said, there's 60% increase in our power charges overall. Look, I think we're likely to see some variation between quarters. So right now, we're playing -- certainly playing the spot market. So it's at a lower level but we've sort of accounted for an average in terms of our guidance, obviously, through the year. So we'll probably see some fluctuations reported in our quarter-on-quarter costs. We tend to see higher power charges come through in the cooler months, of course. So that's added probably around about $0.17 to our C1 costs. So that's been a major -- one of the major uplift factors. Probably the other uplift factor to [call], I think the average FX '22 is about $0.69. So we were picking up another $10 out of FX in terms of our $0.72 a function, so collectively, it sort of got another AUD0.30 that we're carrying through in terms of our guidance.

[Rahul Anand, Morgan Stanley]

Got you. Okay. Just one follow-up there, Warrick. The BHP takeover offer, I mean, on the ground, are you seeing any of your workforce starting to get impacted in the sense that you think perhaps potential for more turnover rates as people sort of start thinking about a more permanent home? Or are you seeing no change in terms of ground conditions with your labor force?

[Warrick Ranson, CFO and Finance & Governance Executive]

From my perspective -- I'll ask Matt to comment as well, but no, we're not seeing any sort of significant change. I think there is a lot of opportunity for our people in terms of the [scheme], if it proceeds and we're trying to obviously encourage them to continue with an open mind around the opportunities that exists for them in a broader business.

[Matthew Reed, Operations Executive Lead]

Yes, I'd echo those comments. I think from an operating asset perspective, we're seeing really no change. People are excited about the future of whatever that might look like. And if we see where that takes us, but no change from an operational perspective.

[Andrew Cole, MD, CEO and Director]

It's also important to add that BHP have also stated that they intend to keep the vast majority of OZ Minerals people. So, I don't think people are necessarily concerned on that basis.

[Rahul Anand, Morgan Stanley]

Yes. No, that makes sense. Okay. Look, the second one is on Carra. So, congrats, obviously, for breaking through the surface. I perhaps wanted to touch a bit upon the mill rates and mine grades. Is it simply just the lower grades in the mill development ore that you're currently utilizing? And then in terms of next year or calendar year '23, what type of mine production rates are you expecting in that guidance? I'm just trying to get a sense for how the grades might track versus what you're mining.

[Matthew Reed, Operations Executive Lead]

Yes. No problem. So yes, you're right. The difference between milled tonnage and grade, and then mined tonnage and grade is development [waste], that as we spoke about at the last couple of quarters. We are intending to continue at around about the same sort of rates for '23. We suspect we might change that strategy in '24 once the -- once crusher 2 comes online. So our current thinking is around about the same rates through Phase 3 and we're mining around about the -- I think we're mining reserve grade on average through the course of '23 as well.

[Operator]

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

[Paul Young, Goldman Sachs]

Andrew, now that the Board has recommended BHP's offer, just wondering if you can actually comment a little bit about this further compared to, say, the last couple of conference calls. In particular, the offer price of $28.25, it's still well above consensus NAV for OZ Minerals. So I can see why you might -- the Board might have recommended. But just wanted to dig into some of the underlying assumptions, which you've observed during -- with the Board recommending it. First of all, on the financial assumptions and operating assumptions, that's copper and nickel price and WACC on financial assumptions and on operating assumptions with respect to potential mine life extensions and scalability and also synergies, can you maybe just comment about where you think the differences have been between the Board's views and, say, the market's views?

[Andrew Cole, MD, CEO and Director]

Okay. Look, I'll make a couple of pretty high-level comments here, Paul, and I'll ask Warrick to build on these. Look, the first thing I'll say is that, the OZ Minerals Board and all of the directors have unanimously recommended that shareholders vote in favor of the scheme. That's, of course, in essence of the superior proposal. It also requires an independent expert concludes and continues to conclude the schemes in the best interest of our shareholders. And that recommendation didn't come lightly. It's come based on deep and careful consideration of a range of factors. They include the OZ Minerals value on a stand-alone basis, of course, and that takes into account, amongst other things, commodity price forecasts, macroeconomic outlook, operational delivery, the projects, the capital cycle we're stepping into, et cetera. So we have -- that independent expert report is currently being prepared.

I might just get Warrick to take us through the independent expert report and then the scheme which will -- I think, which will then answer some of your questions, Paul. Do you want to take us through that?

[Warrick Ranson, CFO and Finance & Governance Executive]

Yes, maybe I'll just talk about price to start with, Andrew, because I think that's maybe where Paul is sort of coming from. But I mean, consensus long-term hasn't really moved, Paul. So I think it's about [3.45], I think the range has increased a little bit in terms of critical upside and obviously, there is a bit of a lag there, but we haven't seen a huge uplift despite the short-term market increase. I mean, there's still plenty of mine side risks, particularly, in South America, as we've talked about. So, on the supply side, that's certainly a factor. But the economic indicators in China is still a little bit weak, as we mentioned, around the property sector still struggling. So I think whilst we're seeing certainly some uplift in EV sales and battery installations there as positive drivers, there's a level of caution that still applies. So -- and I think, again, that sort of reflected in consensus. So, again, our Board has certainly taken a long-term view in terms of where that is, and it is a matter of also thinking about capital and risk in those considerations as to where it's at.

So in terms of the independent expert, we're still -- we're working with the independent expert. We haven't -- that's still being worked through as we haven't seen any outcomes from that. I suppose that's why they're called independent in some ways so they can make that assessment. That will come in line with the Scheme Booklet, as Andrew mentioned. We hope to be able to issue that into the market in March for a shareholder vote in around about the middle of April. So we're continuing to work against that. And of course, the Board's recommendation is on the basis of the independent experts, concluding, but also continuing to conclude that the scheme is in the best interest of OZ Minerals shareholders.

[Paul Young, Goldman Sachs]

Okay. Just -- maybe just specifically on the synergies. Have you tried to quantify the synergies between Carra and Prominent Hill and BHP's Olympic Dam operations, particularly the 2-stage smelter and also the synergies potential between West Musgrave and Nickel West? And if you -- I'd be interested to know what sort of estimates if you can share those? And will the independent expert dig into those synergies and calculate those?

[Andrew Cole, MD, CEO and Director]

A couple comments because we -- as we've answered -- we've talked a bit about this before, Paul, in that when we were -- the Board was forming a view on BHP's offer originally and then the revised offer at the end of last year, we did dig into synergies to understand what the synergy benefits may be between our assets. And we did form various views and various opinions based on our assessment and third-party assessments, and they went into the decision-making process to land on a unanimous Board recommendation for the '25.

In terms of the specific synergies that exist between [OD] and the OZ Minerals assets and Nickel West and West Musgrave, that's really a question for BHP to answer, not really for us. We are leveraging as best we can the synergies between our assets currently. And we have historically spoken with BHP about commercial opportunities to exploit various synergies. But in terms of the specific synergies themselves, you really need to ask BHP what they believe they will achieve from a synergistic respective. I think that's a question for them to answer.

[Paul Young, Goldman Sachs]

All right. And then lastly for me, just again on the topic of BHP. You want to discuss with them around specifically West Musgrave and the design and timing with West Musgrave. If you got any comments about -- from BHP about are they happy with the design and also the timing of that project?

[Andrew Cole, MD, CEO and Director]

So I can tell you under the current agreement that we've reached with BHP, I'll get Warrick to answer this, if I miss anything. We're progressing the construction of West Musgrave as released and as outlined in the study that we released last year. So that project is progressing. Contracts are being issued. There is a process here, which I'll ask Warrick take us through to review material contracts with BHP. But in essence, we are continuing to construct the project as we originally scoped.

Do you want to touch on that?

[Warrick Ranson, CFO and Finance & Governance Executive]

Yes. No, I think from a BHP perspective, obviously, it's a core interest to them in terms of the project, and that certainly supported the ongoing project development. So, as Andrew mentioned, I think the only thing that they wanted to make sure of is, if they do -- if the scheme does progress and becomes effective, then any opportunities that they might have to add some broader procurement power, purchasing power, et cetera, into the mix will be something that they'd like to consider. So certainly, from our perspective, we're full steam ahead in terms of West Musgrave.

[Operator]

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

[Kaan Peker, Royal Bank of Canada]

Two questions from me. Just wondering, just looking at the guidance there, I think the longer-term guidance a few months ago, I think, in December, there was a reserve update. And from memory, copper reserves from block cave were lowered about 200,000 tonnes. And now CapEx has been deferred, I think being flagged as lower priority spend being deferred. So just wondering what has changed. And how does low priority spend -- what does actually low priority spend mean? And how does that impact the overall mine plan?

[Andrew Cole, MD, CEO and Director]

Matt, do you want to talk a bit about the plans there?

[Matthew Reed, Operations Executive Lead]

Yes. No problem. Yes, I think there's probably a couple of moving parts there. We have been certainly -- well, I would say, cutting our costs to see a more difficult external environment. So we have deferred, as you say, lower priority, lower value projects. There's nothing really very significant in that list, a lot of smaller activities. We don't believe that they will have an impact on the safe operation of that facility.

The other thing that's going on is, we are getting -- sorry, before I go to that, there's another piece where there are activities that I think just as we better understand the operation, things like tail storage facility, we're getting improved performance out of the dam. We're getting more capacity through effectively improved [angle of proposed], let's call it, for the tailings. So things like that have allowed us to save capital.

And then I think the other big driver is, we're getting much clearer now through the course of last year, we brought together the block cave project and the existing operation on some of the overlaps and synergies, let's say, between that interface of sub-level cave or block cave. So that's allowed us to make a reasonably substantial reduction in capital -- sustaining capital associated with a better understanding of that interface. So that is sort of the 3 blocks to think about as far as Carra, better understanding the performance of the asset, example, tail storage, decision to remove some of our lower-value projects without material impact and then better understanding of the interface between the sub-level cave and the block cave allowing us to optimize and remove activity.

[Kaan Peker, Royal Bank of Canada]

And the reserve changes for the Block Cave 1 and also Block Cave 2?

[Matthew Reed, Operations Executive Lead]

Yes. Sorry, can you -- what's your question there? Can you repeat that?

[Kaan Peker, Royal Bank of Canada]

Yes. I think in December, the reserve update, there was from Block Cave 1, 200,000 tonnes of copper were -- reserves were lower by that. And also Block Cave 2, I think, about 60-odd tonnes. Just wondering what drove that.

[Matthew Reed, Operations Executive Lead]

Yes. Okay. Again, a couple of things. So one is just the product of improved understanding of the ore body we drilled and then the second factor was we decided to bring some of the higher-grade material at the -- effectively what was at the top of the block cave and therefore, would have been at the end of the life of the block cave that we would have seen that through our processing facility. We decided to bring that into the sub-level cave. So what that does is brings forward that higher-grade that otherwise would have been at the end of the mine life and potentially buy that phase in whatever period of time that is dilutive. So they are 2 things that drive those changes around the block cave resource and reserve.

[Kaan Peker, Royal Bank of Canada]

Sure. And just second question was on the development rates at Carra. Seems like they are 2-year low. Just was production preferenced or is it more to do with breaking through the surface?

[Matthew Reed, Operations Executive Lead]

Yes, it's a little bit of both. So we were focused on [indiscernible] certainly in the last quarter, as we've talked about before, that has constrained activity on the ground and particularly at challenges ventilation. And that can impact our development activities more so than our production activity. So there's an element of that. Development rates have come up a little bit over the course of this year. I think probably the other thing to keep in mind is that, development rate you see right at the start of the life of the asset are not required to maintain performance into the future. So around about, I think, 3,000 meters or so a quarter is where we expect to see it over the next year or so.

[Operator]

[Operator Instructions] At this time, there are no further questions at this time. I would like to turn the call back to Andrew for closing.

[Andrew Cole, MD, CEO and Director]

Yes. Thank you very much, operator. Thanks, everybody, for dialing in. Thank you for your questions. If there's anything to follow-up on, please give Travis a call, and he will know the right person to come in and answer the question. And we will speak again next month with our financial year results. So thank you very much. Have a great day.

[Operator]

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