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Edited Transcript of OZL.AX earnings conference call or presentation 28-Aug-19 12:00am GMT

Half Year 2019 OZ Minerals Ltd Earnings Presentation

Victoria Sep 20, 2019 (Thomson StreetEvents) -- Edited Transcript of OZ Minerals Ltd earnings conference call or presentation Wednesday, August 28, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Cole

OZ Minerals Limited - MD, CEO & Director

* Warrick R. J. Ranson

OZ Minerals Limited - CFO

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Conference Call Participants

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* Daniel Morgan

UBS Investment Bank, Research Division - Director and Analyst

* Lyndon Fagan

JP Morgan Chase & Co, Research Division - Analyst

* Michael Slifirski

Crédit Suisse AG, Research Division - MD

* Paul Young

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Rahul Anand

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Andrew Cole, OZ Minerals Limited - MD, CEO & Director [1]

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Good morning, everybody, and welcome to OZ Minerals' conference call to discuss our half year financial results that we released this morning.

So I'm joined here this morning with Warrick Ranson, our Chief Financial Officer, who is going to lead most of today's teleconference. And at the end of this, we'll open up the call for Q&A.

So I'd like to draw your attention to the disclaimer on Slide 2, which you can obviously read at your leisure.

So before I hand over to Warrick, I would like to kick off with a few higher-level comments.

So starting with the highlights of the half 1 result, which I think firmly links to our strategy that you can see on the right-hand side of this page. The half year is a good opportunity for us to take stock of where we're at and where we're heading through the remainder of this year and into the next planning cycle. We consider ourselves to be a modern mining company, with the various strategic elements highlighted in yellow, and how we work to get our principles underpinning this which underpin our culture for the company. We are also a growth company. We're firmly focused on delivering value for our 5 key stakeholder groups, which are our shareholders, our employees, our communities, the governments in the areas we operate and our key suppliers and partners.

In terms of where we're at in this journey, I'd like -- I think we're about in the transition phase. We're moving closer towards having multiple operating assets. We're on the cusp of having 2 large mines here in South Australia, and we have a strong set of opportunities in Australia and Brazil. After the last few years of building, we are now in a position of having an array of potential projects to advance. This will require that we carefully consider which projects we progress and which ones we do not, and we'll be leveraging our capital allocation approach to help us with these decisions. And Warrick is going to talk more about this later in the call.

There are a few key points to note for the first half. Firstly, a net profit of $44 million was achieved despite a $100 million reduction in revenue, mostly the result of concentrate shipments taken from Q2 into Q3. This deferral has almost reversed already, with half 1 inventory all but cleared. Ore production for the remainder of the year is committed, and we've seen some customers bring forward shipments as a result of their destocking activities in the first half of this year. The other influence on profit was, of course, our increased growth investment. We're currently funding growth from a solid cash flow being generated by the Prominent Hill mine. So on this basis, along with the outlook for a strong second half and with the knowledge of the various possible outcomes from our growth pipeline, we were pleased to announce this morning that the Board declared an $0.08 fully franked interim dividend, which is consistent with previous years.

Through the half, we made very good progress on our growth plans, but firstly, at Carrapateena the team is tracking on schedule to produce first sellable concentrate in November this year. We currently have over 100,000 tonnes of development ore stockpiled on surface ready for commissioning and production. The Carrapateena expansion prefeasibility study and the Carrapateena Province scoping study are both progressing well using our collaborative, value-based approach to help us define the long-term future of the Carrapateena Province. With the prefeasibility study phase of any project being the most important step in getting the scope right, we've chosen to extend the West Musgrave prefeasibility study time line, and now it's expected to be completed in early 2020. This will allow us to assess several recently identified value-adding opportunities for the proposed open-pit copper-nickel mine in Central Australia.

Last month, we shared with you our plans for the Carajás and the Gurupi provinces in Brazil. We now have a good understanding of our base case and how we can best advance the projects in each of these provinces to maximize value creation, which we should see us finalize our plans for Pedra Branca this quarter.

Our exploration pipeline also grew, but these additions came on the back of a few existing exploration projects that will require decisions on whether to progress or exit later this year. We regularly assess our exploration pipeline, with the view of exiting projects not suitable to us. You can see from the company's snapshot that Australia comprises more than 3/4 of our portfolio by value, and this is proportionately how we spend our time and our tonnes. And based on the current growth pipeline, this mix will likely stay relatively consistent in the near term.

So I'm now going to hand over to Warrick to cover our financial performance, and then I'll wrap up before Q&A.

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Warrick R. J. Ranson, OZ Minerals Limited - CFO [2]

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Okay. Thanks, Andrew. And good morning, everyone.

Firstly, we saw another strong half from Prominent Hill, which continued to generate cash and performed strongly, with production on track for guidance at bottom-quartile costs. The gold ore processing trial demonstrated improvements in expected recoveries, and we are currently reviewing this information to analyze our processing sequence for next year. And the haulage feasibility study which is part of the underground expansion study is nearing completion, and 9 kilometers of expansion study diamond drilling has now been completed.

At a group level, it's probably easiest if I talk to the next 3 slides collectively in terms of the overall profit performance for the first half.

Revenue for the first half of the year was $419 million, $111 million lower than the comparative period. Base metal markets continue to suffer from trade war fatigue, as robust macro fundamentals are overcome by the political uncertainty between the U.S. and China are at the moment. Higher scrap importation, maintenance, new smelter startups -- startup issues contributed, as did tighter credit for smelters generally, and certainly drove buyer behavior in the first half. Concentrate sales were lower as a result, with a number of customers preferencing concentrate deliveries into the second half, as Andrew has highlighted. However, indications of falling TCRCs and pricing at the bottom of the 10-year range have seen a change in purchasing sentiment over the last few months. And a number of customers are now bringing shipments forward to secure supplies. We expect to hold minimum stock levels at year-end based on current shipping schedules. And through July and August, we have seen a robust response to the drawdown in smelter stock levels experienced during the first half.

Whilst U.S. pricing remained volatile, the average A dollar cover price was around 3% lower than the comparative period. Our decision to hedge a portion of the open pit gold stockpile a few years ago resulted in just under $6 million in realized losses also being included in revenue for the half year, with just under 38,000 ounces in financial contracts maturing.

Operating margins declined slightly between the comparative periods. The sale of lower-grade concentrate from the end of 2018, coupled with the lower production rates from the underground that we reported in quarter 1, were principal contributors, though positively, absolute costs continue to remain relatively stable and particularly in terms of input pricing. Prominent Hill's transition to an underground-only mine operation was also completed in early 2018, contributing to the reduction in the absolute mining costs. Pleasingly, underground mining rates have progressively ramped up, with the opening of additional stoping fronts and one-way trucking the key drivers. The processing plant continues to operate at full capacity, supplemented by ore from the open pit stockpiles.

The inclusion of costs attributable to production at Antas were also another component of the cost base for the first half of 2018 and added to production costs for both mining and processing, with significant waste removal in the Antas pit of particular driver. With the continued, continuing improvement underground, our C1 costs are trending back towards more sustainable levels, with lower levels of open cut ore required to supplement the mill feed and just to note that with the adoption of AASB 16, which covers lease accounting, we do not intend to alter our C1 calculation methodology. And we'll continue to include these costs as a cash outlay, although they're now recorded as a financing activity in the accounts.

Depreciation for the half year was lower than the comparative period. And there are a few factors here to highlight, including depreciation on open-pit operations in 2018, a review of the remaining asset life in Brazil following the establishment of our hub processing strategy, the further extension of operations at Prominent Hill; and partially offset by that adoption of AASB 16, which sees us now amortizing the right-of-use assets included within service and operational contracts. So as a result, we've updated our guidance in this area.

We continue to invest heavily in our growth pipeline, with nearly $37 million incurred during the half to progress the Carrapateena expansion study; drilling and study progression in the Gurupi and Carajás provinces; and other exploration, corporate development and earn-in activities, which Andrew has touched on. Corporate allocated costs increased over the comparative period primarily due to the inclusion of Brazil central costs and further organizational capability build. And income tax expense ended lower than the previous year as a result of the lower profit and the benefit of prior fractional tax losses recognized during the year -- during the half year, that is. As previously indicated, though, exploration and evaluation costs in Brazil are not attributable income tax items.

So collectively, this resulted in a net profit after tax for the period of $43.9 million and a reduced earnings per share performance. However, the expected stronger second half performance has supported the Board's determination in relation to an interim dividend; and pleasingly, as Andrew noted, is resolved to maintain this at $0.08 per share, consistent with last year. And the interim dividend will be fully franked for Australian tax purposes.

So if I move on to Slide 9. And operating cash flows of $101 million for the half year were $53 million lower when compared to the comparative period, impacted principally by the timing of concentrate sales. Payments to suppliers and employees were of similar level, with inclusion of the Antas operation. Despite the lower revenue, payments for exploration and evaluation increased by $25 million, reflecting the strength of the growth pipeline opportunities that sit in front of us. PAYG tax payments were substantially lower in the half year due to the lower revenue base.

Net investing cash flows of $355 million were attributable to development costs at Carrapateena; general property, plant equipment and mine development at Prominent Hill and Antas; and the study costs associated with the West Musgrave project, which we capitalized. Cash outflows relating to finance activities comprised $48 million for the payment of the 2018 final dividend to shareholders; and $19 million in payments to suppliers, which are now classified as lease payments following that application of AASB 16.

On the balance sheet, we summarized the comparatives for the last 6 months on Slide 10. Our balance sheet continues to remain strong and position us well for the growth pathway we've been progressing. I've talked about a number of these items already, so I'll just touch on a couple of key aspects here.

Consistent with our capital management strategy, we progressively applied our cash resources to the development of Carrapateena and the capital requirements at Prominent Hill. We expect to see our cash reserves continue to deplete as we complete the development of Carrapateena. The adoption of AASB 16 has required the recognition of lease assets and liabilities from the beginning of this year. This standard requires the recognition of an asset and an associated liability where the lease provides certain commitment -- committed use rights over infrastructure and equipment within contracts. So for us, that includes contracts such as our surface and underground mining contracts. And in the future, the power transmission infrastructure contracts that we have with ElectraNet will be included in this area.

The movement in other liabilities relates to the market valuation applied to our commodity hedges as at the 30th of June.

As already highlighted, given the strength of our balance sheet, the delivery of Carrapateena later this year and expected stronger second half operating performance, the Board has declared a fully franked dividend for -- interim dividend for 2019 of $0.08 per share. This approach continues to recognize the importance to the Board of the level of shareholder returns at the same time as allocating capital to grow, remaining cognizant of our commitments to the development opportunities in our pipeline but also making informed choices as to which ones we actually progress. Having these choices continues to be underpinned by ongoing operating performance; and making sure we maintain our natural hedge by ensuring our assets operate in the bottom half of the cost curve or, if not, that they have a pathway to get there. At the same time, we are focused on maximizing valuing how and where we deploy capital. And whilst we have an enviable pipeline of growth activities, reflected on Slide 12, we remain prudent in our expenditure, constantly reviewing and assessing the value and prioritization of our spend. Being very selective in our exploration targets, partnering with experienced juniors, consolidating targets such as Jericho and limiting expenditure at Centro whilst extending our provincial footprint through Jiboia are all examples of our approach to investing responsibly and applying our capital prioritization framework.

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

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Andrew Cole, OZ Minerals Limited - MD, CEO & Director [3]

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Great. Thanks very much, Warrick.

Before I wrap the call up, I want to give an update on a few specific projects.

So firstly, on Carrapateena. It's in a very exciting stage in its journey. The tailings storage facility construction is practically complete and is being handed over to operations as we speak. As the top photo shows on this slide, the processing plant non-processing infrastructure construction and procurement is over 90% complete. The 50-kilometer power line to site is energized into the main distribution switch room. Over 17 kilometers of underground development has been completed to date, and we've started drilling our first sublevel coproduction rings. As the bottom photo shows, construction of the underground crushing chamber is progressing well. And we now have an ore stockpile of over 100,000 tonnes on surface, which is expected to grow to over 150,000 tonnes prior to plant commissioning. As we approach the final stage of the above-ground construction, we can now be more definitive. So we expect first sale of a concentrate production to be in November of this year. From that point, we will cease capitalization of the preproduction operating costs.

Given this timing, we can provide more clarity around the preproduction capital costs of the project, which we expect to be between AUD 920 million and AUD 950 million. The capital cost includes all costs up to the generation of sellable concentrate; and therefore includes all site overhead costs, underground development costs and underground infrastructure installation costs. Importantly, the summation of preproduction capital up until November and postproduction capital from November through end 2019 continues to track to the 2019 annual guidance range of $540 million to $570 million.

Now that we're getting into detailed scheduling. We currently do not anticipate running the processing plant in December, instead building ROM stocks for processing in early 2020 and using this time to optimize the infrastructure following commissioning. Given the majority of our production costs in this initial period will now be allocated back into capital, we have removed the 2019 guided all-in sustaining cost and C1 costs for Carrapateena. This approach should set the team up well for next year.

West Musgrave project prefeasibility study is advancing well, and we're progressing the 10 million tonne per annum scope as previously defined in the scoping study as what appears to be a value-maximizing case. The process we're using to maximize value creation for the West Musgrave project is leveraging a small in-house owner's team using agile methodology, with a vast array of external generalists and specialists from various fields from around the world. As the process has progressed, we have identified new and different technologies and workflows that we believe could help improve the value of this project even further. The PFS phase to the project is the most important stage, as this is where you define the optimized scope to advance into feasibility and engineering, so to give the team time to assess the recently identified, potentially value-adding opportunities, we have extended the PFS schedule to early 2020. The next few months will see desktop studies, a number of laboratory and pilot-scale trials and in some cases specific supplier engagements; and give us the confidence we need to include these opportunities in our base case. As a result, we now expect the PFS to complete early next year.

We made a separate release today that contains the details of progress to date on the West Musgrave project. We are, unfortunately, not yet able to provide you with the financial metrics for the project, as per the listing rules, but I can say that the magnitude of the benefits of the work outstanding warrants more study time. As a result of this, the most material change to our asset time line has been to push out the West Musgrave PFS by 2 quarters, which has a flow-on effect to the planned feasibility study, construction and production time lines, assuming they go ahead, of course. All other items on the slide remain as per our last call, when we provided you with clarity on the Carajás and the Gurupi provinces in Brazil.

So as I mentioned before, it's a pretty busy second half for this year. And I'm going to use this slide as a quick visual guide to summarize what's coming up through year-end, which is only 4 or so months away now.

So Prom Hill. We are expecting the results of the haulage feasibility study, which we believe could support an underground mine expansion beyond the 3.7 million to 4.0 million tonne per annum rate currently assumed. Pleasingly, underground mining rates have been progressively ramping up, with the opening of additional stoping fronts and way trucking now implemented both being key drivers of this outcome. At Carra, we are on track for first commercial concentrate production scheduled in November. We then expect it will take us about 18 months to ramp up to full production. In the Carajás, feasibility study work is continuing at Pedra Branca, and we expect to be able to consider whether to start early works on the project shortly. In the Gurupi belt, we are really only working toward the CentroGold injunction being removed later in the year.

We anticipate providing an update on a number of OZ Minerals' asset resource and reserve statements in November, and the implications of each of these. And as you know, at Prom Hill we have a stated intent of completing enough drilling to replace underground mine depletion year-on-year. At Carra, we're learning more about the resource and the reserve as we continue to develop and drill into the mineralization and complete accompanying studies. At West Musgrave, we have now completed the last drill program that will be used for an updated resource and, all going well, a maiden reserve at the end of the PFS. At CentroGold, we're incorporating the last drill program to the resource, which wasn't completed in time for the last release. And lastly, in exploration, we'll be drilling a number of projects, including some of the Explorer challenger targets around Prom Hill.

So just before we move on to questions, let me touch on guidance.

Underground production rates at Prom Hill continue to improve, and C1 costs are currently expected to finish the year at the low end of the $0.65 to $0.75 per pound. The Carrapateena build -- as the Carrapateena building hits completion, our guided growth capital expenditure for the project is unchanged at AUD 540 million to AUD 570 million. As mentioned earlier, we anticipate producing first sellable concentrate in November and then shutting the plant down in December to allow time to respond to any commissioning teething issues while stockpiled underground ROM ore increases. Hence, we've removed the 2019 all-in sustaining cost and C1 cost guidance.

Project studies and drilling commitments have been increased to $90 million to $95 million, up from the $75 million to $80 million, primarily as a result of allocating additional funds to complete the West Musgrave project PFS. There are a few projects, as illustrated in the asset time line, that we haven't yet finalized and sought all approval to proceed, so we thought it useful to give you an estimate of what the project studies and drilling commitments guidance number may increase to. Hence, the cap, it could go up to $120 million, but this assumes that we progress all projects and they are all approved.

So just to recap. We've gone through quite a few things today.

We have a net profit after tax of $44 million, which was impacted by second quarter shipments being pushed into Q3 and increased growth investment. The revenue timing issue has largely reversed over these last 2 months, and all production for the remainder of each year has been committed. Our growth is being funded from the solid cash being generated at the Prom Hill mine. The Board has declared a fully franked interim dividend of $0.08 per share given our confidence in the operational and project performance.

Carrapateena is on schedule for first concentrate production in November, with over 100,000 tonnes of development ore already stockpiled. Carrapateena expansion study is progressing well. On the West Musgrave project, we're evaluating multiple potential value-added opportunities. And this has pushed out the PFS completion date and, hopefully, a maiden ore reserve early 2020. We've developed a low-risk, modest-capital hub strategy for the Carajás and Gurupi provinces in Brazil; and we are assessing the preferred development pathway for Pedra Branca currently. And we're working toward having the CentroGold injunction being removed by year-end. And our exploration growth pipeline is expanding with new earn-in agreements in the Carajás province, Sweden; and a new joint venture around the Jericho project with Minotaur in Queensland.

So that brings us to the end of our presentation and overview of the project.

Operator, can I ask you to remind people how to ask questions, please, of Warrick or myself? Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from the line of Rahul Anand from Morgan Stanley.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [2]

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Andrew, I might start quickly with Prom Hill costs, if I may, quite interested to understand the underlying trends over there just in line with sort of the gold price moving higher and obviously currency moving to your benefit. How is the underlying trend there going? That's the first one. The second one is really around mined ore year-to-date, wanted to understand. So the calendar year '19 guidance is around 3.7 million to 4 million tonnes. We were sitting at about 1.5 million tonnes in the first half. So how is the progress going there at the moment? And are we looking in line with plans for the full year? Finally, the last one is around West Musgrave, just relating to the value-add opportunities there. Is that mainly around the metallurgical test work that's been ongoing? Or are we looking at potentially different volume strategies to enhance the value of that project as well? And there's a life extension maybe?

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Andrew Cole, OZ Minerals Limited - MD, CEO & Director [3]

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Yes, look, thanks, Rahul. I'm going to -- can I start with your last question? Then I'm going to throw it to Warrick on Prom Hill costs. So yes, at West Musgrave there's a raft of opportunities, and you'll see the ASX release that we published this morning on West Musgrave will give you a summary of them. Some are metallurgical.

(technical difficulty)

recoveries, flow sheet

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flocculent designing used, et cetera. Some are crushing. So we're also progressing with some level of innovated approach to crushing using a [wesh] mill. It's a milling method that's being used in soft rock and other sectors but hasn't been used in hard rock. The pilot test that we've done to date suggests it can be used. And interestingly -- I mean the reason we're pursuing it is it uses a lot less powder to drive technique. So that's an example. We're also working on power. We are working because the -- it's a remote-site, stand-alone power generation. Everything we can do to get power price down and remove carbon, which aligns to our company strategy, is something we want to work on. So they're just a few. There are others as well, which all have an impact on the resource, the cutoff grade and the shape of that reserve and obviously mine life. So there are some fairly big things in these things. So rather than wrap the PFS up and take them into the feasibility study, we think it's more prudent to evaluate them through the PFS and wrap up the scope early next year. That's West Musgrave. Okay. Warrick, do you want to...

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Warrick R. J. Ranson, OZ Minerals Limited - CFO [4]

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So Rahul, thanks for the question. So in terms of costs, I mean, firstly, I would say that Prominent Hill is performing really, really well. On an absolute cost basis, we're not seeing major increases in input drivers. Probably the only one that still sort of fluctuates a little bit is around diesel costs, but it's not a large portion. And so things have stayed relatively stable on that front, recalling also that our power contract is locked in until the end of next year. So we're on a -- we don't see a variation in terms of things like power costs. And really I suppose it's just the trend is more around the proportion of underground material versus open cut in terms of the C1 cost movements. And I think, in terms of the ore mined, we've certainly seen a significant improvement in -- from Q1 in terms of our underground ore volumes. And that gives us, I suppose, confidence in terms of our current guidance and where we should finish at the end of the year. So certainly some great work being done by the Prominent Hill team there.

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Operator [5]

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And your next question today comes from the line of Paul Young from Goldman Sachs.

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Paul Young, Goldman Sachs Group Inc., Research Division - Equity Analyst [6]

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Andrew and Warrick, few questions on Carrapateena, to begin with. Just trying to square away the final capital estimate. The preproduction guidance number is $916 million. And you've said it's now $920 million to $950 million. Is that just an extra couple of weeks or months of overhead and owner's costs attached to that? And then secondly on Carrapateena, Andrew, just trying to understand. Looking into 2020 and the ramp-up, it's going to take 12 to 18 months to ramp up the underground. So does that tell me that the plant will be -- you'll be back trading through the plants on 2-week-on, 2-week-off sort of campaign for the first half? I'm just trying to square away the costs for next year and what actually are fixed costs across this project.

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Andrew Cole, OZ Minerals Limited - MD, CEO & Director [7]

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Yes. Paul, no, I understand what you're needing. We obviously haven't provided guidance for 2020 yet, but we will later on in the year. So let me tackle the second question first. And I'll ask Warrick to tackle the first one, around what costs are being moved, if you like. So you can assume for now in the absence of any other guidance that it's effectively a straight-line ramp-up between November this year over 18 months to the full 4.25 million tonne per annum production. So the operating philosophy is going to be campaigned around the processing plant. So it's going to be underground mine constrained through this whole period, and that's what we've said right through this process. It's about underground is the most important aspect of this project. So we will be pushing underground as hard as we obviously can whilst managing the development of the sublevel cave for beginning through the surface. So that's why we won't be running the plant in December, for example. So we will build enough stockpile to run it in campaign mode, and then we'll switch the plant off. That's the timing for plant operations and the gap between the plant operating is going to depend what's going to change through time as we -- as that production rate ramps up. So we haven't given you the data to do this yet, but you can assume a couple-of-week operating periods and then switch off the plant effectively whilst we build run-of-mine stocks to allow us to then switch the plant on. And that gap between operating will shrink over the 18-month life, if that makes sense.

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Paul Young, Goldman Sachs Group Inc., Research Division - Equity Analyst [8]

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Yes, that does. I mean there will be, I guess, an impact on recoveries during that period, Andrew. Would that be fair?

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Andrew Cole, OZ Minerals Limited - MD, CEO & Director [9]

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No, not -- I'm not sure there will be an impact on recoveries. One of the reasons that we want to operate the plant in this way, obviously, is to maximize recovery. So the best way to run this plant is at full capacity and manage it that way, as opposed to trying to run it at partial capacity. So this is the value-maximizing way of running it. It minimizes the power cost per unit. It also maximizes the recovery and plant effectiveness at recovering metal, so there shouldn't be an impact on recoveries. What it does allow us to do, though, taking this operating philosophy is, as this plant starts and ramps up, we're going to learn things about the plant. And we will learn what might or might not be working well -- as well as we hoped, and we'll be looking for opportunities to improve the performance of the plant. So we'll get extended shut periods to continue to optimize and work on the plant. Our ultimate aspiration, obviously, try -- is to get as much through this plant as we possibly can that the main -- that the mine will support. And having shutdown periods between these will actually allow us to focus on that.

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Paul Young, Goldman Sachs Group Inc., Research Division - Equity Analyst [10]

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Yes. I was referring more to the topside impact that -- yes, that's fine. And then on the capital estimate...

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Andrew Cole, OZ Minerals Limited - MD, CEO & Director [11]

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Warrick?

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Warrick R. J. Ranson, OZ Minerals Limited - CFO [12]

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Yes. So Paul, I mean, overall our capital estimate has stayed exactly the same in terms of the total growth expenditure for the year. I think it's important to recall that a major milestone is really when we start -- when we commission the plant and produce first concentrate, and that's been our reference point in terms of the capital that actually gets allocated into that preproduction area. At the same time, post production, there's ongoing expenditure underground in terms of development and underground infrastructure works. And so really, in terms of our current estimate of the time line, we're just seeing more of -- a little bit more of that underground infrastructure and capital -- and mine development work swing back into the preproduction time zone. And that sort of contribute -- that's really the contributor to that change in the guidance there, but as you'll see on the guidance statement, our overall growth capital expenditure guidance for the year hasn't changed. So we're spending exactly the same amount.

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Paul Young, Goldman Sachs Group Inc., Research Division - Equity Analyst [13]

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Yes. Okay. Well, that's great. Second set of questions, on West Musgrave. A lot of work going on here, innovative work. And a lot on your plate has put, I guess, a delay in understanding when it fixed down or settle on the correct scope, Andrew, but just one thing I picked up on -- in the analysis was on the regulatory approvals and the risk of potentially this project requiring a public environment review and potentially a 12- to 18-month delay. Wondering if you can just talk through that. You've obviously highlighted and said that -- the risks of actually entering a public environmental review. And then just on that, if you -- if hypothetically there was a delay of that magnitude, you'd be actually building this project at the same time as the block cave. And obviously, that's what you want to avoid from a balance sheet perspective. So just wondering around can you actually -- from a balance sheet perspective and a team perspective actually handle about these projects once construction pays?

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Andrew Cole, OZ Minerals Limited - MD, CEO & Director [14]

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Okay. Yes, look, a couple of good questions in that, Paul. So our current time line, which we published on the asset time line, is inclusive of the approvals work which we've built into our schedule. And that approvals time line that we've got built into our schedule is after a lot of consultation with the WA government, a whole raft of departments with the WA government. So it's been built collaboratively with the various departments there. So we're quite comfortable that that's the central estimate for the current time line. So whilst we're highlighting a threat -- I think, whenever you've got approvals, there's always a threat of delay. So I think it's prudent to point out that, that threat exists, but it's not our belief or view that, that threat is going to materialize today. So the time line we've given you is inclusive of our best estimate of the process. And I would say the process with the state government and the communities, the [traditionalized] communities, locally is going very well but still very early stage. Now we're pushing ahead with that process now notwithstanding the prefeasibility study now has been pushed out to early next year. So we're progressing as planned to make sure that we enable that process to unfold, assuming we go to feasibility study early next year. In terms of balance sheet, Warrick, do you want to -- is there anything you want to add?

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Warrick R. J. Ranson, OZ Minerals Limited - CFO [15]

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No. I think that's right. I mean we again -- with -- it really does depend on how things unfold and comes back to our ability to make the right choices at the time. I think also with West Musgrave we're looking at some slightly different funding structures in relation to that. So yes, no, I'm not sure there's anything else to add...

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Andrew Cole, OZ Minerals Limited - MD, CEO & Director [16]

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And just in terms of your question on capability, Paul. Our desire is not to be building multiple big projects at the same time. That does put a strain, I think, on the company and on the balance sheet; and increases the risk profile. So I'm not saying we won't. I'm saying we would rather not schedule or plan to have big projects being built at the same time. The offset to that is a block cave as a brownfield project expansion. It's not a new build. So it'll depend on what the scope of the block cave build is and whether it needs plant and infrastructure, for example, or it's only underground mining. That would have a bearing on whether we're happy to progress both at the same time or not. So in short, I can't answer the question until we understand what the scopes are if it eventuated that way.

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Paul Young, Goldman Sachs Group Inc., Research Division - Equity Analyst [17]

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Yes. Okay. We'll talk about it also in detail at the Strategy Day, so I look forward to that.

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Operator [18]

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The next question today comes from the line of Michael Slifirski from Crédit Suisse.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [19]

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A couple of questions. First of all, with respect to the Carrapateena commissioning then idling, I'm still somewhat confused by that. I mean the way it presents. And I want you to say it's not the case, but the way it presents is that there's slippage. You always said that the underground development was critical path, and now you're saying that there won't be sufficient ore to run for more than a commission peak period. So really interested in understanding what that interaction is between the ramp-up, between what sort of ore you want ahead of the mill before you do the next sort of campaign. And then if you're in this stop-start mode, how are you thinking about sort of concentrate quality and achieving what the part is capable of?

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Andrew Cole, OZ Minerals Limited - MD, CEO & Director [20]

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Okay, Michael. So I mean I think we set the initial guidance for Carrapateena, to commission the Carrapateena infrastructure in Q4 this year, which we believe we're sort of bang on effectively. We're right in the middle of that, in November. So I think we've sort of delivered what we've set out to deliver when we've started building this project. The underground has always been critical path right from the very beginning, and that's why we started the decline right upfront as early works and put that money at risk, with full knowledge that underground development and cave ramp-up is the critical part of this project. So -- and I think that is still the case.

And we haven't actually started the sublevel cave mine at Carrapateena yet. The ore we have on the surface is stockpiled development ore, not production mined ore. And that process doesn't start for a number of months yet. So we are still only stockpiling the development ore as we build out the sublevel extraction levels. I think the team are doing well. They're on schedule and they're doing it the way they said they would do it. So it's all looking positive, but I think, as Paul pointed out earlier, you don't want to be stopping and starting your mill frequently. You want to be minimizing that as best you can, so maximizing the runtime for a mill. So the schedule that the teams are working on still is there to maximize value. So that's their driver, to minimize recovery losses on startup and shutdown, as Paul alluded to earlier, to make sure we run this plant to get the maximum value out of the material that's built. And in the absence of any other guidance, what we've said is you should use a straight line between November and 18 months in terms of mine scale-up. And that will give you a stockpile build rate, if you like. What the team is still working on is how do they optimize the startup and shutdown of the plant to work out what periods they run up for, and that will be part of the guidance that we'll give you later in this year for next year.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [21]

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Yes. So I guess I'm still slightly confused that in your initial schedule, when you commenced development, was it your expectation that there would be some months lag between first caving ore and the mill being ready to take it. I mean were you expecting the lag that seems to be there that perhaps none of us were aware of before?

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Andrew Cole, OZ Minerals Limited - MD, CEO & Director [22]

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I don't think it is a delay, Michael. And as we've said, it starts from 0 and it ramps up to 4.25 million tonnes over 18 months. So the mill would never have been at full production to start with. It needs to ramp up through time. The ore is going to be produced as fast as we can produce it from underground, and that's the limiting factor. And the most important thing at Carrapateena is to manage the sublevel cave. So you will recall, early on, that we talked about managing that sublevel cave carefully to get it to surface, and that's the limiting factor. That's what will determine the schedule for the processing plant up- and down-time. So I don't think it's a delay, and I don't think it's different to what we've said from the very beginning. It's the plant will have to switch on and switch off as the underground produces.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [23]

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Yes. Okay. Secondly, a question about accounts, just to help me with the sort of gymnastics of it all. So the -- at the June quarter, you gave pretty clear guidance about ore inventory movements, how much was ore inventory drawdown, how much was capitalized depreciation, NRV adjustments and so on. How do we unravel that and see it in what you presented today?

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Warrick R. J. Ranson, OZ Minerals Limited - CFO [24]

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Well, Michael, maybe that's a question we can take offline in terms of working through with you, but I mean the information is certainly in the accounts in terms of the income statement and the various accompanying notes. As we said, one of the -- probably the changes that we've made is in relation to the depreciation around both AASB 16, which wasn't in the -- obviously wasn't in the quarterly because we've just really adopted that for the half year; and then obviously the hub strategy working back through our numbers in relation to the hub strategy in Brazil has altered of that, but we quite would be happy to take that offline and sort that through with you.

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Operator [25]

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(Operator Instructions) Your next question comes from the line of Lyndon Fagan from JPMorgan.

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Lyndon Fagan, JP Morgan Chase & Co, Research Division - Analyst [26]

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Look, the first question is just to try and clarify the studies expenditure comment on Page 7 of the slide pack. It's up by about $25 million. And I'm just trying to work out what the "yet to be approved" studies are or how that increased, if you wouldn't mind just going through that again, please.

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Warrick R. J. Ranson, OZ Minerals Limited - CFO [27]

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Yes. (inaudible) number...

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Andrew Cole, OZ Minerals Limited - MD, CEO & Director [28]

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(inaudible).

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Warrick R. J. Ranson, OZ Minerals Limited - CFO [29]

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Lyndon, Warrick here. [I know we don't] jump into the questions (inaudible). So Brazil is one of the major drivers. So obviously that wasn't there in the comparative period. So obviously the study work in both Pedra Branca; and Centro even though we pulled back a bit on that; and mine exploration around Antas; et cetera. So that's been one of the key drivers. I suppose the other key driver is really around our earn-in portfolio, in terms of that increasing and some of the money that we spent there in the various earn-in arrangements globally. So they're probably the 2 primary contributors on that one.

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Lyndon Fagan, JP Morgan Chase & Co, Research Division - Analyst [30]

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Okay. I guess while we're on Brazil, a couple of questions there. Firstly, is there any sort of impact from the Amazon fires on any OZ Minerals assets? And I guess, the follow-up to that, given where Antas costs are sitting relative to the copper price, does it actually makes sense to look at putting that on care and maintenance earlier than you've previously guided?

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Warrick R. J. Ranson, OZ Minerals Limited - CFO [31]

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Maybe I'll answer the second one -- well, I can answer both. So firstly, no, there's no impact in terms of the Amazon fires. The Amazon is a very large area, and our operations are nowhere near those fires. So no impact there. In terms of Antas, it's really important that and -- I think, that you look at Antas from the point of view of the time between now and the actual cessation of the open-pit mining. So there's -- and this -- and over that whole period, that certainly remains in a cash-positive position and therefore provides us with the confidence to keep operating there. Also, in this half and for some of the rest of the year, we've incurred -- we're incurring quite a large amount of waste removal costs out of the pit which are influencing those costs, but overall it certainly remains cash positive between now and the point of closure of the pit. And then obviously, with the hub strategy and the potential to align with ore coming out of Pedra Branca, it becomes -- it makes much more sense for us to keep that open, maintain the labor force, et cetera and logistics around that.

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Andrew Cole, OZ Minerals Limited - MD, CEO & Director [32]

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I'll just add to what Warrick said with Pedra Branca. The piece that you're missing, obviously, for the Carajás hub is the direction on Pedra Branca. Now we're working through that and we're bringing that to conclusion shortly, so we'll soon, hopefully, be able to bring you an update on what the Carajás strategy looks like, and the future of Pedra Branca. And that will complete the piece -- the puzzle for you.

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Warrick R. J. Ranson, OZ Minerals Limited - CFO [33]

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Yes. And I should have mentioned, Lyndon, that that's the -- that's fairly much the rest of the guidance, the difference between current guidance and the potential for the rest of the year.

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Lyndon Fagan, JP Morgan Chase & Co, Research Division - Analyst [34]

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And just one final one for me, just with the Prominent Hill expansion. Can you maybe talk about the haulage optionality? Like how much more could you get out? What are the scopes that you're assessing there?

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Andrew Cole, OZ Minerals Limited - MD, CEO & Director [35]

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Sure. So just the Prom Hill expansion, just for context: Our base case runs for about 3.7 million to 4 million tonnes per year from an underground mining operation until mine closure. And mine closure was currently 12 years out, but we expect that will increase as we drill more resource and convert the reserve through time. So as you know, we've got 10 million-plus tonne per annum plant sitting there at Prom Hill, so anything that we can do to increase the underground mining rate above 4 million tonnes per year is material for Prominent Hill. So that's the primary objective is to get underground mining operation above 4 million tonnes per year. Our current constraints at Prom Hill are effectively 2 things. One is the number of stoping fronts to extract ore from. And the second thing is trucking, so getting the ore out from underground to surface. They're the 2 constraints. So what the team is doing is working on 2 pieces. Firstly is to better understand the 80-plus million tonnes of resource, which is not in our mine plan, to get a better understanding of how confident we are in its grade and consistency. The second piece of work they're doing is looking at alternate all-haulage strategies, which include shaft haulage; and conveyor haulage, both vertical and inclined conveyor. And this year, we will finish the studies on ore haulage to understand what the capital and operating costs of those options are, and we'll have an initial view based on our current resource statement as to what that could look like for Prom Hill and whether it's viable. And next year, we'll be in a better position, after we've completed more drilling, to know whether that's something we want to invest in or not, later next year. In terms of what scale and scope it could be, I would say it's too early to tell. The ultimate aspiration is to keep the plant full. Whether that's achievable or not, we're still -- I don't know the answer to that. We're still working on it. So we're investigating all options between 4 million and 10 million tonnes per year to anchor on what the value-maximizing case is. So that's what we're working on, Lyndon. And I don't have an annual target run rate this year.

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Operator [36]

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And your next question today comes from the line of Daniel Morgan from UBS.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [37]

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Andrew and team, so with the one-way trucking at Prominent Hill and the guidance being maintained on the mining rates for Prominent Hill for the year, would that imply that you're exiting the year at the upper end of that, i.e., above 4 million tonnes? And I think you alluded to, earlier on the call, that you might be able to extend or go beyond 4 million tonnes versus the 3.7 million to 4 million which seems to be the base case.

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Andrew Cole, OZ Minerals Limited - MD, CEO & Director [38]

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Yes, Daniel, look, thanks for your question. I think the Prom Hill team is doing an excellent job. They had a fairly slow start to the year back over Christmas, January, when we had some manning and equipment issues, but I think they've recovered very well from that. And as you can see in one of the slides we put in the deck, that our Q2 underground performance is quite a bit better than the Q1 performance. So they've really managed to continually improve their performance in the underground mining operation. They do obviously have had a stronger second half than first half, to reach our guidance. So for now, I think a stated guidance range that we've given you is what we need to hold to. I would not expect them to get above 4 million tonnes per annum for the year, but we are also obviously expecting to have a better second half than our first half. So I'd like to stick to that guidance range. I think you should be using that in your calculations.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [39]

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Well, it was more a question about thinking about next year. If your mining rates exiting the year at close to 4 million or above 4 million, what does that mean for next year?

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Andrew Cole, OZ Minerals Limited - MD, CEO & Director [40]

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Yes, yes. Look, I wouldn't assume anything higher than that for now, Daniel. So this is not just about time and place. It's about the whole sequence over the whole mine life. And don't forget it's the design of the mine and the number of stopes you've got open to pull as well as trucking that is a limiting factor. So keeping up with development leaders and keeping development ahead as well is really important. So I wouldn't be assuming higher than 4 million on your base cases for Prominent Hill.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [41]

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Okay. And then a question for Carrapateena. I mean we've been talking about the plant itself doing batches in the initial phase. And I'm just wondering how this relates to the decision to declare the commercial production or not. How are you going to think about that decision on timing?

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Andrew Cole, OZ Minerals Limited - MD, CEO & Director [42]

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Do you want to talk about it, (inaudible)? So effectively, that's a time. It's a cut-off time based on the plant being -- producing a sellable concentrate. We've effectively used that date to stop capitalization of all costs at Carrapateena. Is there more to it that you want to add?

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Warrick R. J. Ranson, OZ Minerals Limited - CFO [43]

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No, not really. I mean we will start to produce sellable concentrate. As we've indicated before, we will parcel that up. And we'll have our first sale actually in Q1 of 2020, but yes, our milestone is based on that development of initial sellable concentrate. And that's really the November date in terms of our current estimates. So from then on, we will continue to parcel and generate sellable parcel from Q1, so...

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [44]

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So just to clarify. For the P&L, is Carrapateena -- when did that start contributing or detracting from earnings in the early stage? Is it going to add any P&L contribution this year? I would think not. It's probably a time next year.

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Warrick R. J. Ranson, OZ Minerals Limited - CFO [45]

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No, no. Correct, yes, remembering that the first production out of -- preproduction ore is -- will be allocated into -- ultimately will be allocated into capital. And that first -- and that sale of that preproduction ore will come off as a credit in the balance sheet. So it'll be the -- basically the second sale in terms of -- the commencement of that P&L impact.

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Operator [46]

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There are no further questions on the line today. I would now like to hand the conference back to Andrew for closing remarks.

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Andrew Cole, OZ Minerals Limited - MD, CEO & Director [47]

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Okay. Great. Thank you, operator. Thanks, everybody, for dialing in. As usual, if you've got any more questions, please give Tom Dixon a call. And we'll organize a time to, hopefully, answer them for you.

Thanks very much.

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Operator [48]

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Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect.