The Company’s annual budget and related production and operations outcomes are subject to a range of assumptions and expectations all of which contain a level of uncertainty and therefore risk. The Company adopts a risk management framework in order to identify, analyse, treat and monitor the risks applicable to the Company. The risks are formally reported and discussed with the Company’s Executive Committee on a quarterly basis and with the Board twice a year. Risks are analysed and reported on using risk registers which are common to all areas of the business and are centrally consolidated.
Detailed below are risks areas that have been identified as at the date of the Directors Report which may affect the Company’s future operating and financial performance and the Company’s approach to managing them.
Business risks
Single operating asset
The Company currently has a single operating asset, the Prominent Hill mine in South Australia. The Prominent Hill operation currently provides the Company with the majority of its income. The operation consists of an open pit mine, underground mines, processing plant and village accommodation facilities. Concentrate is transported using road and rail to the Port of Adelaide and other Australian destinations. While development of the underground mines has mitigated previous sole dependence on the Open Pit, should any of these elements be subject to failure or disruption, the Company’s expected financial result may be significantly impacted.
Execution of the Company’s strategy
The Company has a stated strategy of seeking to identify and purchase value accretive copper assets in low risk jurisdictions. While the mine life at Prominent Hill has been recently extended, the Carrapateena exploration asset purchased, and the Company’s balance sheet is debt free, there is no guarantee that the Carrapateena exploration asset will be developed or that a value accretive transaction can be procured or implemented. OZ Minerals competes with other entities for deposits. The continuing expected long-term shortages in copper supplies results in significant competition for assets which meet
OZ Minerals’ strategic goals. OZ Minerals evaluates each opportunity with due care and relies on expert opinion, both internal and external, where necessary. The primary focus is that any potential transaction will be value accretive to the Company’s shareholders.
Operational risks
Increases in costs could result in diminished financial performance
The production and capital costs incurred by OZ Minerals are subject to a variety of factors including and not limited to: fluctuations in input costs determined by global markets, for example, fuel and other key consumables; changes in economic conditions which impact on margins required by contracting partners; and changes in mining assumptions such as ore grades and pit designs. Significant increases in these costs or movements in a combination of these elements could have a material adverse effect on the financial performance of the Company.
Reliance on contractors
Many aspects of the Prominent Hill operations and the Company’s exploration and development activities are conducted by contractors. The Company’s operational and financial results are impacted by the performance of these contractors, the input costs charged, and the associated risks relating to these contractors, many of which are outside the control of the Company.
Geotechnical failure within mining operations areas and adverse weather conditions
The Prominent Hill site operates both open pit and underground mining operations. Both operations remain subject to geotechnical uncertainty and adverse weather conditions which may manifest in a pit wall failure or rock falls, mine collapse, cave-ins or other failures to mine infrastructure and reduced productivity. The depth of the Open Pit will increase until mining ceases in 2018 and the commissioning of Malu Underground will result in increased underground mining activities. The Company continuously monitors open pit and underground geotechnical structures to ensure the safety of personal working in the affected areas and where possible activities are undertaken to reduce the risk of geotechnical failure. Geotechnical failures which impact on either current or future mining zones may result in diminished operational performance and may require significant investment to remediate the failed areas if they occur.
Estimates of reserves and resources
The assessment of reserves and resources involve areas of estimation and judgement. Although the reserve and resource estimates and mine plans have been carefully prepared by the Company and in some instances independently verified by independent mining experts or experienced mining operators, these amounts are only estimates and involve matters of judgment and no assurance can be given that any particular level of recovery of minerals from the reserves will in fact be realised or that an identified resource will ever qualify as a commercially mineable (or viable) deposit that can be economically exploited. The Company reviews and publishes its reserves and resources annually. The estimation of the Company’s reserves and resources involves analysis of drilling results, associated geological and geotechnical interpretations, operating cost and business assumptions and a reliance on commodity price and exchange rate assumptions. The Company’s production plan is
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underlying assumptions may impact on the future financial and operational performance of the Company, or the economic viability of the Malu Underground project.
Sales of copper concentrates
OZ Minerals' revenue is derived from the sale of copper concentrates and therefore any disruption to the production,
transportation, export, import or sale of the product will directly impact the revenue and hence the earnings of the Company. The marketability of the concentrates is dependent on mine supply, smelter demand and quality of the product. Prominent Hill concentrate has a high copper grade containing gold and silver credits and fluorine and uranium impurities. There is a range of controls in place at Prominent Hill to minimise the fluorine and uranium impurities to be as low as reasonably achievable. As mining at Prominent Hill progresses deeper in the pit and underground, the proportion of the uranium in the ore is expected to increase and there are various alternatives that are being considered to minimise this impact on potential concentrates sales including ore blending, concentrates blending , (where appropriate, with third party concentrates), and additional flotation treatment in the existing plant. Some of these measures have been successfully trialled and implemented as noted in this Report. Other metallurgical options are also being considered in a broader context, as noted in this Report.
There are regulatory limits for these impurities which vary across different jurisdictions. In some jurisdictions, there are limits tested by assay or physical measure of these and associated impurities, which without exemption can impedethe importation of the concentrate.
It is possible that regulators in various jurisdictions may change these limits, apply a more stringent approach to guidelines, impose additional requirements/measurements, or introduce requirements/measurements not previously applied.
These changes may result in additional requirements related to the ore, tailings or concentrates or result in difficulty in selling, transporting or importing Prominent Hill concentrates in various jurisdictions which would affect the Company's financial performance.
Financial risks
Significant reduction in realised prices for copper, gold or silver production
The prices received for the commodities which the Company sells (copper, gold and silver) are dictated by global commodity markets over which OZ Minerals has no influence. The Company takes no active steps to hedge or ‘take a view’ on commodity prices and as such changes in prices will have a direct impact on the Company’s financial performance.
Significant changes in the Australian/US dollar exchange rate
The Company’s functional currency is the Australian dollar which reflects the majority of its cost base. Revenues from concentrate sales are denominated in US dollars which are then converted to Australian dollars for reporting purposes. The Company also physically converts US dollars into Australian dollars to meet its cost obligations. The Company does not ‘take a view’ on the level of the Australian dollar or take active steps to hedge the currency. As such changes in the Australian dollar exchange rate will result in a fluctuation in value of Australian dollars upon conversion which will affect the Company’s financial position.
Sustainability and personnel
Injury or harm to people and property while performing work relating to OZ Minerals operations
OZ Minerals undertakes operations in areas which may pose a safety risk, including but not limited to areas such as handling explosives, underground operations subject to rock fall, confined spaces, areas where heavy and light vehicles interact, manual handling and operating at height. The occurrence of significant safety incidents could result in regulatory investigations or restrictions which may delay production and have a significant negative impact on the morale of the workforce.
Breach of environmental regulations
The Company operates under a range of environmental regulation and guidelines. The cost of this obligation is provided for in the Company’s accounts. Environmental regulations and occupational health and safety guidelines for certain products and by- products produced or to be produced are generally becoming more onerous. Increased environmental regulation of the Company’s products and activities or any changes to the environmental and occupational health and safety regulations could have an adverse effect on the Company’s financial condition and results of operations. The Company is required to close its operations and rehabilitate the land affected by the operation at the conclusion of mining and processing activities. Although estimates of these costs are reflected as provisions in the financial statements the actual closure costs may be higher than estimated.
Retention of skills and knowledge
The employees and contractors of the Company have skill sets and specific knowledge of the company's operations. The company views its personnel as a significant resource. The company identifies critical and high potential individuals. The company invests in its employees and contractors though ensuring that compensations measures reflect their individual skills and contribution to the company. The company invests in training to ensure that its employees and contractors are provided
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with the most up to date information in order to execute their roles. The loss of significant numbers of employees in a unplanned or external event could result in negative outcomes for the company.
Maintenance of community relations and good title
The Company works closely with local communities affected by mining or exploration activities, particularly the indigenous communities in South Australia. The Company has access and compensation agreements in place with those communities affected by mining activities and these arrangements are revised and updated from time to time.
The Prominent Hill mine is located within the ‘green zone’ of the Woomera Prohibited Area and the Company has entered into a Deed of Access with the Commonwealth of Australia that governs the terms of access. The Company has controls in place to ensure compliance with the Deed and relies on good relations with the Australian Defence Department regarding defence operations in the Woomera region and any potential impact that these operations may have on mining operations. The Company also relies on the maintenance of good title over the authorisations, permits and licences which allow it to operate. Loss of good title or access due to challenges instituted by issuers of authorisations, permits or licences, such as government authorities or land owners may result in disruptions to operations.