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Copper price hammers Oz Minerals

For shareholders in Oz Minerals (ASX: OZL) there has been no let up to the pressure on their company’s share price. After a bleak period for the mining sector, diversified miners such as Rio Tinto (ASX: RIO) and BHP Billiton (ASX: BHP) appear to be bouncing back a little, however the announcement of 1st quarter production figures has seen Oz’s stock price down around 8% after the release.

The major factor affecting production levels was a “slippage” that occurred in the south wall of the Prominent Hill mine. This slippage, in a section of overburden, has restricted access to the mine and created a headache for management, which must now spent up to $20 million removing the waste to restore full access to the site. It is expected to take until August to fix the situation. As a direct effect of this slippage, the quarterly release downgraded production guidance for copper from a previous range of 90,000 – 95,000 tonnes down to 82,000 – 88,000 tonnes. Gold production guidance was maintained at 130,000 – 150,000 ounces.

To add to Oz Minerals’ woes, the fall in the copper and gold coupled with a higher exchange rate, has forced management to raise its C1 cash cost guidance to US$165c – $180c/lb from a previous US$150c – 165c/lb. In comparison, the previous quarter C1 costs were even higher at US$185c/lb, while the average for 2012 C1 cash costs were much lower at US$120c/lb.

Oz Minerals is a somewhat complicated investment case given the short expected life of the current open pit Malu mine operation at Prominent Hill. The company is undertaking studies to determine how to best prolong the life of these assets through deeper extraction, including the potential to move from an open pit to underground operation.

As the chart below shows, the resource sector has been a tough place to be invested in the last 12 months, with most mining investors experiencing negative returns. At the same time the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has gained 13%.

chart1

 

Foolish takeaway

Resource prices have fallen but mining company values have in many cases fallen by much more. This is reasonable in many instances as some miners have high costs of production and are marginal producers. However it’s important not to taint all miners with the same brush. For the enterprising investor there are contrarian opportunities appearing in the mining space that are worth a look.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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