Lun 11 Oct 2010 18:03
With Lumwana Now Pumping Out Cash, Acquisitions...
October 07, 2010
With Lumwana Now Pumping Out Cash, Acquisitions Are The New Priority For Copper Producer Equinox Minerals
By Our Man in Oz
For the past 17 years the story of Equinox Minerals has been all about the development of a big copper mine in Zambia, at the centre of Africa’s rich copper belt. Today, the developing is done, and that prompts Minesite to a question that few analysts or investment bankers are yet asking: what’s next? Thanks to a chat with Equinox’s chief executive, Craig Williams, Minesite’s Man in Oz reckons he knows the three upcoming stages in the life of ASX and TSX-listed Equinox, with one of those stages likely to fall into surprising category. Expansion is the obvious next move at Equinox’s Lumwana mine, which is currently ramping up to a targeted 135,000 tonnes of copper a year, and which is already showing clear potential to get much bigger. Exploration is the second step, with drill crews already on the trail of a mirror-image orebody to the east of the main pit. The unheralded third step is an acquisition, with Craig now re-allocating much of his time to a deal, or deals, which will deliver geographic, but probably not commodity, diversity.
“We haven’t really had time over the past few years to look far beyond the job of bringing Lumwana into production”, Craig said. “We do now, and I’ve started the process of looking for our first substantial acquisition.” He knows he’s not alone in the hunt for choice copper assets, but Equinox has several advantages. First there’s the cash flow from Lumwana. Then there’s a project management team that’s proved itself more than capable, having successfully delivered to market one of the biggest copper mines to have been constructed in the past 20 years anywhere in the world. Finally, there’s a capital market that’s egging Equinox on to repeat what has been achieved over the past two years.
Institutional investors, especially those in North America, now love the Lumwana story – though that wasn’t the case in late 2008. Back then Equinox had a problem or two to contend with, including a fire in its electrical system which set back the project completion date. That, combined with the collapse of world trade in the wake of the Lehmann Brothers collapse lead to a decline in Equinox’s share price from a high of A$6.53 in early 2008 to a low of A$1.15. But since those dark days it has been one-way traffic for the shares, which last week came close to their 2008 highs as trades went through up at A$5.93, before the price then eased back to recent sales at A$5.62. At that price, this one-time struggling mine developer is valued at an eye-catching A$3.98 billion, and ranks as one of Australia’s top 10 miners.
September was especially kind to Equinox, as it was to a number of companies. The shares opened the month at A$4.99 and steamed due north, catching most its most ardent admirers in the broking firms off guard. After the release of Equinox’s first half results, analysts at CIBC World Markets, Cormack Securities, Macquarie Equities, and Goldman Sachs all set 12 month price targets of between A$5.75 and A$6.00, a level that was effectively reached within days. What the brokers liked were the solid production numbers: 74,300 tonnes of copper, including 44,000 tonnes in the second quarter at a cash cost of US$1.19 a pound, which was a major improvement on previous reporting periods.
Cash flow, expansion plans and exploration success are what’s currently driving the Equinox share price. US$204 million was generated in the first half of the 2010 calendar year, as Lumwana’s start-up capacity hit an annualised 20 million tonnes of ore a year. With de-bottlenecking underway the annual ore throughput rate will rise quickly to 24 million tonnes, and if the numbers are encouraging there will be a further expansion to 35 million tonnes. And even that could be just another stepping stone for Lumwana, which is currently estimated to contain 922 million tonnes of ore grading between 0.63% and 0.76% copper for a contained 13.8 billion pounds of copper. And those already impressive numbers do not include the excellent drill hits in the eastern extension area of the main Chimiwungo pit, which include 77 metres at 0.84% copper and 127 metres at 0.82% copper.
For followers of Equinox these are exciting times, and they might soon become more exciting, as Craig and his team plot the next corporate move for the company. “We’ve got a strategy of getting another operation somewhere in the world within the next few years”, Craig said. That is a precise statement of intent which Minesite’s Man in Oz has not heard from Equinox before, though it is very much in the logical move department, and it triggered a series of follow-up questions, such as “where?”, “precisely when?”, and “in what commodity?” Craig’s been around too long to be specific, but he did say that “another operation” meant just that, not another exploration project, or a green-fields development. “I mean another source of revenue, so that means we’re looking at things which are pretty advanced, or actually in operation”, he said, although he then added with a chuckle: “that’s our objective, whether we can achieve it could be another matter.”
If there are specifics on the Equinox shopping list it is commodity and risk profile. “We will seek to diversify in terms of geography, but we are very much a copper company”, Craig said. “In terms of pure copper plays we’re one of the world leaders, and that’s what the capital markets seem to like, and it’s the way we see ourselves.” Does that mean a continued focus on African copper? “Not necessarily”, Craig said. “My objective is that we look at an acquisition in a region which is of equal, or lower, sovereign risk than Zambia, to move our risk profile downward.” At that point Craig quietly slips into conversation another little bombshell: “at least, that’s how I see our first acquisition”.
Pardon? thinks Minesite’s Man in Oz. Here’s a company which has spent the past 17 years lifting heaven, earth, and a large part of Zambia, to develop a world-class copper mine. Within months of getting everything at the Lumwana to deliver on its promise, new chapters of expansion are being opened. For investors, that makes Equinox a fascinating company to follow, because it is delivering a combination of strong profits and exploration success, and is now charting an ambitious programme of corporate acquisition. One reason for this new-found mood of expansion is that the cash flow from Lumwana will make funding easy. Another is that while Equinox is running the rule over targets, there will undoubtedly be bigger players running the rule over Equinox. But such is the nature of success!
