EQN
anybody got any thoughts on why equinox hasnt /isnt being rerated?
cashburn, sovereign risk, ignorance?
It’s All Smiles At Equinox As Copper Production At Lumwana Gets Into Its Stride, And The Uranium Stockpile Grows Ever Larger
By Our Man in Oz
In the black, on the podium, and stacking cash. Take your pick of that trifecta and you’ll understand why Equinox Minerals chief executive, Craig Williams, had a broad grin on his dial when Minesite’s Man in Oz caught up with him for a quick chat at the Diggers & Dealers forum in Kalgoorlie last week. “We’re certainly starting to make good progress”, was his cautious response to the standard questions of performance and outlook. When pressed for detail Craig begged off, citing the imminent filing of the June quarter report, which made it to the stock exchange on Friday. The wait was worthwhile, as Equinox reported a maiden profit, and rising copper production at its big Lumwana mine in Zambia. But, somewhat curiously, that was not the main reason for Craig’s big smile.
"I’ve waited 13 years for a chance to make a presentation at Diggers, and now I’ve got it”, he said. Why it took so long for one of Australia’s more successful explorer/miners to win a podium spot is one of the mining world’s more interesting stories, and it has more to do with the way the event is tightly-controlled by a group of Kalgoorlie “mates” than with the delivery of any deliberate snub. “I guess my problem is I didn’t go to Kalgoorlie primary school”, was Craig’s one-liner, delivered with a laugh. Another issue that companies have to overcome is that Diggers is a “gold heavy” event with a preference for anyone operating within 100 kilometres of Kalgoorlie. That’s a problem for an African copper miner, which also has a growing pile of stockpiled uranium ore.
History aside, the point is that Equinox got its moment of glory in Kalgoorlie, albeit that it was a few days before the formal lodging of a stock exchange report, making it a somewhat cautious presentation. Much more information came in the quarterly. This contained both positive and negative detail. On the positive side, Lumwana generated a maiden operating profit of US$36 million in the three months to 30th June. After financing and other costs this melted away to leave an accounting loss of US$38.7 million. But, that loss, and a slow ramp-up in mining operations, could not diminish the joyous fact that around 10 years after Lumwana emerged as a potential mine development it is in now production, posting operating profits, and getting set for at least 37 years of productive life.
In what is the project’s first “normal” quarter after a protracted completion phase, which came complete with a delayed start-up courtesy of fire and flood, Equinox reported the mining of three million tonnes of ore for the production of 62,603 tonnes of copper concentrate. That equates to 24,413 tonnes of copper metal, or 53.8 million pounds, produced at a cash cost of US$1.44 per pound. Problems in the pit rather than in the processing plant dogged operations in the latest quarter even though mine fleet availability rose from 71 per cent to 89 per cent. “This availability needs to further improve and be maintained to meet production targets”, Craig noted in his management discussion.
Analysts also singled out the mine fleet for careful comment, with Goldman Sachs telling clients that the market “remains concerned at the rate at which Lumwana will ramp-up to full scale”. Despite this remark Goldman remains a staunch supporter of Equinox, maintaining a “buy” recommendation on the company, and putting a 12 month price target of A$4.25 on the shares, which are currently trading at around A$3.06. The profit forecast from the broker is that Equinox will report a full year loss for calendar 2009 of A$57.1 million, but that that will rocket up to a profit next year of A$196 million, and effectively double again in 2011 to A$358.8 million. That best guess puts Equinox on a 2011 price to earnings ratio of just 4.8, an interestingly low number, given the long-term nature of the Lumwana mine.
It’s the scale of Lumwana which sometimes seems to be lost on armchair critics who look only at the speed at which the mine is achieving its potential. This is not a small mine. It is one of the world’s biggest, and it has decades of production ahead, not to mention additional exploration potential both for copper and uranium. For newcomers to the Equinox story, Lumwana is an orebody containing copper-rich and uranium-rich structures. The copper material is the first to be processed because there’s much more of it. The plan is for Lumwana to achieve annual copper production of 170,000 tonnes, or 375 million pounds, at a long-term cost of US$1.15 per pound. The uranium-rich ore is being stockpiled because it would contaminate the copper circuit. A decision on a uranium processing circuit will be made once the copper operations are bedded down.
Over the past year the uranium stockpile has been a “sleeper” on the Equinox books which has interested everyone who looks closely at the company. In fact, technically it is more than a sleeper - it is actually being treated as waste from an accounting perspective. But, this “waste” material is starting to become extremely interesting, hence the reference in the opening lines of this report to Equinox “stacking cash”. At 30th June the stockpile of uranium-rich ore stood at 345,000 tonnes of material grading 800 parts per million uranium, and 0.7% copper. Putting a value on that is not easy, but for argument’s sake assume there is currently about 300 tonnes of uranium, or about 600,000 pounds (using the US measuring system of 2,000 pounds to the ton) which, at the current spot market price of US$48.5 per pound is about US$29 million worth of uranium. There’s also an additional 3,000 tonnes of copper, which adds up to another US$15 million.
Goldman Sachs is starting to echo the view of Minesite’s Man in Oz that the Equinox uranium stockpile is becoming a little hard to ignore, especially as it appears to be growing at a rapid rate. The broker noted that the mine will have stockpiled three million tonnes of copper/uranium ore by the end of the calendar year, all awaiting treatment in a new uranium plant. “This is an acceleration from the mine plan which envisaged 1.7 million tonnes by the end of 2009,” Goldman said. This is making the stockpile almost as interesting to watch as the Lumwana mine itself, as Equinox gets its mine fleet up to speed, and shakes off the last of the commissioning and ramp-up issues which have distracted management and investors.