I think Barry has summarised the situation very well. Full Article below for those too busy to read the paper.
"Exco Resources has something Xstrata wants"
FOR near on three years, there has been an expectation that "Big" Mick Davis at Xstrata will strike a deal with Exco Resources to keep its hungry concentrator plant at its Ernest Henry copper/gold mine in north-west Queensland fully fed.
The open-cut mine at Ernest Henry is on its last legs and the move to an underground operation means that it will be all too hard to keep the concentrator full - and by extension, Xstrata's Mount Isa smelter - without bringing in a new ore source around 2010-11.
That's where Exco fits in, with its fast-growing copper/gold resource at its E1 camp, eight kilometres from Ernest Henry.
Informal talks between the two continue but there is no deal yet. What can be said with some certainty is that if a deal is to be struck, it is closer now than it was three years ago when Exco (ASX: EXS) was a $20 million company and not the $100 million group it is today (37.5¢ a share on Friday).
In that three-year period, Exco has not been sitting on its hands waiting for Big Mick to call. It has been busy building a resource base that now stands at 400,000 tonnes of copper and 393,000 ounces of gold across a number of deposits in the broader Cloncurry region, with the E1 camp the biggest at more than 200,000 tonnes copper/200,000 ounces gold. Drilling continues and there is more to come, with Exco having a target to get to 500,000 tonnes of copper by the middle of next year.
More to the point is that Exco has been busy studying the feasibility of a stand-alone development that would cost $187 million and produce 20,000 tonnes of copper-in-concentrates and 14,000 ounces of gold annually.
It looks to be feasible all right, with a super quick payback of two or three years. But that ignores the even bigger returns that would come from having the stuff run through the Ernest Henry plant.
With its advanced work on the stand-alone option, Exco has established the yardstick for a deal with Xstrata. It will be about sharing the substantial benefits in doing away with the stand-alone concentrator option.
One way or the other, Exco is poised to get the sort of re-rating that comes when an explorer/developer becomes a producer, either through its own plant or someone else's.
The professional money has been backing home that idea. Robert Friedland's Ivanhoe and Robin Widdup's Lion Selection have been exercising options at 35¢ a share and now hold 19.6% and 10.8% of Exco respectively. Apart from helping build Exco's cash towards $20 million, it also means Exco doesn't have to worry about Xstrata making a low-ball takeover bid to secure control of the E1 camp.
EXS Price at posting:
0.0¢ Sentiment: Hold Disclosure: Held
