Macquarie suggests Equinox Minerals (EQN) offers the purest copper exposure on the Australian market, so given the broker has a positive view on the outlook for the price of the metal it is similarly positive on the outlook for the company and rates the stock as Outperform.
Its positive view has been reinforced by a site visit to the company's key Lumwana project in Zambia in Africa, where it suggests there is solid progress being made since the broker last visited the operations. Credit Suisse agrees, seeing the company as more advanced than it had expected with respect to addressing mine production constraints.
The work done by the company has seen production for the September quarter improve over the June quarter and largely meet market expectations, as preliminary numbers show copper in concentrate production of 28,100 tonnes for the period, up form 24,400 tonnes in the previous three months. Material movements were also higher at 29.9 million tonnes, up 44% from the June quarter.
But not eveything has improved, as Credit Suisse notes grades are and will remain below the feasibility plan, the broker expecting reserve grades will be restated down to reflect a lower dilution thanks to lower recoveries. GSJB Were also saw grades as a disappointment, noting the 0.92% copper grade achieved was below its estimate of 1.05% copper, meaning production for the quarter fell short of its estimate.
To reflect this the broker has lowered its full year production estimate, which flows through to a lower earnings forecast for the year. Looking forward the broker continues to expect solid production growth, estimating copper production of 108,000 tonnes this year, 158,000 tonnes in FY10 and 168,000 tonnes in FY11.
Based on this the broker's earnings per share (EPS) forecasts stand at US12.1c this year, US38.7c in FY10 and US54.5c in FY11, which compares to Macquarie at US3c, US56c and US72c respectively for FY09-FY11. Credit Suisse is forecasting EPS of a loss of US4.6c this year before positive results of US31.1c in FY10 and US59.5c in FY11.
Factored into Credit Suisse's numbers is an expectation of higher mining costs going forward, reflecting an increase in the strip ratio along with the need to operate a larger fleet at the operations. The broker points out management has not offered guidance on production and costs for 2010 as of yet as the mine plan has not been finalised.
While the wet season is likely to have an impact on production in coming months, Macquarie points out the company has done a significant amount of work preparing for this via moves such as creating diversion channels and increasing pumping capacity, while all main ramps and roads have been sheeted and surfaced to improve road conditions.
This should play a role in December quarter production being higher than that achieved in the September quarter, with Credit Suisse noting management regards it as possible the company will achieve mine design of five million tonnes during the period, an outcome that would support the positive production outlook in coming years.
Credit Suisse continues to rate the stock as Outperform post the site visit, with no change to its $3.60 price target. Valuation supports its positive view, the broker pointing out the shares are currently at a substantial discount to valuation, which in its model is $5.00 per share on a discounted cash flow basis or $6.00 per share based on current spot metal prices. The broker does point out its valuation includes a return to feasibility grades, something it now doesn't expect will happen.
GSJB Were is also positive and rates the stock as a Buy with a Target of $4.50, seeing the stock as inexpensive on all valuation metrics. The other big attraction is the company currently has a 37 year mine life at Lumwana that could well be extended further, so the current issues in ramping up production are not a major factor in this context in the broker's view.
Macquarie remains positive on the copper price outlook, forecasting a price of US$3.20 per pound in the Devember quarter, suggesting if this is achieved the share price should continues to perform strongly. As a result its Outperform rating is unchanged, with a price target of $4.26.
Overall the FNArena database shows a total of four Buy ratings, one Neutral, one Reduce and one Sell, with an average price target of $3.78. Shares in Equinox today are slightly higher and as at 11.15am the stock was up 1 at $3.32, which compares to a range over the past year of $0.95 to $3.69.
EQN Price at posting:
$3.33 Sentiment: Buy Disclosure: Held
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