Equinox Minerals Now On Verge Of Copper Production
By Our Man In Oz
Putting prices into perspective is not easy in a panicked market. That’s why it is sometimes worth taking a brief trip back in time to get a clearer view of the opportunities which lie ahead. Equinox Minerals is a useful starting point for a journey “back to the future”, and it starts with a double-digit number, 63. In 1999, when Equinox completed the studies which led to a decision to mine the Lumwana copper deposit in Zambia, US63 cents per pound was the price of copper. Today, in a horribly depressed market, copper is selling for around US$2.48/lb, close to half what is was at the peak of the boom, but still 3.9 times more than when the decision to proceed with the mine was made. Time and rising costs have pushed the numbers around a bit but the essence of the message remains the same. If Lumwana was seen as being profitable when copper was less than US$1/lb it remains very profitable now. Not many investors will have the courage to buy a slice of Equinox just yet, especially as the stock has plunged from a high last year of A$7.05 to recent sales at A$1.80. But, those prepared to take a peek over the lip of the bunker will discover a company which is about to make the grand transition from money going out to money coming in. “I’m hopeful of getting the first revenue by Christmas,” is the way Equinox chief executive, Craig Williams, described the all-important change to Minesite’s Man in Oz when he popped into Equinox’s Perth office for a chat earlier this week. “It won’t be a big cheque, but it will be a pretty significant event.”
It certainly will be a significant event. Lumwana is THE company-making project for Equinox, but the last three months have been far from easy. Not only has the copper price crashed, along with every other commodity, but the planned production start-up of the mine was delayed when fire severely damaged the electrical system at the mine, forcing Equinox to raise a precautionary US$80 million in additional debt to cover the messy period of sorting out insurance claims, and foregone revenue. Repairs to the electrical system are the absolute focus of the company and are nearing completion, which Williams described as resulting one of the stranger events in Africa. “It’s an unusual place to visit right now, because everything is in place, the project looks complete, but there isn’t the power to operate,” he said. “Normally when you visit a project like Lumwana it’s noisy and busy. Visit now and you can hear the birds singing. We were all set to go when the fire broke out, and now we have to wait.”
From December, fingers crossed, it will be the sound of mills turning and copper concentrate tumbling out at the other end, completing the first stage of what ranks as the world’s biggest new copper mine, and one with considerable potential to expand as well as adding a uranium production circuit. Talk of expansion is, in the current climate, off the agenda, Williams said. “Every effort is going into completing what’s been started and getting cash in the front door,” he said.
Before going through Equinox’s financials it’s worth looking at a few critical production numbers. Lumwana will process at least 20 million tonnes of ore a year, but with early mill trials already pointing to that figure being expanded to as high as 30 million tonnes. Out the other end will come an annual 172,000 tonnes (380 million pounds) of copper in concentrate for at least 37 years. The pits around the processing plant will be massive, and the equipment being used is of a type normally seen in a bulk mine such as a coal or iron ore pit, incorporating a clever mix of diesel and electric-assist trucks and shovels.
The tonnage numbers are impressive, but the more important aspect of the project can be found in the financials. It’s here that you discover that Lumwana remains on track to produce copper at between US80 cents and US$1/lb, which represents a profit margin of around US$1.50/lb. If you apply that to the annual output it leaves Equinox with an annual profit approaching US$570 million, and perhaps more if the metal market recovers next year. Obviously, it would have been so much better if copper had stuck at the US$4 level, but half-a-billion dollars in annual profit at a time when cash is the commodity in greatest demand around the world is not to be sneezed at. In time, that cash will fund a series of expansions at Lumwana, including treatment of the uranium ore mined as a by-product, expansion of the copper circuit, a possible downstream addition to produce copper metal rather than concentrate, and new mines within the region to feed ore into Lumwana.
“Copper can come back a fair way yet before we’re hurt,” Williams said. “The long term cash cost of the mine is around US80 cents a pound. It might turn out to be a bit higher, and we might finish up closer to US$1/lb, and it will be higher in the first year because of ramp-up issues, but not a lot higher.” Williams said that even if the copper price retreated as far as US$2/lb the project would remain highly profitable. “The latest CRU estimate is that the marginal world cost of copper is US$1.80/lb. But, even now there are going to be a lot of mines around the world not making money, and they will come off line.”
For Williams the near start-up of Lumwana represents the culmination of a nine year project, and while he declines to acknowledge this observation from Minesite’s Man in Oz the highlight was probably the recent raising of that additional US$80 million in debt. At a time when some banks are refusing to lend to other banks the fact that a copper mine developer was able to dip into the debt market is a remarkable act of confidence by Equinox’s bankers. “I hate to say it but in a terrible downdraft we have performed better than most,” he said.
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