playing catch up: marengo v equinox

August 19, 2010

Playing Catch Up: Marengo v Equinox, A Copper Investment Study.

By Our Man in Oz / www.minesite.com

There is a new champagne bar called Elba in the Napoleon Street shopping strip of Perth's beachside suburb of Cottesloe. This is, for Minesite's Man in Oz, extremely good news, because it puts an up-market glass of bubbles within walking distance of home. London readers, especially those with an interest in mining stocks, might reasonably wonder why they need this information. The answer can be found in a print of a famous painting in the doorway. It shows the great frog himself, Napoleon Bonaparte, astride his famous horse, Marengo, charging into battle.

The man who donated the print to the bar, a print acquired many years ago during a visit to the Louvre in Paris, was Les Emery, chief executive of Marengo Mining, a copper explorer named after Napoleon's horse. Few visitors to Elba know the story behind the horse, or the print, and fewer understand why Marengo Mining is in danger of becoming the latest example of a successful Australian exploration company that got away.

"I suspect that were getting to be better known in Canada than we are in Australia," Les said from his Perth office. "There seems to be a greater understanding there of the value builds in exploration and mining stocks." Minesite has previously touched on the subject of Australian miners not getting full value on their home stock exchange, something that Les talked to us about too when he was last in London. What's different this time is that Minesite's Man in Oz suspects he has found a novel way to wrap a few numbers around the issue: by comparing the performance of two Australian copper companies which have broadly similar assets in the ground, but utterly different values, for reasons which should become less valid over time.

Marengo, the company, not the horse, is currently finalising a definitive feasibility study (DFS) on its big Yandera project in Papua New Guinea. The plan is to develop a mine producing 100,000 tonnes of copper a year, plus 1,500 tonnes of molybdenum, 60,000 ounces of gold and up to 400 tonnes of rhenium, a very rare element, sometimes referred to as pixie dust, which is used in super-alloys like those required in jet engines. The capital cost of the mine, processing facilities, and transport infrastructure will be around US$1.5 billion, and it will be another four years before first metal hits the market. The capital cost, and the incomplete DFS, are used by investment analysts to explain why Marengo is valued at around A$75 million.

Equinox Minerals was once in Marengo's shoes. It was a small copper explorer with its foot on a world-class orebody in the southern African country of Zambia, struggling for attention in its home market of Australia. It is impossible directly to compare Equinox's Lumwana project with Marengo's Yandera project because of location, ore-grade differences, and because Equinox has already built its flagship and is steaming ahead with production. On the current projections, Equinox is closing in on its annual production target of 172,000 tonnes of copper for the first six years, after which the output will settle down to 156,000 tonnes for the next 30 years. Marengo will produce less copper than Equinox, but has the promise of cash flow kickers from the moly, gold and pixie dust, though the really big difference between the two companies is that Equinox is valued on the ASX at A$3.6 billion.

There is one glaringly obvious reason why Equinox is 50 times bigger than Marengo - it's in production and generating strong cash flows. Time and capital will fix that problem for Marengo, which is why patient investors have taken early, low cost positions in Marengo. While most investors dream about landing a 10-bagger, one that delivers a tenfold return on the initial outlay, canny old foxes like George Soros are quite happy to wait four years for a 50 bagger. That's the basis on which he was a willing participant in Marengo's recently completed A$21.4 million capital raising, money which will be used to pay for ongoing exploration drilling and the DFS.

Drawing a comparison between Marengo and Equinox is not a completely invalid exercise if you allow for the time factor. It is also interesting to see Marengo going the way of Equinox and becoming less Australian, as international investors, especially North Americans, build positions in a company on track to become a major supplier of copper and moly in the Asia Pacific region from 2014 onwards.

Les said the DFS is currently limited to a 20 year project based on a structure known as the central porphyry, which contains around 500 million tonnes of the 700 million tonnes of ore already outlined at Yandera. But the latest round of drilling points to Yandera having potential for a major expansion after it starts production. The latest deep hole returned a stunning 980.7 metres - yes, almost a kilometre - of mineralised material assaying 0.38% of copper equivalent, with some zones assaying more than 1% copper equivalent.

For investors key events to watch for are exploration news and the results of the DFS. Ahead of those results, the conjecture has to be that the DFS is looking good, with copper above US$3.00 a pound, more than US$1.00 higher than when the study started. After that, will come the financing question, and Les is already keeping an eye out for a strategic partner interested in providing capital and assured marketing.

"We know the sort of partner we want," Les said. "We're not knocking on every door, and we're not interested in talking to tyre kickers. We're only dealing with groups that have a proven track record, and have a need for our products. We're not talking to any of the major mining groups. The last thing we want is for Yandera to become just another mine development option for a big miner. What I need is to do a deal with someone in need of copper concentrate over the next three to five years."

Les singles out the concentrate market as a real driver for interest in Yandera. "The concentrate market is tight, and getting tighter by the day. What's been happening is that projects are being snapped up by direct users of metal, leaving the smelters short of material. The smelters have been saying to me that they don't even get a chance to enter into off-take agreements, because someone else has moved first and done a project equity deal."

For investors with an eye for a stock which will pick up speed from next year, in much the same way Equinox did as it moved from exploration into development and then production, Marengo is an essential item on a watch list. And that's before one even considers George Soros's ability to pick 50 baggers.