Equinox into production in Zambia

Vancouver – After several years of hard work, Equinox Minerals (EQN-T) is into production at its massive Lumwana copper mine in Zambia.

Equinox broke ground at Lumwana in early 2006 and has since spent $814 million at the site. The mine and associated power station, village, and water facility were supposed to be operational by mid-2008 but a fire at the power station delayed start-up by roughly half a year. Equinox persevered and in mid-November the Lumwana engineering contractor handed the project over to Equinox; commissioning and ramp-up are now underway.

In December the company hit the key milestone: Lumwana produced its first copper concentrate and the first commercial quantities were delivered to offtake customers. By the end of 2008 the mine had produced 20,046 tonnes of concentrate averaging 40% copper and the mill had achieved its nameplate processing capacity of 2,450 tonnes per hour for a sustained period.

And, like other base metal miners riding recent price upswings, Equinox is in the midst of raising funds. The company wants to bring in $160 million by selling 88.9 million shares at $1.80 a piece. An overallotment could add 13.3 million shares to the sale, potentially lifting gross proceeds to $184 million.

The company needs cash to cover its debt payment obligations, which it recently restructured. Its total debt stands at US$639.7 million. In 2009 Equinox has to repay US$138.4 million of that; under its old debt repayment structure it would have had to pay US$47 million more. Under the new agreement Equinox will repay its debt over five years, with the amount due declining each year.

But it should not have to use the financing cash for its debt payments. Cash flow from Lumwana is getting underway; the company plans to produce 170,000 tonnes of copper in concentrate in 2009 at a cash operating cost of US$1.15 per lb. In addition, the company hedge book currently carries a mark-to-market value of US$137 million (based on a Mar.26 copper price of US$1.78 per lb.). Equinox plans to close out that hedge book and use the proceeds on its debt, subject to financier approval.

The time certainly seems ripe for an equity raise, as analysts have of late written good things about the company. UBS Securities analyst Onno Rutten boosted his target price by 40¢ to $2.50, saying Equinox should be able to meet the new debt payments out of cash flow assuming copper prices average at least US$1.50 per lb. in 2009. And Raymond James analyst Tom Meyer reiterated a “strong buy” recommendation for the stock, targeting it at $4.

Lumwana was discovered in 1961 but saw little serious work until Equinox arrived on scene in 1999. Pursuant to an earn-in agreement with Phelps Dodge, now part of Freeport McMoRan Copper & Gold (FCX-N), Equinox earned a 51% interest in Lumwana in 2003 by completing a feasibility study and then paid Phelps US$5 million for the remaining 49%. Freeport retains a 1% net smelter return that Equinox can purchase for US$12.8 million, which is something the company plans to do with part of the proceeds from its current financing.

The Zambian copper mine is a project of scale. Lumwana, in northwest Zambia 65 km west of the town of Solwezi, is expected to produce 20 million tonnes of ore each year; the largest semi-autogenous grinding (SAG) mill in Africa will assist in turning that ore into 340 million lbs. copper annually. And it will do so for at least 37 years.

Mineralization at Lumwana is hosted in two pits 7 km apart. Malundwe is home to 121.1 million proven and probable tonnes grading 0.89% copper; Chimiwungo contains 200.2 million proven and probable tonnes averaging 0.62% copper. Inferred resources add 4.2 million tonnes grading 0.77% copper at Malundwe and 413 million tonnes grading 0.6% copper at Chimiwungo.

The deposits will be mined sequentially, starting with Malundwe. The processing facility is in between the two and ore will be carried from mine to mill via 3.5-km long conveyor belts. The property is also home to a 1,000-home town that Equinox built to house Lumwana workers, who will pay down 19-year mortgages through automatic paycheck deductions that Equinox will match. Outstanding employees are eligible for subsidies covering up to 30% of their mortgage.

Since 2006 the company has raised US$427 million through financings. But Equinox knew it would need to take on some significant debt to get Lumwana built and so in late 2006 it signed a US$583.8 million senior and subordinated debt facility, which included a US$45 million contingent funding credit facility for cost overruns or for corporate needs once the mine was built. The US$45 million remains untouched and available. And in October the company secured an additional US$80-million debt facility to cover additional working capital requirements stemming from the transformer fire and subsequent delayed start-up.

In order to get that development financing Equinox had to sign offtake agreements, a requirement that with time has proven highly beneficial. The company has one offtake agreement with Chambishi Copper Smelter, a joint venture between China Nonferrous Metal Mining and Yunnan Copper Industry formed in order to build a new copper smelter on the Zambian Copperbelt, that commits Equinox to deliver 100,000 tonnes of copper in concentrate per year for five years.

The other offtake agreement is with Swiss-based metals firm Glencore International and Mopani Copper Mines, a Zambian copper and cobalt produced controlled by Glencore. They signed on for 53,000 tonnes of copper from Lumwana each year, also for five years.

Combined, the two agreements account for all Lumwana production for the mine’s first five years. And the agreements have already paid off – the company recorded a net income of US$172.7 million for 2008, due mainly to derivative instrument fair gains of US$361 million as a result of the copper price dropping to US$1.38 per lb. at the end of the year.

Equinox is weighing several options to help get more out of Lumwana. First, engineers believe that with modest investment the process plant throughput could be boosted by 4 million tonnes a year to 24 million tonnes. Second, a study into improving transport logistics is investigating the potential to build a concentrate pipeline to the Copperbelt, which would considerably reduce trucking costs.

Third, exploration drilling has shown that the Kanga prospect is actually a southern extension of the Malundwe deposit, which extends the mineralized zone for 1 km beyond the current pit design. Equinox plans to continue drilling at Kanga to better delineate the added resource.

Fourth, the 2003 feasibility study for Lumwana included designs for a roast-leach-electrowinning (RLE) plant to process Lumwana concentrate into copper cathode on site. Equinox says it is still considering building a RLE plant once its five years of offtake agreement expire. An on site facility would enable recovery of by-product gold, cobalt, and sulphuric acid, while also significantly reducing transportation costs.

And finally Lumwana is also home to considerable uranium mineralization. A feasibility study found on-site treatment of the discrete, high grade uranium zones within the copper pit shell would be economic. The study suggested a US$200 million investment could build a plant to recover roughly 2 million lbs. U3O8 and 12,800 tonnes copper concentrate per year. Equinox initially decided to go ahead with the uranium plant, then delayed those plans in the face of a failing uranium price. In the interim high grade uranium ore will be stockpiled at Lumwana.

Investors were displeased with Equinox’s plans to issue another 89 to 102 million shares in its latest equity offering, likely because the company already has 597 million shares outstanding. On the Apr.7 news Equinox’s share price lost 33¢ to close at $1.84; over the next two days it regained 14¢ to sit just below $2. The company has a 52-week trading range of 76¢ to $5.15.

Equinox’s biggest shareholder is First Quantum Minerals (FM-T), which recently boosted its interest to 19.25% from 17.27%. The move prompted TD Newcrest analyst Greg Barnes to write, “We have long believed that a combination of Equinox and First Quantum could create a significant, African-based copper producer with annual production approaching 500,000 tonnes.” Barnes does not believe First Quantum is positioned to make a cash offer right now.


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