Perseverance pays for Equinox at Lumwana

SITE VISIT

Solwezi, Zambia — At Equinox Minerals’ (EQN-T, EQMIF-o) Lumwana copper project in northwestern Zambia, it’s all about scale and perseverance.

“This is an earth-moving operation, more than a mining operation,” says Harry Michael, Equinox’s vice-president of operations and chief operating officer.

The mill at Lumwana will process 20 million tonnes of ore a year for 37 years to produce 269 million lbs. copper annually, on average. That will make it the biggest copper mine in Africa, in terms of ore processed. The project’s workers will live, with their families, in a specially built on-site village with over 1,000 houses.

The project’s tenure covers 1,355 sq. km. During the current con- struction phase Equinox draws 350 semi-trailers a month into the country. There are more than 3,800 people at camp working under 13 different contractors; together, those workers have poured 40,000 cubic metres of concrete and used 2,000 tonnes of steel. To feed this labour force, the kitchen goes through 4,000 eggs per day and 9 tonnes of beef each week. And construction in the Zambian heat is thirsty work — the camp downs 30,000 beers every month.

Despite the challenges inherent in developing such a large project, construction at Lumwana is on schedule. Stripping at the first of two pits is complete, ore is being stockpiled, and the mill should get its first taste of feed in late June. It’s the final phase in a long road for Equinox and one that the junior travelled handily on its own, in spite of many doubters.

Lumwana was discovered in 1961 but had seen little serious work until Equinox arrived on scene in 1999. Instead of following the path beaten by many a junior that discovers a major deposit — selling out to a major — Equinox, under the leadership of president and CEO Craig Williams, decided to develop the project on its own. It wasn’t easy. When the company added a Toronto Stock Exchange listing to its Australian one in 2004 it had a $50-million market cap but needed to raise $500 million to develop the remote, low-grade project in a notoriously underdeveloped country.

Even when Equinox outlined a measured and indicated resource of some 13.8 billion lbs. copper and 21.8 million lbs. uranium oxide, no majors took interest. Then, in 2005, the company raised $29 million in an equity financing and Williams, foreseeing shortages, spent most of it on major mining and plant equipment, even though a production decision hadn’t been made.

His gambles paid off. Today Equinox has a market cap of nearly $3 billion and is one of the most heavily traded names on the TSX. By July, it should be a producer.

Getting into Zambia

Driving the 65 km from Solwezi along the Northwest Highway to Lumwana takes over an hour. The road is pitted with holes, crowds of people appear out of nowhere, and bicycles laden with huge bags make passing difficult.

The drive passes by a few markets and schools but along most of the route, development is limited to sustenance living. Groups of mud-and- thatch huts house extended families, each with a small garden. Bags of charcoal sit at the roadside, the result of a day’s work tending a fire and a small source of income for a poor family.

This is Zambia, one of the world’s poorest nations. Some 70% of the country’s 11 million citizens live below the poverty line. The per capita gross domestic product is US$650 and the infant mortality rate is 95 per 1,000 births.

The country may be poor but it is no stranger to mining — the Zambian Copperbelt was the mainstay of the country’s economy for years. Once a middle-income nation, Zambia began to slide into poverty when copper prices declined in the 1970s. A subsequent lack of investment combined with uncertaintyover privatization meant copper output fell for 30 years, to a low of 228,000 tonnes in 1998.

In the late 1990s, the massive, state-owned Zambian Consolidated Copper Mines (ZCCM) was divided up and sold to private investors. Privatization has certainly brought more money into Zambian mining — pits threatened with closure have stayed open, new mines have been developed, and production and profits have increased. However, many of privatization’s expected benefits have not materialized. Some 45% of mine workers now work on rolling contracts instead of having permanent, pensionable jobs. ZCCM had provided hospitals, schools, and housing, but private companies have not in general taken on those roles. And private companies were not forced to take over ZCCM’s pension payments. So while privatization increased mining profits, many argue it created a social crisis around the Copperbelt.

Equinox stepped into this Zambian mining picture in 1999 when it signed a joint-venture agreement with Phelps Dodge, now part of Freeport-McMoRan Copper & Gold (FCX-N). Equinox completed a feasibility study in 2003 to earn a 51% interest in Lumwana, then paid Phelps US$5 million for the remaining 49% in late 2004. Freeport retained a 1% net smelter interest that Equinox can purchase for US$12.8 million on the start of commercial production, something vice-president Kevin van Niekerk says his company plans to do.

The complex Zambian relationship with mining has played a significant part in the company’s development since day one. Niekerk points out that this project is the biggest single capital investment in Zambia’s independent history. And while the influx of money is certainly one key aspect of the project, its longevity is another.

“We are here for the long term and so we’re doing everything possible to ensure that Lumwana becomes more than just a mine,” Michael adds. “We want Lumwana to be a growth point in transforming the economy of this area of Zambia. This is a situation where mining can kick-start growth and bring a measure of prosperity to areas that otherwise would have little chance of escaping from poverty.”

Lumwana copper

Lumwana hosts two major copper deposits, Malundwe and Chimiwungo. Both are sulphide ore deposits: copper mineralization is hosted in high-grade metamorphosed, intensely mylonitized, recrystallized muscovite-phlogopite- quartz-kyanite schists with disseminated sulphides dominated by chalcopyrite at Chimiwungo and bornite at Malundwe. Both deposits are capped with a thin oxide layer. Since oxidized copper accounts for only 5% of Lumwana’s copper mineralization, Equinox does not plan at this point to process it.

Malundwe is the higher-grade of the two deposits, hosting 121.1 million tonnes of proven and probable reserves grading 0.89% copper. Chimiwungo is larger but lower grade, with 200.2 million tonnes of reserves grading 0.62% copper. The deposits are 7 km apart and Equinox plans tomine them sequentially, tapping into Malundwe’s higher-grade ore first.

“Chimiwungo is a breakeventype pit on its own,” Michael says. “But it works out here because we pay back the project with Malundwe and then have everything set for Chimiwungo.”

With a 5:1 strip ratio, in the early years, producing 20 million tonnes of ore from the Malundwe pit will require moving 120 million tonnes of material. Not surprisingly, in buying trucks and diggers to move that quantity of material, Equinox became Hitachi’s biggest customer outside of Asia. The company spent $170 million on twenty-six 240- tonne trucks and six loaders with 27-cubic-metre buckets and 4,000- tonne-per-our loading capacity, and got one of each for free.

And interestingly, most of Equinox’s mining machines are hybrids. The road out of each pit will be fitted with an electric track; the trucks latch on to get a boost climbing out. A loaded truck burns roughly 300 litres per hour without electric assist but Equinox expects to reduce that by as much as 30% with the technology, saving US$650 million in fuel costs. And four of the project’s seven loaders are electric.

The deposits are 7 km apart and Equinox decided to build the process plant right in betw
een. That necessitated a 3.5-km-long conveyor belt to bring ore from the Malundwe pit to the plant; a similar conveyor will have to be built for Chimiwungo. Ore is stockpiled near the plant in a pile capable of holding 300,000 tonnes.

The plant will process ore by conventional crushing, grinding, and flotation. The mill can eat 2,500 tonnes of ore per hour. A 38-ft.-diameter, 20-ft.-long semi-autogenous grind (SAG) mill drawing 18 megawatts — the largest in Africa — grinds rocks down to 400 microns; a 26-ft.-diameter, 40-ft.-long ball mill then works ore particles down to 280 microns.

Fourteen 160-cubic-metre rougher cells and four 50-cubic-metre cleaner cells give the plant comfortable flotation capacity. From there, the rougher is cleaned and re-cleaned to produce concentrate. Metallurgical test work indicates the process recovers more than 95% of the ore’s copper. Malundwe ore will produce a concentrate grading 43.3% copper; once Malundwe is tapped and mining moves over to Chimiwungo, the concentrate grade will drop to 29.5%. As such, annual production is expected to come in at 373 million lbs. for the first six years but will average out at 269 million lbs. over the 37-year mine life.

The tails are pumped to a thickener 56 metres in diameter. The massive mixer upgrades the tailings density from to 55% solids from 30%; a pump then sends the slurry out to the tailings dam.

To power the project, Equinox signed a 15-year power supply offtake agreement with ZESCO, the Zambian national power generating and distributing company. As part of the agreement, ZESCO built a 330- kilovolt power line extension to Lumwana from Solwezi, 65 km east.

Three 90-megawatt transformers provide more than enough capacity for the operation; in fact, any one alone could do the job. The project will draw 75-80 megawatts at full operations, split almost equally between the mill and the pit’s electric-assist track.

And where, one might ask, will all of the workers needed to run such a massive project live? In the town that Equinox is building. The Lumwana residential township, as the project is known, is 4.5 km away from the pit, near the lake created by the water storage dam. And it is truly an entire town under construction. On one street after the next, identical sprayed-concrete houses are going up every day.

Employees and their families designed the houses in which they will live–made from a modular design that makes it simple to add rooms on later. To start, each of the 850 junior employee houses is 50 sq. metres. Senior employee houses, which are set off to the side, separated by a stand of forest, are more variable: the 150 houses have two to four bedrooms and range in size from 70-120 sq. metres.

Lumwana employees have the option to sign 19-year mortgages that direct a portion of their salary towards paying off their houses. Equinox will match each mortgage payment. If an employee leaves early, he will get his house contributions back but will, of course, lose Equinox’s matching payments.

“We foresee a labour shortage in Zambia, especially within the mining sector,” Michael says. “By providing houses and an earn-in program we can lock in our employees.”

But Equinox doesn’t just want employees: it wants good employees. As such, the company has developed a subsidy program based on employee performance. Equinox will subsidize up to 30% of the cost of a house for excellent employees.

“As part of our Christmas party, employees brought their spouses to the site and we gave them a tour of the town,” Michael says. “Now the guys are complaining because their wives liked it so much they keep telling them to work harder!”

No one can own land in Zambia but Equinox has all of the Lumwana land on a 99-year lease from the national government. When an employee pays down his house, he also takes over the portion of the lease that covers his section of land.

Since houses don’t go up instantly, Equinox had to build some dormitory- style housing for workers during construction. But that won’t go to waste: the wall partitions in the dorms will come down and those rooms will become classrooms in the town’s school.

The cost for the town comes in at around US$70 million. While that may seem like a fair chunk of change, Michael points out that temporary housing for mine workers would have cost US$30-40 million, so Equinox thought it was a better plan to “spend a little more and get solid benefits, for us and for them.”

Financials and sales

To finance this massive undertaking, Equinox has raised US$427 million since early 2006, including a $211.3-million equity offering in early 2007. But that is not nearly enough for project construction.

The overall development cost at Lumwana is a whopping US$762 million. The fixed-price, fixed-term engineering, procurement and construction contract for the process plant accounts for US$407.6 million of that. The contract, which is with a joint venture of Ausenco International of Australia and Bateman Minerals and Metals of South Africa, protects Equinox from the cost creep affecting so many other developing projects.

So the company also arranged a US$583.8-million project finance loan, which comprises subordinate and senior project finance. A syndicate of European, African, and Australian-based commercial lenders, development finance institutions, and export credit agencies provided the loan, which included asset-backed finance for the mining fleet and capitalized interest.

The debt facility required Equinox to sign offtake agreements, which it did. The first offtake agreement is with Chambishi Copper Smelter, a joint venture between China Nonferrous Metal Mining Group and Yunnan Copper Industry Group created to build a new copper smelter at the Chambishi mine on the Zambian Copperbelt. Equinox signed on to provide the new smelter with 100,000 tonnes of copper in concentrates, which corresponds to some 230,000 tonnes of Lumwana concentrate. And even though the smelter won’t likely be commissioned until early 2009, Equinox’s agreement is a five-year “take-or-pay” contract that starts when Lumwana commissions. That means Lumwana concentrate deliveries will begin immediately, regardless of the state of the smelter.

Equinox also signed concentrate sale and purchase agreements with Swiss-based metals firm Glencore International and Mopani Copper Mines, a Zambian-based cobalt and copper producer controlled by Glencore. The two companies signed on for a total minimum contractual take-or-pay tonnage of 53,000 tonnes of copper in concentrate from Lumwana. Two-thirds of the concentrate will go to Mopani for toll treatment at its Mufulira smelter; the remainder will go to Glencore for trading. The agreements will charge Equinox copper treatment and refining charges to be determined annually based on global benchmark terms and give Glencore a first option to process additional annual quantities of Lumwana concentrates.

Combined, the offtake agreements account for all Lumwana production for the mine’s first five years.

The future

Equinox sees potential for growth at Lumwana. The company’s engineers believe that mill throughput could be increased by 20% to about 24 million tonnes per year, at limited additional capital cost. The company is also studying transport logistics at Lumwana, including a look at the potential for a concentrate pipeline to the Copperbelt. Transporting concentrate through the pipe as slurry would significantly reduce trucking costs and a feasibility study done two years ago on a pipeline estimated costs at around US$75 million.

In addition, Equinox decided against building a roast-leach-electrowinning (RLE) plant to process concentrate into copper cathode on-site in the first wave of project development. However, the company says it will still consider building an RLE facility on-site after year five, when the offtake agreements expire. Apart from reducing transport costs and giving Equinox independence from copper
smelters, an RLE plant would allow byproducts including gold, cobalt, and sulphuric acid to be recovered.

And don’t forget that Lumwana’s orebodies also host discrete zones of uranium mineralization. Equinox is in the midst of a feasibility study investigating on-site treatment of Lumwana’s uranium, the results of which are expected in the next few months. The company included an environmental impact assessment as part of the study.

Late last year, the drill program undertaken to support the feasibility study confirmed and further defined the discrete zones of high-grade uranium mineralization within the Malundwe orebody. Significant intercepts include 17 metres of 0.56% U3O8 in hole 62, 11 metres grading 0.75% U3O8 in hole 159, 6 metres of 1.41% U3O8 in hole 192, and 2 metres grading 2.56% U3O8 in hole 115.

Uranium mineralization at Malundwe is contained along the central portion of the orebody’s western flank, primarily within two discrete bodies. More specifically, uranium mineralization is associated with the hangingwall and footwall contacts of the Malundwe orebody, also extending into the footwall suite of rocks that are barren of copper.

According to a 2005 estimate, the two pits together host 9.5 million indicated tonnes grading 0.093% U3O8and 2.6million inferred tonnes grading 0.042; roughly two-thirds of the resource is within Malundwe. One of the key goals of the recent drill program was to upgrade the resource to measured and indicated status.

Provided the feasibility study comes back with a positive result, Equinox hopes to commission the uranium plant in the first half of 2010.

Equinox is currently trading at around $4.75. The company has a 52- week trading range of $2.18-6.20 and has 565.9 million shares issued.

First Quantum Minerals (FM-T, FQVLF-O) picked up 41.3 million shares last year to bring its stake in Equinox to 97.6 million shares, or 17.3% of the company.