A Glance At Equinox’s Lumwana Mine

Equinox Minerals (EQN-T, EQN-A) has secured a US$400-million corporate loan facility from four commercial banks to pay its outstanding debt for its large scale Lumwana copper mine in Zambia’s North West province.

The funding is expected to be finalized in March and has the potential to be increased by up to US$180 million if approved by the lenders, which include Standard Bank, Standard Chartered Bank, Industrial and Commercial Bank of China and BNP Paribas.

“Refinancing our existing project debt facilities with a corporate loan reflects our transition from a developer to an operator of a world-class mining asset,” said chief executive Craig Williams in a press release.

The Aussie junior took on some significant debt to build its 100%-owned prized asset in the rolling Zambian bush in 2006.

“There was nothing there in 2005, just green sprouts in the bush, but no development,” says Kevin van Niekerk, VP of investor relations, in a phone interview from Zambia.

To take the greenfield development into production, the company raised US$427 million in 2006 through financing and signed a US$583.8-million senior and subordinated debt facility, which included a US$45-million contingency. It also secured another US$80-million debt facility in September 2008 to cover additional working capital requirements as a result of a fire at its power station, which delayed the start-up by 18 weeks.

The company has invested a total of US$841 million in the mine, since it acquired the project in 1999 from Phelps Dodge, which is now part of Freeport-Mc-MoRan Copper & Gold (FCX-N).

Lumwana, situated 220 km west of Zambia’s legendary Copperbelt and 65 km away from First Quantum Minerals (FM-T, FQVLF-O)’s Kansanshi copper mine, is touted to be Africa’s largest open-pit mine.

Equinox’s mining licence for Lumwana covers 1,355 sq. km, and includes two deposits just 7 km apart– 11Malundwe and Chimiwungo.

Mulandwe has proven and probable reserves of 119 million tonnes grading 0.9% copper and 4 million inferred tonnes grading 0.8% copper.

Chimiwungo has proven and probable reserves of 200 million tonnes grading 0.6% copper and 413 million inferred tonnes grading 0.6%.

Combined, the two deposits boast proven and probable reserves of 319 million tonnes grading 0.7% copper, and inferred resources of 417 million tonnes grading 0.6% copper. Over its 37-year lifespan, Lumwana is expected to produce an average of 156,000 tonnes copper in concentrate per year, with a strip ratio of 4.2:1. Lumwana ore is predominately sulphide with oxides providing 5% of the feed to a conventional crush-grind flotation plant.

Lumwana produced 109,413 tonnes or 241 million lbs. of copper in concentrate during its first year of production in 2009. The original copper output forecast for 2009 was 170,000 tonnes, but was reduced to 110,000 tonnes due to the delayed start-up and wet season.

Although production increased by 23% for the fourth quarter ending on Dec. 31 compared to the third quarter, the company expects to face problems, while ramping up Lumwana.

But the company is not new to challenges. “It has created a brand new mine from zero. That is a very challenging thing to do,” says van Niekerk.

Equinox noted in a press release that it will continue to ramp up Lumwana until the second half of 2010, in hopes Lumwana will achieve a steady state where the mine and mill will operate at 20 million tonnes of throughput annually.

The company also stated that the wet season has reduced the total material movement in the last quarter of 2009 and it will continue to negatively impact production for the first quarter of 2010.

Van Niekerk explains that the company has to take into consideration the weather conditions in its financial model. He believes some people don’t seem to understand the nature of the business.

“People have the wrong perception about the seasonality of our business. They seem to think that ‘oh dear, there is some kind of impediment that just has occurred.’ No. What happens is that the rains occur in a pre-predictable, repeated matter every year, and folks seem to get their knickers in a twist about this issue.

“It is very frustrating for us as operators, for the market to be selling off at this supposed negative news . . . What we are telling people is that our financial model accounts for the lower utilization and lower production rates for the mining operation during those wet periods. During the dry periods the mine will operate at a higher utilization and at a higher capacity.”

The target production for 2010 is 135,000 tonnes copper in concentrate at cash cost of US$1.35 per lb. The average operating cost for the third quarter of 2009 was US$1.49 per pound copper. The final quarter’s operating costs and results for 2009 will be released in mid-March.

Will Lumwana be able to reach its 2010 target? It depends on how quickly Equinox can overcome the obstacles it listed in its Feb. 2 presentation. These challenges include increasing material movement by improving truck availability, productivity and use, as well as making use of the latent capacity of the mill by being more selective with ore mining, and preparing for the wet season.

The company put in place work programs in mid-2009 and its mining team is devising strategies to improve performance and mine productivity, says van Niekerk. “We believe the combination of the programs addressing those issues and the strategies will take us to achieving steady state operation in late 2010.”

When this state is reached, van Niekerk maintains the production from Lumwana combined with the copper production from First Quantum’s Kansanshi copper mine “should be over half of the total copper export for the nation of Zambia going forward.”

First Quantum is Equinox’s biggest shareholder with a 19.25% interest.

At presstime in Toronto, Equinox traded at $3.44 apiece. The company has 707.5 million shares outstanding.