Equinox generates good cash flow but struggles with rising costs

With Equinox Minerals‘ (EQN-T, EQN-A) bold bid for Lundin Mining (LUN-T) — to be financed by a $3.2 billion bridge loan — top of mind, the release of its year-end financial results attracted a little more attention than usual.    

An increase in copper sales and higher prices coupled with lower C1 operating costs helped Equinox generate an operating profit of US$529 million in 2010, 170% higher than the US$196 million it posted in 2009, while after-tax profit reached US$269 million compared with an after-tax loss of US$183 million a year earlier.

Earnings-per-share for the year reached $0.38 compared to a loss-per-share in 2009 of $0.27. And the company ended the year with US$320 million in cash, up 193% from the US$109 million it held at the end of 2009, due to positive operating cash flow propelled by strong operating profit at its Lumwana mine in Zambia, which started commercial production in April 2009.

Long-term debt repayments of $370 million were made during the year ended Dec.31, 2010, which cut Equinox’s total long-term debt balance to $399 million. The repayment of $370 million was funded by the drawdown of a $400 million corporate loan facility and the remaining amount through cash reserves. The debt repayment included $19 million of break fees and $14 million loan origination fees associated with the refinancing of the Lumwana senior and subordinated project debt facilities, which closed in March 2010.

Copper production increased to 146,690 tonnes in 2010, an increase of 34% compared to 109,413 tonnes in 2009, surpassing its annual guidance. C1 operating costs reached $1.38 per lb. copper for 2010, a decrease of 7% compared to $1.49 in 2009. Equinox reports that the cost improvements were largely driven by better mining efficiencies and higher throughput, despite falling head grades. (C1 operating costs in the fourth quarter however rose to US$1.64 due to falling head grades, rising diesel costs, undercarriage rebuilds and more tire usage at the start of the wet season.)

The company is focused on operating its 100%-owned Lumwana copper mine,  220 km northwest of the Zambian Copperbelt, and building its Jabal Sayid copper-gold project in Saudi Arabia.

The mine ramped up to the full production rate during the year and the plant processed 18.6 million tonnes of copper ore after running at the design rate of 20 million tonnes per year for the second half of the year. Copper recoveries were 91% and fluctuated throughout the year in line with the amount of transitional ore being treated.

A plant debottlenecking and optimization program has started and is expected to boost throughput to 25 million tonnes per year by the end of 2011. Equinox is targeting production this year at Lumwana to reach 145,000 tonnes of copper in concentrate at a  C1 operating cost of $1.45 per pound.  

During the second quarter of last year Equinox began a two-phased feasibility study to look at expanding Lumwana to 35 million tonnes per year by 2014. The Lumwana Expansion study was subsequently modified to include an expansion to a plant capacity of 45 million tonnes per year.

Meanwhile, at Jabal Sayid, 350 km northeast of the Red Sea port city of Jeddah, the commercial capital of Saudi Arabia, and 120 km southeast of Medina, Equinox has entered the construction phase with commissioning expected in the first half of 2012.

Equinox recently acquired the Jabal Sayid copper gold project in its acquisition of Citadel Resource group, a base metals and gold company with a portfolio of development and exploration assets in Saudi Arabia.

The company currently holds a 70% stake in the Jabal Sayid assets and is in the process of completing a transaction under which it would acquire the remaining 30% ownership from its local Saudi Arabian partners. 

The total project cost estimate is about US$315 million.

The fair value of the Citadel assets includes $1.39 billion, net of tax, for the Jabal Sayid copper project and $66 million for exploration and evaluation assets in Saudi Arabia, including the Jabal Shayban and Jabal Baydan gold and base metal projects, the Lahuf gold project, and the Bari Porphyry gold-copper project.

At presstime in Toronto Equinox was trading at $5.20 per share and over the last 52 weeks has traded in a range of $3.07 per share (May 20 2010) and $6.94 per share (Feb. 16 2011). The company has 877 million shares outstanding.