Eurozinc gets the attention but falls

Eurozinc Mining (EZM-T) has been the most popular mining stock over the last week and it continued to draw heavy trading with the announcement of its first quarter earnings.

All that attention, however, wasn’t positive.

With production at its Neves-Corvo operation in Portugal being slightly lower than expectations, shares fell 9.7% or 31 to $2.90 with a whopping 25 million shares changing hands.

Still, the downward pull was mitigated by the continued gains in the price of copper and zinc.

David Davidson, an analyst with Paradigm Capital, says while some investors were likely taking profits on the share’s recent gains, others were taking the slight downswing as an opportunity to buy into the Vancouver-based company.

Net earnings of US$17.4 million or 3 per share were off from both the same period last year US$18.9 million or 4 a share and from the fourth quarter of 2005 US$27.8 million or 5 a share.

Mined copper fell to 491,000 tonnes for the quarter compared with 527,000 tonnes mined in the corresponding quarter for 2005. The company says the lower number was due to tough ground conditions in the bench stopes causing mining activities to be moved to other areas.

In addition the average copper head grade dipped to 4.2% — lower than the 4.7% average copper head grade for the same period in 2005. Eurozinc says the lower grade had to do with the nature of the orebody.

The company says lower head grades in the first and second quarters were anticipated, but forecasts increases for the third and fourth quarters. It plans to reach an average head grade for the year of 4.9% copper compared to 5.0% for 2005.

Even with the dip in head grade the company says it’s on track to produce slightly more than 195 million lbs. of copper it targeted for 2006. On conference call, chief executive and vice chairman Colin Benner, said the company was on track to produce “a little over” 200 million lbs.

Also on the upside, the company recently announced exploration drilling at Neves-Corvo encountered a large sulphide zone with an 18-metre thickness and a 175-metre strike that graded 10% copper over 16.6 metres and 8.5% copper over 7.5 metres.

As for the zinc in Eurozinc, zinc production is expected to start at its Neves-Corvo mine in the second quarter.

Additional zinc should come on line by mid-2007. That is when the company plans to have its Aljustrel mine, also in Portugal, in operation.

The mine is projected to have capital cost of US$88.3 million, operating cost of US$27.32 per tonne, and an annual average production of 176 million lbs. of zinc, 40 million lbs. of lead and 1.2 million oz. of silver, with a minimum mine life of 10 years.

From the conference call

With copper prices heading into new territory, the company’s hedge book was a hot topic during the question period of Eurozinc’s conference call on May 10.

Chief executive and vice chairman Colin Benner says while having 20% of copper sales hedged at $3.00 are lb. for 2006 will hurt the company if copper prices continue to rise, he welcomed the windfall of revenue that will be attached to the 80% that remains un-hedged.

Going into 2007 the company has roughly 9% of copper sales hedged. Benner says the hedging was kept to a minimum but was done to ensure that operating costs would be covered.

Why so much volume?

While Wendell Zerb, an analyst with Canaccord Adams, describes the massive trading of the company’s shares as being “outrageous,” he and other analysts agree that the shear number of shares outstanding are driving volume more than anything else.

Eurozinc has 546 million shares outstanding a figure that dwarfs rivals like Inmet Mining‘s (IMN-T) 48 million shares, Aur Resources (AUR-T) 96 million, and First Quantum Minerals‘ (FM-T) 62 million.

Zerb says share volume which has doubled in April compared with December of 2005 is partly tied to the surge in interest for companies leveraged to zinc and copper.

Another analyst explained the volume by simply saying of Eurozinc: “It’s big and it’s liquid.”

Paradigm’s Davidson says while liquidity on such a scale can raise dilution concerns, the issue has been largely done away with the gains in Eurozinc’s share price.

As recently as January — when the stock was trading in the one dollar range — large senior institutional investors from the United States weren’t buying. But the shares stronger price has attracted large scale players, and now Davidson says its liquidity works in its favour as funds can come in and out without causing much disruption to the market price.

Neither Davidson nor Zerb holds Eurozinc shares. Canaccord hasn’t had an investment banking relationship with the company in 12 months but it was not immediately evident if Paradigm has.