EuroZinc Mining draws market attention

EuroZinc Mining (EZM-T, EZM-X) has been a popular mining stock lately and it continued to draw heavy trading with the announcement of its first-quarter earnings.

Not all of that attention, however, was positive.

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

Still, the downward pull was mitigated by 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 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 ore 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%, down from 4.7% 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 were anticipated in the first and second quarters, but forecasts increased for the third and fourth quarters. It plans to reach an average head grade of 4.9% copper for the year, compared with 5% in 2005.

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

Also on the upside, EuroZinc’s recently announced exploration drilling at Neves-Corvo encountered a large, 18-metre thick sulphide zone with a 175-metre strike. Drilling intercepted a 16.6-metre interval of 10% copper and a 7.5-metre section grading 8.5% copper.

Zinc production is expected to start at the company’s Neves-Corvo mine during the second quarter of 2006.

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

Capital costs at the mine are projected at US$88.3 million, with operating costs of US$27.32 per tonne, and annual average production of 176 million lbs. zinc, 40 million lbs. lead and 1.2 million oz. silver, and a minimum mine life of 10 years.

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.

While Benner conceded that rising copper prices could hurt the company since 20% of its sales for 2006 are hedged at $3 per lb., he welcomed the windfall revenue that would be attached to the remaining 80%.

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

‘Outrageous’ volume

While Wendell Zerb, an analyst with Canaccord Adams, describes the massive trading of the company’s shares as “outrageous,” he and other analysts agree that the volume is being driven primarily by the sheer number of outstanding shares.

EuroZinc has 546 million shares outstanding — a figure that dwarfs its rivals. Inmet Mining (IMN-T, IEMMF-O) has 48 million shares outstanding, Aur Resources (AUR-T, AURRF-O) 96 million, and First Quantum Minerals (FM-T, FQVLF-O) 62 million.

Zerb says EuroZinc’s share volume — which, in April, was double that of December 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 diminished with the gains in EuroZinc’s share price.

As recently as January — when the stock was trading in the $1 range — large senior institutional investors from the United States weren’t buying. But the stronger price of the company’s shares 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.