Lumwana Offers Upside For Equinox

This story features EQUINOX RESOURCES LIMITED. For more info SHARE ANALYSIS: EQN

By Chris Shaw

Last week Equinox Minerals ((EQN)) announced a material resource upgrade at its Lumwana copper project in Zambia, with plans to increase resources further via an aggressive exploration program in 2011.

Equinox intends to utilise eight rigs and drill 110,000 metres over the course of the year, the objective being to bring the Chimiwungo East shoot and an extension of the Chimiwungo Main shoot into the resource and reserve category.

As Macquarie notes, the implication of this is the Lumwana mine looks capable of supporting a much larger scale operation than the current throughput rate of 24 million tonnes per annum. The target is now 45 million tonnes per annum, well up from a previous objective of 35 million tonnes.

To achieve this expansion, DJ Carmichael estimates Equinox will require additional capital of US$450-$550 million. The broker estimates payback will be achieved inside of two years as output will nearly double to 260,000 tonnes short-term, increasing to better than 300,000 tonnes a year from 2015. Mine life is estimates to be 27-37 years at the expanded rate of production.

To reflect the update, DJ Carmichael has lifted its valuation on Equinox to $7.10 from $4.85 previously. The change also reflects higher near-term copper prices and a lowering of the discount rate associated with the broker's model to 13% from 15%.

Macquarie has also lifted its valuation on Equinox on the news, the increase to $6.02 from $4.59 in Canadian dollar terms. Macquarie retains its Outperform rating on the stock, noting the revised production plan at Lumwana as well as the addition of the Jabal Sayid assets via the recent acquisition of Citadel Resource Group means total output could hit 315,000 tonnes from 2016. This would be an increase of 117% from current levels.

Earnings will be supported from the expansion to production, the FNArena database showing consensus earnings per share (EPS) estimates for Equinox of 40.2c for 2010 and 61.5c for 2011.

On the update from management DJ Carmichael rates Equinox as Accumulate, while noting if it assumed a lower discount rate to reflect lower sovereign risk assumptions its valuation on the stock would increase to $8.70. This would be enough to upgrade to a Buy rating.

The FNArena database shows a total of four Buys, two Holds and one Sell rating. UBS has the Sell rating on valuation grounds, which also underpins the Hold ratings of both Citi and Credit Suisse.

The consensus price target for Equinox according to the FNArena database is $6.34, which implies downside of about 5% from current levels. It is worth noting not all brokers have updated their price targets to reflect the resource update at Lumwana. 

Shares in Equinox have traded in a range over the past year between $3.40 and $6.79.

Click to view our Glossary of Financial Terms