Equinox Minerals has hit a hurdle with its offtake partners over its Lumwana copper mine in Zambia as it puts its uranium project on the backburner and prepares for a court hearing over power supply.
Equinox Minerals has hit a hurdle with its offtake partners over its Lumwana copper mine in Zambia as it puts its uranium project on the backburner and prepares for a court hearing over power supply.
In an update to the market today, the copper miner said concentrate presented to Mopani Copper Mines, a company co-owned by Glencore International and First Quantum Minerals, has not been accepted to date.
Mopani claims the concentrate does not meet contract specifications, Equinox said.
"The Company maintains that the Lumwana concentrates are within the contract specifications and the shipments have been re-directed to international traders," Equinox said.
"The Company intends to pursue its rights under the contracts with Mopani and Glencore."
Equinox also has a long-term offtake contract with Chambishi Copper Smelter, with deliveries to start later this month.
Meantime, the company has decided to delay its uranium project on the back of current difficult international project financing environment and the lower uranium price.
The company planned to develop a treatment facility for the uranium ore stockpile that will come from the selective mining of high grade uranium zones within the Lumwana project.
"... the Company believes it prudent to defer the implementation of this uranium project until such conditions improve sufficiently to deliver appropriate shareholder value," Equinox said.
"In the interim, high grade uranium ore will be stockpiled at Lumwana in accordance with Zambian legislation and international best practice."
The spot price of uranium is currently at $US53 per pound, according to specialist Ux Consulting Company, down from some $US90/lb reached at the same time last year.
The company added it was in a dispute with Zambian power utility Zesco, which claims it is owed $US12 million over electricity charges it believes Equinox incurred since late 2007.
As a result of the dispute, Zesco has given notice that it will terminate power supply to Lumwana from January 26, however Equinox said it has applied for protective relief in the High Court of Zambia, with a hearing scheduled for next week.
Equinox added it has also given notice to the London Court of Arbitration to start proceedings in a bid to solve this matter.
At the end of December 2008, the Lumwana mine had processed 1.07 million tonnes of ore, producing 20,046 tonnes of copper concentrate with 12,156t of concentrate already delivered.
Equinox is currently ramping up production from 20 million tonnes per annum to 24mtpa, and forecasts production for the 2009 calendar year to reach 170,000t of copper metal in concentrates. Cash operating costs are around $US1.15 per pound.
Shares in Equinox dropped 50c or 21 per cent to $1.89 at 15:34 AEDT.
The announcement is below:
Equinox Minerals Limited (TSX and ASX symbol: "EQN") ("Equinox" or the "Company") is pleased to provide the following update for its flagship Lumwana Copper Mine ("Lumwana") in Zambia.
Project Completion
During construction the Lumwana Project achieved an excellent health and safety record, achieving over 5 million hours without a lost time injury and resulting in a lost time injury frequency rate of 0.3 (per 200,000 hours), which management believes to be an outstanding result. Subsequent to handover of the processing facilities late in November 2008, final preparatory works were completed prior to the commencement of plant wet commissioning early in December. Final project capital expenditure is estimated at US$814 million consistent with previous Company guidance.
December to Date Production
To the end of December 2008, Lumwana had processed 1,070,000 dry metric tonnes of ore producing 20,046 dry metric tonnes of concentrate at an average grade of approximately 40% copper, with nameplate capacity of 2,450 tonnes per hour (equal to 20 Mtpa) being achieved on a 12 hour continuous shift basis. Concentrate deliveries have commenced, with 12,156 tonnes of concentrate dispatched to various destinations on the Copperbelt. Concentrate grade and specifications are both in accordance with design expectations, testwork and all offtake agreements. Throughput rates are now being progressively increased to test processing plant capacity. Concentrate production continues to ramp up towards steady state commercial production.
Concentrate Deliveries
Concentrate deliveries to offtakers commenced on December 13, 2008. Long term contract deliveries will commence later this month to Chambishi Copper Smelter ("CCS"), with interim deliveries of concentrate going to international metal traders' facilities on the Zambian Copperbelt under short term contracts. Scheduled tonnages of concentrate presented to the Mufulira Smelter of Mopani Copper Mines Plc ("Mopani") (owned by Glencore/First Quantum Minerals), whilst in accordance with contract specifications, have not been accepted for delivery by Mopani and Glencore to date. Mopani and Glencore have claimed that the Lumwana concentrate does not meet contract specifications. The Company maintains that the Lumwana concentrates are within the contract specifications and the shipments have been re-directed to international traders. The Company intends to pursue its rights under the contracts with Mopani and Glencore.
With CCS as the primary offtaker, Equinox has offtake flexibility with a number of other local Zambian and international buyers whose facilities may be used for any additional concentrate production.
2009 Production Forecast
With production ramp up progressing smoothly, the Company estimates production for 2009 will total 170,000 tonnes (375 million pounds) of copper metal in concentrates at a cash (C1) operating cost of
US$1.15 per pound. As can be expected, unit production costs are anticipated to be higher in the early part of 2009 until steady state production activities are reached, which is expected by mid-2009. The Company's objective is then to reduce operating costs over time and increase throughput from 20 Mtpa to 24 Mtpa over an 18 month expansion program through optimization and de-bottlenecking. A further medium-term expansion objective to 30 Mtpa throughput will be the subject of a feasibility study.
Town Development
Housing development in the Lumwana town continues to grow with over 450 houses completed to date, of which 120 houses have already been allocated to local staff under a home ownership mortgage program. The commencement and establishment of schools as well as specific commercial and retail developments are expected to be operational this year, thus making the town a self-sustaining modern living environment. To support this unique development, a new debt facility of US$25 million has been established with Nederlandse Financierings-Maatshappij voor Ontwikkelingslanden N.V. ("FMO"), the Dutch development funding institution, to complete the funding of town construction by providing the infrastructure and services component required for the Lumwana town development. This debt facility is to be provided to the Lumwana Property Development Company ("LPDC"), a special purpose vehicle established to own and manage the Lumwana town. The loan has a term of 15 years with principal repayments commencing in 2012, and an applicable interest rate of LIBOR plus 6.5%. Drawdown on the FMO facility is subject to a number of Conditions Precedent that the Company expects to meet in Q1-09. The Conditions Precedent include the submission of a business plan and financial model, legal opinions and other conditions precedent customarily associated with finance arrangements. Consents from the Company's existing Lenders will be required prior to drawdown under this facility.
Lumwana Uranium Project
In April 2008 Equinox released the results of a feasibility study on the design of a treatment facility for the uranium ore stockpile that will result from the selective mining of the discrete, high grade uranium zones within the Lumwana copper orebodies. Subsequent to the release of this feasibility study the Government of the Republic of Zambia ("GRZ") has implemented its guidelines for uranium mining, processing and export that are consistent with International Atomic Energy Agency guidelines and the Nuclear Non-proliferation Treaty. The GRZ has recently approved the Lumwana Uranium Environmental Impact Assessment. However, due to current difficulty in international project financing as well as current market prices for uranium oxide, the Company believes it prudent to defer the implementation of this uranium project until such conditions improve sufficiently to deliver appropriate shareholder value. In the interim, high grade uranium ore will be stockpiled at Lumwana in accordance with Zambian legislation and international best practice.
Dispute with ZESCO
The Company is in dispute with Zesco, the Zambian power utility that is providing power to Lumwana, over electricity charges believed by Zesco to be incurred by the Company since late 2007. Zesco claims that charges of about US$12 million are owed by the Company, which the Company disputes. The Company has given Notice of Arbitration to the London Court of Arbitration to commence arbitration proceedings in an effort to resolve the matter. Zesco has given Notice of Termination of the parties' Power Supply Agreement which could take effect on January 26, 2009. To ensure continued electricity supply and allow the arbitration process to proceed, the Company has applied for Protective Relief in the High Court of Zambia to prevent the Notice of Termination from taking effect, with a hearing scheduled for January 14, 2009. The Company remains confident of a positive outcome with respect to both submissions, anticipating that continuity of supply will not be affected given contractual due process being allowed to take place.
Fiscal Policy
As the Company has highlighted in previous guidance, it remains confident that the material components of its Development Agreement with the GRZ will be honoured. The Company continues to work closely with GRZ to secure the relevant incentives to ensure the fundamental economics of Lumwana remain intact. To that extent, the Company has recently secured a Statutory Instrument for exemption of the concentrate export tax recently legislated by the GRZ for Lumwana concentrate production that may be exported. The Company has previously been granted Statutory Instruments for exemptions from import duty and for excise applicable to fuel and electricity consistent with the Lumwana Development Agreement, and continues to work with relevant Ministries in realizing the remaining incentives as they may be required. The recent international financial crisis has reinforced the Company's consultative approach with the Government as being in the best interests of its shareholders as well as the people of Zambia.
Insurance Claim
As a consequence of the transformer fire in July 2008, the Company has submitted claims under its material damage and delay in start-up insurance policies. The insurance syndicate has accepted indemnity for the incident and the claim process is well underway, with interim payments received and indicative receipts from the underwriters, subject to final confirmation, being in the vicinity of US$10 - 15 million.
Hedging
The Company has hedging in place, comprising Forwards and Deferred Premium Puts, for about 30% of its first 3 years of production. The Company's hedging book covering the period from January 2009 to March 2011 currently totals 124,585 tonnes of copper at an average price of US$2.65 per pound of copper (US$2.39 net of put option premiums). Note that the hedging contracts between October-December 2008 have been closed out/matured, realizing a net benefit of US$22.4 million for the Company. As an indication of the current value of the remaining hedge book as of January 5, 2009, the Mark-to-Market value, net of costs, at a copper price of US$1.45/lb is US$243 million.
