Sydney, Aug 28, 2008 AEST (ABN Newswire) - Exco Resources Limited (ASX:EXS)(PINK:EXRSF) is an Australian listed company with copper assets in north-west Queensland and a small gold ore-body in South Australia. The main assets are the copper ore bodies in the Cloncurry region of Queensland, located just 8km from the large Ernest Henry copper-gold mine owned by Xstrata. A prefeasibility study has been completed indicating the viability of a two million tonne per year operation. The feed to the mill was scheduled from a number of or bodies, starting with the highest grade which is Monakoff.
The Bankable Feasibility Study (BFS) commenced in July 2008, and is due for completion in the first quarter of 2009. Given the success of the drilling program during the 2008 drilling season, we would anticipate that there will be an increase in ore resources and that the BFS will be conducted at 2.5 or 3Mtpa. There are also depth extensions to each of the three E1 ore bodies that have yet to be drilled plus a significant magnetic anomaly between the E1 North and E1 South ore bodies that is currently being drilled. It is significant that Exco has a target resource of 50Mt for 2009. In anticipation of this, we have run our model using 2.5mtpa. The ore body also contains significant quantities of magnetite and our modelling has also assumed that a Wet High Intensity Magnetic Separator will be installed in the original design and that 625,000t pa of magnetite will be produced and sold.
As a stand alone operation, commencing production in mid FY11, we have valued the project at A$313M, (A$1.17/share). However, there are numerous options available to EXCO as they seek to develop their copper project. Most importantly, the nearby Ernest Henry mill, with a capacity of between 10 and 11mt pa is running short of open pittable ore and we do not believe that the underground mine, currently under development will be able to keep the mill full. This begs one of several questions:
- Does Xstrata, the owner of Ernest Henry buy Exco or the Cloncurry Copper project as a source of ore for its mill? or
- Do they agree to toll mill the ore? or
- Do they buy the ore?
- Lastly, instead of building its own copper concentrator, does Exco offer to buy the Ernest Henry mine as a going concern?
The question goes far beyond keeping the Ernest Henry mill at full capacity. Its concentrate helps to keep the Mount Isa copper smelter at full capacity and hence the Townsville copper refinery. If these two operations are not kept at close to full capacity, then the profitability starts to drop.
There are also other opportunities available to Exco, revolving around the shortage of sulphuric acid in the region. Whilst we have not included these in our model, we do believe that they represent real growth potential for Exco once their copper mine is commissioned. Besides additional copper and gold production, such a strategy would enable the cobalt in the ore body to be recovered.
Longer term, the depth extensions to the E1 series of ore bodies give the potential for significant extension to mine life. The latest drilling at the E1 North ore body hint that the open pit could be considerably larger than previously envisaged with the potential for two depth extensions.
From the perspective of risks, the major concern at the moment is considered to be financing, given the current state of the financial markets. However, the bankable feasibility study is based on a relatively simple open cut mine followed by a straightforward copper concentrator. Location also favours Exco, with Cloncurry having a long mining history with water, electricity and other necessary services all readily located near-by. However, should a toll milling or ore sale agreement occur, then 6the finance risk would be mitigated since the overall costs would drop considerably.
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Fox Davies Capital are initiating coverage of Exco Resources Ltd, with a BUY recommendation. Our target price is A$1.03/share
Comment
- Exco is a Perth based pre-production mining company with assets in Queensland and South Australia.
- The major asset is the Cloncurry Copper Project, which is currently undergoing a bankable Feasibility Study.
- Current drilling is indicating that there could be significant extensions to the E1 North ore body on its eastern flanks.
- There is also potential to expand the metallurgical concepts and incorporate an acid plant which would yield additional copper and gold production but more importantly, it introduces cobalt to the equation.
Valuation
- Our DCF valuation for Exco is A$1.21/share, valuing the company at A$323.7M on a diluted basis.
Contact
Exco Resources Ltd +61 8 9211 2000
Michael Anderson (Managing Director)
Geoff Laing (GM: Corporate & Project Development)
Fox-Davies Capital +44 207 936 5200
Daniel Fox-Davies (Managing Director)
Peter Rose (Head of Mining Research)
Richard Hail (Head of Corporate Finance)
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