Cloncurry sale launches ‘new’ Exco Resources
Exco Resources managing director Michael Anderson is a man who is very rarely lost for words. Now the sale of one of the company’s major assets has given him plenty more to say.
Exco recently announced it had entered into an agreement to sell the Cloncurry copper project to Xstrata Copper for the tidy sum of $175 million.
The proposed transaction is subject to a number of conditions, including gaining the approval of Exco shareholders, Xstrata receiving FIRB and all necessary Queensland government approvals.
Unsurprisingly, directors of Exco unanimously recommended that its shareholders approve the proposal.
The transaction has the potential to totally transform Exco from a bit player in the northwest region of Queensland to a featured headliner actively seeking out potential merger and acquisition targets.
“Anybody who has spent any time following the Exco story would have known just how much time and effort we have put in getting to this point,” Anderson told the Inside Story.
“It is certainly quite gratifying to be on the brink of delivering such a decent outcome for the company and its shareholders.
“However what is important after the deal is completed is what ‘new’ Exco looks like.”
Following approval of the transaction Exco will boast a bank account of approximately $220 million in Cash.
This figure is based on proceeds from the sale, existing cash reserves and forecast cash flow from White Dam.
“There is a fantastic opportunity, post this deal, to not only reward our patient shareholders, who backed us to deliver this outcome, but the company will be transformed into a very well-funded vehicle with at least two key areas for growth,” Anderson said.
“We are retaining a sizeable package of exploration ground in Queensland. We are, of course, retaining everything we have at White Dam and we will be extremely well funded to go forward with exploration and development activities within that organic portfolio.
“Perhaps for the first time we are also going to be extremely well-funded to look at acquisitions.”
Exco will also have an impressive portfolio of projects including the Hazel Creek project, where it aims to carry out a major exploration program at new discoveries made last year.
At Hazel Creek results have shown the existence of large areas of copper-gold-magnetite mineralisation with potential to define large tonnage, open-pit style deposits.
“Within the portfolio right now there is no question that Hazel Creek, which is our exploration package to the north of Cloncurry, is finally going to get what it deserves, and that is a serious, aggressive, proactive exploration program,” Anderson continued.
“Over the years we have done enough ground work, drilling and exploration, geophysics and the like, to know that the geology and the prospectivity up there is exactly the same as it was at Cloncurry when we first started there.
“It’s just that it doesn’t sit on the doorstep of Ernest Henry.
“But the rocks are the same; and the geology, the mineralogy, the metallurgy is likely to be the same.”
Exco’s White Dam gold joint venture with Polymetals Mining (Exco 75%) in South Australia delivered its first gold pour in April this year.
The project has already repaid financing having recouped its capital cost in less than 10 months and has generated net pre-tax operating cash flow to Exco of $38 million to the end of March 2011.
The project is expected to produce a further 40 thousand ounces (Exco share 30koz) from the remainder of the current reserve with good potential for additional resource extensions.
Exco and Polymetals have access to over 700 square kilometres of granted exploration tenements surrounding White Dam.
“We are very confident that we can replicate the success of White Dam and Cloncurry both from within the portfolio and also by taking a good look at what else is out there,” Anderson said.
“Really it is a pretty simple message. We are realising value now for Cloncurry in a way which I say, wouldn’t come as a surprise to many people, and setting ourselves up to move forward to repeat that success from within the portfolio and by looking internationally as well.
“So it is a very exciting time for Exco. I think the last 12-18 months at White Dam, we have had a spectacular time there. Three years ago we looked at selling that project and couldn’t get anybody to pay $10 million.
“We just made $24 million in a quarter and our calculations are that this price for Cloncurry, at $175 million, represents something in the order of a seven to eight times return on equity.
“Those are two pretty decent outcomes.”
Another string to the ‘new’ Exco bow is the Great Australia Royalty: A royalty over the sulphide ores under the Great Australia Mining Lease in Cloncurry, which is being mined by CopperChem.
Based on prevailing LME copper prices of around US$4.20 per pound and the current estimated 1.7 million tonnes of ore, it is expected that the royalty can generate gross cash to Exco of around A$30 million over the next 4 years.
“The Great Australia Royalty is another aspect to the organic portfolio, which has only just come to people’s attention,” Anderson said.
“The linkage there is quite significant in that they’re 50% owned by WH Soul Pattinson, who are now one of our major shareholders.
“We have had an alliance with CopperChem for many years and that too now shapes to bear some fruit.”
To complement all of this Exco also holds a further tenement package of approximately 2,400km2 in the Cloncurry region, which it says is highly prospective for further copper discoveries.
A good chunk of the sale price for Cloncurry will most probably find its way to funding proactive and targeted exploration / resource development programs across a range of established prospects including the Pumpkin Gully Projects.
Exco is confident it can replicate the success of Cloncurry in identifying a new portfolio of resources.
The focus will be on developing further high grade resources, at key targets including Salebury, Fisher Creek and Tanbah.
“None of these are in resource yet but we are very focused on converting, even modest tonnages to resource reserve quickly, because – a bit like White Dam where our exploration now is just focused on incremental ounces – any tonnage from that area, sitting just 15 -20 km away from Great Australia can be converted to resource reserve and trucked down to that mill very quickly,” Anderson explained.
“So it doesn’t have to justify its own stand-alone facilities.”
The relationship with Xstrata sets a tremendous precedent for Exco and there can be little doubt the major would be interested in maintaining a dialogue with the junior regarding other potential sources of feed for Ernest Henry.
“But we also have another home for potential tonnage and that is with CopperChem at Great Australia and then we have the greenfield stand-alone potential of projects like Hazel Creek,” Anderson said.
“And that’s before you start talking about things up there that we might like to acquire. Because that is certainly on the front of our minds
“Northwest Queensland is a highly prospective belt and it is long overdue that some of these resources and reserves were unlocked and value created from them.”
Exco Resources Limited (EXS)
…The Short Story
HEAD OFFICE
Level 2, 8 Colin Street
West Perth WA 6005
Phone: +61 8 9211 2000
Fax: +61 8 9211 2001
Email: info@excoresources.com.au
Web: www.excoresources.com.au
DIRECTORS
Barry Sullivan
Michael Anderson
Alasdair Cooke
Peter Reeve
MAJOR SHAREHOLDERS
Ivanhoe Australia Ltd 22.9%
WH Soul Pattinson & Co 7.5%
JP Morgan Nominees 7.4%
Alasdair Cooke 5.0%