Copper miners Equatorial Mining seem to have little to be optimistic about, coming close to collapse in 2001 but for the financial support of AMP. AMP even kicked in another $100 million for prefence shares, on top of around $250 million already invested in Equatorial. Crikey will be asking Stan Wallis at this week’s AMP AGM why they didn’t just cut their losses.

The company’s financial performance is one to behold, for all the wrong reasons.

Their core business is copper mining, and sadly for a very poorly performing company, they had to face the 2001 year against the backdrop of record low copper prices. The chalked up a $47.4 million loss in 2001, which, despite the aforementioned adverse commodity prices, compares very well to the previous year’s loss of $172.8 million.

As a spurned shareholder in a few dud mining companies over the years, Crullers has heard it all before from miners who say they’re just about to strike pay dirt.

Not Equatorial – they didn’t even seem to bother trying a positive spin.

At the AGM, there was little cause for optimism. The company sank a bucket-load into a project in Nevada which was later found to have nothing like the reserves predicted in the feasibility study that Equatorial had relied upon.

Equatorial has now taken legal action against the authors of this piece of fiction, claiming damages “in excess of US $145 million” – good luck getting that back!

Chairman Stephen Gerlach did say that the company wouldn’t have needed the financial assistance that was provided by its major shareholder, AMP Life, had this investment been cash flow positive.

The one bright light for the company is its investment in a copper mining company in Chile, which, while only just past the “ramp up” and initial production phases, has started producing copper and achieved a slight operating profit (of US $1.64 million) in 2001. Its copper production is set to almost double in 2002, but again, unless there is a major improvement in copper prices, the profitability of this operation probably only be marginal at best, despite the company claiming its cash cost levels to be in the lowest quartile in the world.

Other than the copper mine in Chile, all other projects conducted by Equatorial Mining have flopped. In his address to shareholders, the chairman said there had been little (read “no”) exploration other than in Chile.

With accumulated losses of just over $300 million, it is a wonder that this company hasn’t fallen over altogether.

Well, it would have, if not for a lifeline thrown by AMP Life. And the question is, why would they bother?

Is this a case of throwing good money after terrible? Would they have been better off cutting their losses and getting out of the company?

AMP Life, through a chain of subsidiaries, owns almost 94% of the shares in Equatorial Mining. AMP Life even tried to mop up the remaining shares during the year, but was prevented because more than 10% of the minority shareholders opposed the move.

Aside from owning almost all of the ordinary shares in the company, AMP Life had owned $109 million in preference shares prior to the 2001 year.

To further capitalise the company, during the 2001 year AMP Life subscribed for another $100 million in preference shares.

While we have our concerns about the viability of the company, AMP did manage to snaffle a nice little $1 million arrangement fee for the transaction.

Still, if Equatorial does end up falling over as we fear, that arrangement fee will be chump change compared to the losses that AMP suffers.

All up, they have forked out $209 million in preference shares and, assuming AMP Life bought in at around par value, somewhere in the region of $150 million in ordinary capital. (The notes to Equatorial’s accounts disclose fully paid shares of $157 million, although obviously these don’t show what each shareholder paid to acquire their particular shares.)

With around $350 million in Equatorial, AMP Life will hoping this company can turn the corner.

Equatorial (and by extension, AMP Life) is taking a big punt on its Chilean mining investment (a company in which Equatorial has a 39% stake).

Out of Equatorial’s $189 million in total assets, $67 million relates to their equity investment in the Chilean mining company and $77.7 million is a subordinated loan to the Chilean mining company. The fact that it is subordinated is another cause for concern.

The bottom line, therefore, is that three quarters of Equatorial mining’s assets are tied up in the one venture – a copper mining company in Chile.

As we said before, this is the one glimmer of hope for Equatorial, but it isn’t such a shining light that we’d bank three quarters of our assets on it.

Interestingly (although not surprisingly), the loan to the Chilean mining company is “subject to the successful exploitation and development of the controlled entities’ interests in exploration and evaluation of mineral tenements… or, alternatively, the sale of the Company’s interest in loans and shares at amounts at least equal to book values”.

Whatever the “Senior Subordinated Loan Agreement” is that the Equatorial loan is subordinate to, no doubt it has Equatorial by the short and curlies. Equatorial’s annual report says the loan is “repayable in 18 consecutive equal semi-annual instalments subject to covenants required by the Senior Debt Lender” to the Chilean company.

Still, the annual report indicates that repayments of this loan “will commence” (although it doesn’t specify exactly when), which is at least positive that the project hasn’t fallen at the first hurdle.

But chairman Gerlach qualified this in his address by saying that he couldn’t give “specifics” on their progress in Chile but would do so as soon as they can.

In other words, it’s probably too early to start hailing the Chilean partly-owned subsidiary as the saviour of Equatorial.

The history books are littered with mining companies reassuring their shareholders that they are just about to strike it rich, only to collapse soon thereafter. We certainly don’t hope to see Equatorial add to the list (and they certainly weren’t making extravagant claims in their AGM), but fear they really aren’t a long-term proposition.

We’ll definitely be asking Stan Wallis why AMP Life pumped another $100 million into this struggler during the year and trust that he is far more optimistic about its prospects than we are.

The Equatorial AGM was almost wake-like, except this company hasn’t quite died yet. One elderly shareholder asked a question about why the company is spending so much effort repairing the Nevada desert mine site, two new NEDs were elected (why would you bother getting on board?) and the chairman was re-elected unanimously.

The question must be asked, how bad must a company perform for a board member to get the boot?

It’s a little hard to be critical of the company given that the main cause of their problems was that they were seemingly the victims of a bunk feasibility study.

But other than Chile, the company has no prospects on the go. And with 75% of the company’s assets devoted to its copper mining subsidiary in Chile, this is last-roll-of-the-dice stuff that I wouldn’t be comfortable with if I were a shareholder.

Peter Fray

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