Exco Resources (ASX: EXS) managing director Geoffrey Laing has increased his stake in the company though an on-market purchase of 300,000 shares for a consideration of $48,000 - providing an average entry price of $0.16.

Laing now holds a direct stake in Exco of 381,000 shares, with another 200,000 shares in the family trust.

Exco is currently in a very interest position, and just last month committed a A$10 million 2012 budget for copper and gold exploration in Queensland.

The Cloncurry Lineament, on which a considerable portion of Exco’s tenements lie, covers an area of prospective ground that runs from BHP Billiton’s (ASX: BHP) Cannington silver-lead-zinc mine to Xstrata’s (LSE: XTA) Ernest Henry copper-gold mine.  
The principal target for Exco in the Eastern Succession of the Mt Isa Inlier is Ernest Henry-style iron-oxide-copper-gold mineralisation.

The company has identified a number of targets with potential to host large stand-alone resources, known as tier one targets.

The Turpentine/Eight Mile Creek, Salebury/Tanbah and Canteen/Weatherly Creek areas have geological, geophysical and geochemical characteristics that suggest they are within an IOCG system. 

Soil surveys at the Canteen/Weatherly Creek prospect have revealed strong copper-gold-iron-potassium-phosphorus-uranium at surface, with grades of about 0.27% copper and 0.43 grams per tonne (g/t) gold.

New managing director Geoff Laing told Proactive Investors that Exco’s focus is on exploration in Queensland, to maintain the company’s self-sustaining position and replace cash flow from the White Dam gold project.

“For me the focus is very much on exploration in Queensland,” he said.

“We’ll certainly be looking to replace the cash flows that White Dam has brought in for the last 18 months by potentially acquiring a reasonably advanced project that we could start generating cash flow from in the not too distant future.”

In the Eastern Succession of the Mt Isa Inlier, Exco is targeting iron-oxide-copper-gold (IOCG) mineralisation.

This mineralisation bears similarities to Xstrata’s Ernest Henry underground mine, also in North Queensland, and is typified by the coincidence of strongly anomalous magnetic and gravity highs.

Exco has identified three new high priority targets at the Salebury South, Elder Creek and Canteen, which it intends to drill test in 2012.

Weatherley Creek drilling

At the Weatherly Creek project, initial drilling at a number of prospects has produced positive first phase results.

Drilling at the Canteen prospect intersected copper and gold below a small historical open pit, with results including 12 metres at 1.34% copper and 0.56 grams per tonne (g/t) gold from 18 metres depth.

Three holes were drilled at the Victory Prospect where previous drilling defined an inferred resource of 196,000 tonnes at 1.2% copper and 1.4g/t gold.

The latest round of drilling intersected relatively low grade mineralisation beneath the existing drilling, and indicated an increase in gold towards the south of the prospect.

One drill hole intersected 18 metres at 0.28% copper and 1.12g/t gold from 36 metres depth.

At the Bosca and Bosca South prospects, three drill holes tested for oxide copper mineralisation below small historical open pits.

One drill hole at Bosca intersected 24 metres at 0.62% copper while at Bosca South, an intercept of 0.33g/t gold and 8 metres at 1.69% copper and 0.09g/t gold was returned.

Finally, one drill hole of a proposed four hole program was drilled at the Rock Rat prospect to test a line of historical workings and shafts.

The rest of the drilling program was postponed due to the threat of wet weather, and will be continued after the wet season.

The first hole intersected 24 metres at 0.21% copper and 0.51g/t gold from surface.

Other operations

In other company news, work at the Pumpkin Gully syncline has yielded positive results, with drilling at the Salebury, Crow’s Nest and Tanbah North areas returning:

- 14 metres at 1% copper and 0.28g/t gold from 70 metres;
- 32 metres at 0.56% copper and 1.04g/t gold from 74 metres; and
- 10 metres at 1.51% copper and 1.34g/t gold from 98 metres.

Meanwhile resource drilling at the Kangaroo Rat copper gold deposit has been completed, with results returned to date in line with expectations.

Diamond drilling is planned for the project for metallurgical testwork, geotechnical studies and specific gravity determinations.

Well Funded

At the end of the December quarter, Exco Resources had $58.6 million cash in the bank, equivalent to about $0.164 per share.

The company recently paid $135 million, or $0.38 per share, back to shareholders, following the sale of its Cloncurry project to Xstrata for $175 million.

New Exco managing director Geoff Laing told Proactive Investors today allowing Polymetals Mining to become a 50% partner in the Vertigo gold project will allow Exco to continue aggressive exploration in Queensland but not at the detriment to the White Dam region in South Australia.

“Polymetals have been the operators of the mine site and so by allowing them to earn a greater interest it really does incentivise them to keep pushing, make sure that we do get every last viable ounce out,” he said. 

Production from the currently producing Hannaford Pit will continue to be split 25:75 while production from Vertigo and any other deposits developed will be split 50:50.

Mining at Vertigo is due to begin in January 2012 and will extend production operations at Drew Hill to June 2012. Processing of Vertigo ore will mainly use the existing White Dam infrastructure.


White Dam

Polymetals will also increase its interest in the White Dam infrastructure, including plant and camp facilities, from 25% to 50% for a cash consideration based on an agreed independent valuation and a commitment to take on an extra 25% of the future closure costs.

The White Dam project contains a depleted resource inventory of 6 million tonnes at 0.98 grams per tonne for 188,700 ounces of contained gold.

Since pouring first gold in April 2010, production rates and margins from White Dam have been well above expectations.

Gold adsorption recovery has consistently exceeded 98% since start up and up to October 2011 a total of 114,924 ounces of gold had been poured from the project.

The project was bought at low gold prices and has made a profit after tax to date of $68 million and a Return on Equity of a very tidy 850%.

Debt financing was paid off in November 2010, some nine months ahead of schedule and after only seven months of operation. The project continues to provide substantial cash flow.

Exco is now focused on extending the life of the operation at White Dam with near-mine exploration and resource development activities.

New Managing Director's Action Plan

Laing’s forward plan for the company is to focus on exploration in Queensland and consider potential acquisitions to maintain Exco’s self-sustaining position.

“For me the focus is very much on exploration in Queensland,” he said. For the first time the company will really be able to do a significant exploration program and that’s not to say we haven’t already started it. Over the last six months we have been gearing up.

“We’ll certainly be looking to replace the cash flows that White Dam has brought in for the last 18 months by potentially acquiring a reasonably advanced project that we could start generating cash flow from in the not too distant future.”

Laing said Exco is in an interesting position for a junior with a significant level of cash in the bank, ongoing cash flow from White Dam and the start of the Great Australia royalty expected this year.

The project was bought at low gold prices and has made a profit after tax to date of $68 million and a Return on Equity of a very tidy 850%.

Exco distributed $135 million in December to shareholders following the Cloncurry Copper project sale to Xstrata by way of a capital return of $0.10 per share and a special dividend of $0.28 per share.

Laing is a chemical engineer with more than 20 years of experience in the mining industry and an MBA from the University of Western Australia.

His involvement in the mining industry includes project development both within Australia and overseas including major projects for Norilsk Nickel, Anglo Platinum, BHP Billiton and Phelps Dodge. He has had management and technical roles in both the engineering business and operations.

Over the last four years Laing has held the position of General Manager Project and Corporate Development for Exco.

Meanwhile Exco is continuing to progress the Mt Colin copper-gold deposit, increasing the resource by 29% to 1.92 million tonnes at 2.59% copper on September 13. The upgrade included an increase in overall grade at Mt Colin, with the high grade zone still open at depth.

An earlier Scoping Study on the previous resource indicated robust economic potential for Mt Colin and work is now in progress on the underground mining design.

Previously, the resource inventory was 1.49 million tonnes at 2.47% copper.

Mt Colin is strategically located 50 kilometres from Cloncurry and in the highly prospective Mt Isa region of Queensland.

A Scoping Study completed on the previous resource indicated robust economic potential - current results are likely to further boost the returns.  

The re-estimate has significantly increased the resource size and improved confidence levels of the resource, with the high grade zone still open at depth (350m below the surface).

The resource was confirmed by an additional infill drilling program which comprised 24 diamond holes and 13 reverse circulation holes, with mineralisation still open at depth.

Importantly for the confidence of the resource, the Indicated category jumped 68% to 1.04 million tonnes at 3.04% copper.

Exco said that the resource classification was developed from confidence levels of key criteria including drill spacing, geological concepts, sampling and data density and grade estimation confidence.

Estimates of dry in-situ bulk density were derived from 822 core samples distributed throughout the deposit.

The bulk density values were interpolated using the Inverse Distance squared estimation method with an isotropic search, after which unfilled blocks were then assigned a value based on the correlation between copper and specific gravity.

Meanwhile, Exco has three rigs active at the project, ensuring news flow towards the end of 2011.

Exco has a 100% interest in Mt Colin, which forms part of the Cloncurry Project which has a total resource of 7.65 million tonnes at 1.69% copper and 0.52g/t gold.

In total 1.5 million $0.40 options were exercised, with Exco to receive $600,000.

The new Exco

In the June quarter of 2011 Exco completed the sale of the Cloncurry Copper Project in north-west Queensland to Xstrata (LON: XTA) for $175 million

Following approval from shareholders on 9th June 2011, the remaining conditions precedent were satisfied and the final formalities for the sale and funds transfer were completed on 30th June 2011.

This allowed Exco at the end of financial year 2011 to be in the enviable position of holding a $224.5 million cash balance - which equates (pre tax obligations) to around $0.64 per share, fully diluted.

Post the sale of the project, Exco’s focus will be to add further value to the company's assets, with the board having already approved an initial exploration program of up to $10 million for the company's remaining tenements in the Cloncurry, Hazel Creek, and Soldiers Cap project areas.

Exploration activity has already kicked off at a number of priority targets.

Importantly, Xstrata has received confirmation from the Foreign Investment Review Board that there are no objections to the proposed sale in terms of the Australian Government’s foreign investment policy.

The outcome for Exco is that the company will now return around $135 million to shareholders, which will leave the company will a very healthy cash balance between $50 million to $60 million.

Exco is not only well funded for exploration, but has also outlined the possibility of an acquisition or farm-in in the near future, with these projects not necessarily having a copper focus.

The decision to sell the Cloncurry Copper Project was a strategic one for Exco, allowing the company to realise early value from the project, rather than the approach of many peers which continue down the path to full development - which can extend the value realisation timeline out for many years.

Exco though still maintains a significant ground holding in the Cloncurry area, which hosts the highly prospective Hazel Creek copper gold project.

The company has already allocated a multi-million exploration budget to Hazel Creek, which will comprise reverse circulation then diamond drilling to follow-up on advanced targets.

A final positive for Exco is that the company will soon start receiving cash flow from the Great Australia royalty, with payments expected to gross around $30 million based on a copper price of US$4.20 a pound.

The review is subject to the successful completion of the sale, but Exco intends to return $135 million of the after-tax cash retained in the company to shareholders by 31 October 2011.

The Exco board believes that cash retained post distributions will continue to provide for the purposeful growth of the company's remaining asset base.

Ivanhoe Australia (ASX: IVA) has confirmed in writing to Exco support for the reviews outcomes, and the steps the board is taking with respect to the distribution.

Earlier in the year Exco announced that the company had entered into an agreement to sell the Cloncurry Copper Project to Xstrata (LON: XTA) for $175 million.

Exco also added in a statement to the ASX today, 'Furthermore the company notes that Ivanhoe have informed the market that “...it is not considering a takeover offer for Exco”.

Exco then reiterated that the company focus remains on the sale of the Cloncurry Copper Project sale to Xstrata.

Last month Exco announced that the company had entered into an agreement to sell the Cloncurry Copper Project to Xstrata (LON: XTA) for $175 million.

The Exco board has already put their support behind the transaction, and recommends shareholders accept the proposal.

Issued Capital: A$355.6m
Price: A$0.625
Market Cap.: A$222.3m
Cash: A$36m

Cashed up and ready for action

Investment Highlights

We are initiating coverage on Exco Resources, an exploration and mining company currently focussed on copper and gold projects in Australia.

With a significant cash injection expected from the sale of selected tenements to Xstrata, the company is planning a A$0.28ps special dividend and is well placed to develop its existing resource portfolio as well as to acquire further projects.

Our pre-distribution valuation is A$0.70ps and our post distribution valuation is A$0.42ps (22% premium on effective market price), which does not account for the exploration upside. Exploration success will be the key value driver going forward. We recommend as a speculative BUY.

Asset sale raises A$175m

In April 2011 EXS announced the signing of an Asset Purchase Agreement worth A$175m with Xstrata over selected tenements in its Cloncurry Copper Project (CCP) area.

The board has recommended the transaction to the shareholders and the company is confident that the sale transaction will proceed (>50% required from voting shareholders), despite uncertainty regarding the direction of Ivanhoe Australia’s vote (22.9% share).

We estimate a net A$140m receipt post tax, with around A$100m expected to be redistributed to shareholders (A$0.28ps) and the balance as well as existing cash of A$36m going towards exploration on remaining licences and possible acquisitions.

Short-term income stream from the White Dam Gold Mine where the company has a 75% stake in a Au heap leach operation expected to produce around 60koz Au over the next year, will also supplement the strong EXS cash position.

Furthermore, EXS will also likely receive around A$30m in royalty payments (NPV ~A$15m) over the next 4 years from an agreement with CopperChem Limited to mine the copper sulphide orebody at the EXS-owned Great Australia mining lease in Queensland.

Exploration upside remains

Resource extension drilling at the White Dam mine is likely to add further gold to the existing heap leach operation as well as the underlying sulphide resource, but this is not likely to add significant additional value.

The remaining NW Queensland tenements, particularly the remaining CCP tenements, are highly prospective and could conceivably be drilled out to a resource at the same scale of that just sold to Xstrata.

Exploration success at the existing EXS tenements, as well as acquisition of further prospective licences/JV relationships is seen to be the key value driver going forward.

Given the strong financial position of EXS, they will be in a position to rapidly advance exploration projects to discovery and through resource definition without the need for further capital input.

Valuation does not reflect exploration upside

A preliminary sum of parts valuation on EXS gives an NAV of A$0.70ps, a A$0.08 or 12% premium on the current share price. Given the expected A$100m to be redistributed to shareholders (A$0.28ps), the post distribution valuation is reduced to A$0.42ps, a 22% premium on the effective market price of A$0.34ps.

We note however that the value of exploration upside to the remaining CCP tenements is not included in the valuation.

Catalyst:

Successful shareholder vote in favour of CCP sale.

The target is almost double the last traded price of $0.61 for Exco.

Extract below from the Fox Davies report

The attributable production from the White Dam mine in South Australia was 18,928 gold ounces and 22,573 were sold.

Cash costs for the quarter were A$388 an ounce.

Comment

This was another excellent quarter for the mine, which exceeded our optimistic expectations.

Sales were substantially higher than production due to the grades being treated at the end of the December quarter.

The attributable production for the quarter was produced from the processing of 757,370 tonne of ore at 1.06g/t.

Only 294,919 tonne of waste was mined, giving a very low strip ratio.

With the pit due to be mined out by around September 2011, we anticipate that the production figures will not materially change in the current June quarter.

Recommendation

We retain a BUY recommendation with an increased price target of A$1.20 a share, formerly A$0.88.

The increase is due to the better than expected MQ gold production and the fact that it is expected to continue at current levels and costs in the JQ.

Price target: $0.88.
Last trade: $0.66.

Recommendation

We retain a buy recommendation with an unchanged target price of A$0.88/share.

We have not modelled the sale of the Cloncurry Copper Project yet and will not do so until shareholder approval has been granted.

Event

Exco has announced that it has entered into an agreement with Xstrata (LON :XTA) to sell the Cloncurry Copper Project for A$175M.

The sale is subject to approval by Exco’s shareholders and requires 50% plus one vote of those voting for approval.

Comment

The sale price is below our net present value for the project, which was $331M.

However, one has to contend with the fact that there is really only one logical buyer, and by selling the project as is there are none of the risks inherent with building and financing the project, or concerns over future metal prices.

The sale has to be approved by the shareholders, and a notice of a meeting to seek approval for the proposal will be distributed to shareholders in due course. For any third party wishing to bid, this gives a window of opportunity, and of course, they know what the starting price is.

It is worth noting that Ivanhoe Australia, the largest shareholder in Exco, with approximately 22.8%, have issued a press release stating that the views expressed in the Exco press release do not necessarily reflect the views and conclusions of Mr Reeve (Ivanhoe's appointed nominee to the Exco Board) nor Ivanhoe.

No assumptions should be made as to how Ivanhoe will vote its 22.8% shareholding in relation to Exco's proposed transaction.

Assuming the sale proceeds, Exco plans to distribute up to A$100m of surplus funds to the shareholders. Since approximately A$55M of tax will be paid following the sale, this could amount to a fully franked dividend of about A$0.29/share.

Exco would be left with its very profitable but short life gold mine in South Australia, the Great Australia copper royalty entitlement and some highly prospective copper-gold exploration projects in north-west Queensland.

Having struck one such deal with Xstrata, one could assume that if any of these exploration tenements were turned into ore reserves, then another deal could be struck with Xstrata.

The Exco board has already put their support behind the transaction, and recommends shareholders accept the proposal.

The board said it believes the value realised under the sale offers a greater return on equity to shareholders than pursuing the project as a stand-alone development, with the consequent cost of further equity and debt capital raisings, as well as the exposure to development and market related risks.

Michael Anderson, managing director of Exco, said "Completion of the proposal will be a transformational event for the company as it will realise significant value for Exco shareholders.

"The Company has been very focused on growing the Cloncurry Copper Project and the proposed sale to Xstrata will provide a substantial return on investment for the benefit of all shareholders."

The cash delivered under this proposal, in addition to other cash flows, will allow Exco to make a substantial return to shareholders.

After providing for exploration and business development budgets, Exco's current intention is to distribute $100 million of surplus funds to shareholders.

Anderson added, "The proposal will enhance Exco’s ability to focus on growing its continuing asset base and reviewing and implementing an appropriate acquisitions strategy.”

Following the sale, Exco’s assets will include:

- Around A$220 million in cash;
- The Hazel Creek advanced stage copper-gold exploration project;
- 75% interest in the White Dam Gold Joint Venture;
- Great Australia copper royalty entitlement; and
- An additional 2,400 square kilometres of highly prospective exploration tenements in the Cloncurry region, including resources such as Mt Colin, and other advanced exploration projects.

Gryphon Partners have acted as financial advisers to Exco, with Blake Dawson as legal advisers in relation to the proposal.

Exco has not provided any more detail but said in a statement the company plans to be in a position later today to elaborate.

Recently, Exco had been pursuing a number of options in relation to the development of the Cloncurry Copper Project.

Earlier in the month after some press speculation, Exco clarified that it was not in discussions with any international entity regarding a takeover bid for the company.

At the end of 2010 Exco established a maiden JORC Reserve at Cloncurry Copper, with the open pit ore reserve estimate; 28.1 million tonnes at 0.83% copper and 0.24g/t gold.

Growing confidence in Exco's ability to establish a sizeable 3 million tonne per annum operation at Cloncurry would not be lost on Xstrata  (LON: XTA), with its Ernest Henry operation located just 8 kilometres to the east of the project.

In April 2010, Xstrata said, it "Was looking at opportunities with juniors in the region to help bolster mill feed as the project transitioned to underground mining”.

Exco is no longer in a trading halt on the release of this annoucement. The company has noted speculation in the press this morning regarding an ‘approach from an international bidder,’ linked to interest in the company’s Cloncurry Copper Project (CCP).

Exco is continuing to pursue a number of options in relation to the development of the CCP.

In a statement Exco said "whilst the company continues to engage in discussions with a number of interested parties about those options, these discussions are indicative and/or incomplete and any conjecture about any such discussions or a resulting transaction is premature."

The company has entered no binding arrangements in relation to any proposed transaction at this stage and can give no assurance that any transaction will eventuate from these discussions.

On December 17 Exco established a maiden JORC reserve at its Cloncurry Copper Project (CCP) located in North West Queensland.

The open pit ore reserve estimate is 28.1 million tonnes at 0.83% copper & 0.24g/t gold.

Growing confidence in Exco's ability to establish a sizeable 3 million tonne per annum operation at Cloncurry would not be lost on Xstrata  (LON: XTA), with its Ernest Henry operation located just 8km to the east of Exco's CCP project.

In April 2010, Xstrata said, it "was looking at opportunities with juniors in the region to help bolster mill feed as the project transitioned to underground mining”.