Increased Risks for Miners in Zambia and DRC

In Zambia it's higher taxes, and in the Democratic Republic of Congo (DRC) it's who-knows-what next. But for each country, UBS Securities analyst Onno Rutten thinks the risk profile for mining is increasing. He has thus increased his discount rate on Zambian assets to 10% (from 8%) and DRC assets to 12% (from 10%).

Two companies that are obviously affected by this move are Equinox Minerals Ltd. (EQMIF.PK) and First Quantum Minerals Ltd.[TM/TSX]. Mr. Rutten continues to assume the Zambian government will scrap the development agreement on the Equinox's Lumwana project and First Quantum's Kansanshi project, meaning both are subject to immediate windfall taxes.

He lowered his target on Equinox to C$5.75 a share from C$6.25 a share to reflect the higher discount rate, and reduced First Quantum to C$108.00 from C$115.00.

Mr. Rutten wrote:

If [Equinox or First Quantum] were to be successful in achieving a compromise with the Government or prevail in any international arbitration, there would be material upside to our valuation.

Mr. Rutten also noted that he thinks both companies are attractive takeover targets for strategic buyers (like Chinese or Indian firms), especially those that would want physical claim to the copper produced. But the windfall taxes make a financially-oriented buyer less likely.

He wrote:

The Windfall Tax effectively removes most of the upside leverage to the copper price and therefore removes a key incentive to invest.

Comments

[fxtrader07:]

it will be truly interesting for how much longer this unique punishment of mining companies allover the world will have to go on until govts realize that they are creating a shortage of mining output and that they shoot themselves in their own foot. Impose "windfall" taxes? no problem. but you better see how you will get those stuff off the ground on your own then. It's high time that there are common international rules set or else mining contracts will get renegotiated after every 50ct rise in copper prices. Mining companies will simply stop investing in these countries and just sit idle on these properties. yeah, great idea by these govts.

2008 Apr 16 08:29 AM

[Timeshare:]

Zambia has much larger problems than this. the number one cause of death among children is bad drinking water. They should be negotiating with the mining companies for some sort of trade. IE dig us a well and we'll reduce the windfall taxes on the mining contracts. Mining companies already have the equipment needed to do this sort of thing so its a no brainer. My company Apex Professionals was able to donate $12k last year towards a well in a small community in zambia and it has HUGELY impacted that region. Would love to see more people stepping up to the plate. Thanks for the article it was an interesting read!

Apr 12 01:09 PM