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