Equinox Gets Back on Track

Sep.30.08 | About: Equinox Minerals (EQXMF)

The biggest copper mine in Africa appears to be back on track.

Equinox Minerals Ltd.  (OTC:EQXMF) ((TSE:EQN)) suffered a major setback in July when a transformer fire at its Zambia-based Lumwana project put it on hold just as it was about to go into production. But UBS Securities analyst Onno Rutten just completed a site visit of Lumwana, and his verdict is positive. He wrote that Equinox appears to be "slightly ahead of schedule" in its recovery from the fire, and that delivery and installation of a new transformer should be completed within a couple of weeks.

"We believe that the first ore could be processed by November 2008, which could be slightly ahead of the current company guidance for a December 2008 start-up," he wrote in a note to clients.

That said, he points out that there are risks to a smooth mine start-up at Lumwana, including mine productivity, process plant reliability, and power availability.

There is also the infamous windfall profits tax in Zambia. The country is holding elections on Oct. 30, and both major political parties have stressed the need for more foreign investment. Mr. Rutten wrote that one early item on the agenda for the next president could be formalizing tax and stability agreements with the mining companies. So far, the government has honoured Equinox's development agreement and has exempted the company from the tax.

Mr. Rutten lowered his target on Equinox by 17% to C$5.00 a share, noting cost pressures and possible equity dilution if Equinox exercises a $45 million cost overrun facility. But he maintained a "buy" rating, and he sees possible catalysts for the stock this year, including an updated resource estimate, mine start-up, and clarification on the Zambian tax regime.

However, he thinks a potential bidding war for Equinox is looking less likely than it did earlier this year.

"While we continue to believe that Equinox's Lumwana project is a highly strategic asset due to its scale, cost structure and expandability, we also believe that current market conditions have reduced the probability of multiple bidders emerging," he wrote. "We highlight that in the context of the current global economic outlook and in the absence of a strategic bidder, our target price will unlikely be realized in the near-term."

Amounts shown in US$ unless otherwise specified.