opes and eqn, page-15

Moneytalks2

A brief rundown of what was written.


Result Description
The Zambian government has ratified new taxes effective April 1. Royalties rise from 0.6% to 3% while the corporate tax rate increases from 25% to 30%.


A windfall copper revenue tax may be introduced. Incremental revenue above US$2.50/lb would be taxed at 25%, above US$3.00/lb at 50% and above US$3.50/lb at 75%.


A further 15% tax on profits may apply when companies earn in excess of 8% return on their investments.


The new royalty and corporate taxes are almost certain. It is uncertain how the windfall profits taxes will apply. There is speculation only one of the windfall tax or 15% tax will apply.


There may be a provision for certain companies to be exempt from the new taxes. EQN’s investment was based on 10 year stability agreement with 25% corporate tax and a 0.6% royalty.


Impact
Our valuation is under review. EQN may not be excessively valued, but confidence is eroded by the Governments total disregard for foreign investors. The new taxes could be one step down a slippery slope. If the Government cannot provide reasonable terms and be trusted, foreign investment will stop.


Government rhetoric suggests EQN’s stability agreement won’t be honoured. In the worst case scenario, EQN has legal recourse via international arbitration. This would be a messy and drawn out affair with no guarantee Zambia will pay.


The harsh 75% tax on revenue above US$3.50/lb could see a perverse situation of prices rising but margins falling. Industry cash costs tend to follow the copper price.


Tax changes erode value from EQN’s potential expansion options. New money will not be invested without certainty.


Recommendation Impact (Last Updated: 02/04/2008)
We reluctantly downgrade our recommendation from Hold to Sell. Without certainty of the tax reigme, we cannot confidently advise investors to Hold. If certainty does come, there may be an opportunity to re-invest but reliable profits are needed. Zambia has significantly damaged its reputation as an investment destination.

** ends **

Also a good read is the Chairman's Letter to Shareholders, from their last Annual report posted a day or two ago, which puts a different slant on it all.


cheers
Mitch