Equinox Minerals (EQN.AX): Citadel transaction a winnerLong term...

Equinox Minerals (EQN.AX): Citadel transaction a winner

Long term (12 months): Buy
Target price: A$6.51
Lyndon Fagan, RBS Equities (Australia) Limited

Despite the recent rally in the mining sector, the Citadel transaction could provide EQN with a high-quality asset without overpaying, in our view. We maintain our Buy recommendation on the stock, with EQN continuing to look attractive to us relative to the sector.

Recommended takeover of CGG a good deal for EQN, in our view
Citadel Resources (CGG) is developing the Jabal Sayid copper-gold project in Saudi Arabia with targeted output of 57ktpa over 10 years (online 2012) at an average C1 cash cost of US$0.91/lb, development capex of US$305m, plus US$113m spend to obtain 100% of the project. M&I resources stand at 57Mt @ 2.2% Cu for contained Cu of 827kt. If successful, CGG shareholders would receive one EQN share for every 14.3 CGG shares plus A$0.105ps cash, which valued CGG at A$1.25bn (A$0.522ps) as at the close of trade last Friday. In our view, EQN is not overpaying. The offer is only at a 21% premium to CGG's 10-day VWAP (lower than the typical 30%). Further, the CGG EV of about A$1bn looks reasonable when compared to SFR, which is also at about A$1bn (SFR's project is much less advanced). EQN is paying a relatively low 5x 2013 PE for CGG, based on Bloomberg consensus earnings.

EPS and NPV accretive
The Jabal Sayid project has a targeted mine life of 10 years. We have modelled the project using a 15-year mine life, based on what we believe is significant exploration upside, but have assumed a more conservative cost profile averaging US$0.98/lb. Our preliminary NPV is A$1.4bn, which would take our EQN valuation to A$6.87ps (6% NPV accretive). Our model incorporates the initial years of the mine plan from the independent experts report on CGG dated 1 October 2010, along with our forecast copper prices, which produces NPAT from Jabal of US$240m in 2013, making the deal 6% EPS accretive in that year.

Positive investment view maintained
We see the CGG deal as well timed following the recent run in the EQN share price (using relatively high priced scrip). The asset is still in the development stage which means EQN does not need to pay a premium for a producing mine. Adding CGG into the portfolio gives EQN more scale (increases copper output by circa 35%), lowers average cash costs, dilutes the Zambia risk and increases exploration prospects. We maintain our Buy rating.