rbs upgrade

Equinox Minerals (EQN.AX): Opportunity: Citadel not priced in

Long term (12 months): Buy
Target price: A$7.03 (from A$6.45)
Lyndon Fagan, RBS Equities (Australia) Limited, +61 2 8259 5870, [email protected]

We have factored CGG into our estimates for EQN, which has materially lifted our NPV. In our view, the market has overlooked the value created by the deal, creating an opportunity for investors. The stock remains one of our key picks for 2011.

A solid end to the year, 45Mtpa processing rates under review
4Q10 production of 34kt was slightly higher than our estimate of 32kt on the back of a significant jump in ore processing rates. Ore milled of 5.48kt (22Mtpa rate) was another record and comfortably above the 20Mtpa nameplate (EQN plans to be at a 24Mtpa rate by year end). Copper ore grades fell significantly from 0.87% in 3Q10 to 0.69% (lower grades were flagged, but slightly disappointing due to the read through to future years). Overall, it was a solid quarter, with full-year production of 147kt ahead of 2010 guidance of 140kt. 2011 production guidance of 145kt was provided, slightly lower than we were expecting (at a cash cost of US$1.45/lb). We note 2011 guidance could be conservative, as was the case for 2010. Further, expansion studies now include a 45Mtpa processing-rate scenario (previously 35Mtpa), which could provide further upside to our valuation.

Factoring in CGG has lifted our EPS
EQN now holds more than 93% of Citadel Resources (CGG) and is proceeding with the compulsory acquisition of the remaining stock. We believe the deal is a credit to management, which has secured a high-quality asset at a low premium relative to recent transactions. Our EPS rises on average 9% over 2013-15 due to the CGG contribution.

EQN one of our top picks for 2011
We believe some in the market may focus on the fall in head grade at Lumwana as a negative. However, the overriding factor, in our view, is the completion of the CGG transaction and NPV accretion. We continue to see upside potential at both Jabil Sayid, and Lumwana. Further, with copper remaining comfortably above US$4.00/lb, we see upside risk to consensus earnings as higher commodity prices are factored in, in our view. Our NPV and target price have risen from A$6.45ps to A$7.03ps after factoring in CGG, the end-of-year cash balance and other operational changes. EQN is one of our key picks in 2011. Buy.