rio to takeover eqn?

Equinox Minerals (EQN.AX): RIO may bid for EQN

Long term (12 months): Buy
Target price: A$7.60
Lyndon Fagan, RBS Equities (Australia) Limited, +61 2 8259 5870, [email protected]

We forecast RIO will reach a net cash position this year. With the company on the hunt for small- to medium-sized acquisitions, EQN is a logical fit, in our view.

RIO seeking assets in Africa's copper-belt region

The AFR has today reported that RIO is looking for assets in Africa's copper belt. The newspaper has quoted RIO's copper chief, Andrew Harding, as saying "we are looking at the copper belt area, it is unbelievably prospective with what is in the ground". The article notes RIO would keep an open mind on acquisitions or developing a project itself. We estimate RIO is generating cUS$2bn per month in operating cash flow vs EQN's current market cap of US$5.7bn.

EQN one of the few pure copper plays left out there

EQN offers a potential acquirer the opportunity to gain exposure to Zambia through its Lumwana mine, along with a significant land position to undertake further exploration. The company also recently acquired Citadel Resources, which was developing the 60ktpa Jabal Sayid project in Saudi Arabia. The group is targeting over 300ktpa of copper production by 2016 (RIO equity share of mined copper in 2010 was 678kt).
EQN remains one of the few pure copper plays out there that we believe would be a logical fit within RIO's small- to medium-sized acquisition criteria. Further, grade decline across RIO's existing operations suggests the company needs further projects in order to maintain production.
We believe EQN is fundamentally undervalued by the market, which may provide a window of opportunity for a potential acquirer. The stock is trading well below our NPV, in a sector where many companies are now trading at a P/NPV premium. We believe this is partly due to the value for the Citadel assets not being fully recognised by the market.

RIO's attitude to smaller copper projects may have changed

RIO has flagged a significant expansion at its Northparkes copper mine from 40ktpa to potentially 120ktpa. While the asset does not fit the definition of a Tier 1 asset (due to its relatively small size), we believe it is now a core part of RIO's portfolio. With large Tier 1 copper assets hard to come by, small yet high margin copper projects may now be part of RIO's strategy to grow its copper business. This could suggest that EQN's Jabal Sayid project could also be appealing to RIO.

RIO has shown it is prepared to grow in Africa through RIV

RIO's bid for Riversdale Mining highlighted the company is prepared to grow further in Africa. We see Zambia as a lower risk region than Mozambique, which could mean a bid for EQN may be easier to get over the line from a geopolitical risk point of view.

EQN still one of our top picks in the sector

EQN remains one of our key Buy calls in the sector. We believe positive momentum in the stock is likely to continue on the basis that: 1) copper prices have upside risk given the tightness of the market, 2) EQN will be at key North American & African conferences over the next two months promoting the Citadel acquisition and Lumwana expansion, 3) positive exploration results are likely over the next 12 months, and 4) the stock continues to trade below NPV in a sector that is becoming increasingly difficult to find value. The company could also be a takeover target.