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Posted: January 14, 2008, 2:10 PM by Peter Koven

The government of Zambia has proposed higher taxes on mining companies, and that affects two names Canadian investors follow closely: Equinox Minerals Ltd. and First Quantum Minerals Ltd. UBS analysts Alec Kodatsky and Tony Lesiak have tried to break down the new tax regime and what it means for those companies. The government is expected to increase the corporate tax rate from 25% to 30% and the royalty rate from 0.6% to 3%.

In the case of Equinox, the company has already negotiated  a 10-year development agreement for its Lumwana project, and believes it is exempt from higher taxes for the length of the agreement. Mr. Kodatsky is keeping that as his base-case assumption. But if the government decides to implement higher taxes at Lumwana right away, his net asset value forecast on Equinox would drop 7.3%, from $6.06 a share to $5.62 a share. He is maintaining a “buy” rating and a target of $6.75 a share.

First Quantum, on the other hand, could see an immediate tax and royalty hike at its Bwana Mkubwa and Kashime projects if the tax changes are implemented. It has a long-term tax stability agreement at the Kansanshi project, but Mr. Lesiak is already assuming higher royalty rates on that one.

Mr. Lesiak has cut his earnings per share estimate for 2008 from $11.78 to $11.50, and he lowered his 2009 forecast from $13.64 to $13.30. He is maintaining a “buy” rating on the stock but reduced his target to $120 a share from $125 a share.

Source: National Post