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Equinox debt ‘more manageable than it appears’

TIM KILADZE

Globe and Mail Update

14:26 EST Monday, March 07, 2011

Some vocal members of the mining community may be up in arms about Equinox Minerals tacking on $3.2-billion (U.S.) in debt to buy Lundin Mining , but new research indicates the cries could be unwarranted.

It took a few days but RBC analyst Geoff Breen, who is based in Sydney, took the time to model the cash flows from a combined Equinox-Lundin and found that the debt load is “more manageable than it appears.”

For starters, pro forma cash of the combined company is expected to come in around $750-million. That immediately makes its net debt worth $2.5-billion, which Mr. Breen noted is much less demanding.

(For his model, Mr. Breen assumed an 11 per cent cost of debt on the bridge facility and 6 per cent for the refinanced longer term debt.)

He also expects the merged company’s cash flow to ramp up over the next two or three years, which will help to cover interest payments. The higher cash flows will come from more production out of Lundin’s Lumwana project, and the start of production at Equinox’s newly acquired Jabal Sayid project.

As for the deal’s accretion, Mr. Breen projected that it is “clearly accretive” on a cash flow per share basis, but not so on an earnings per share basis. That analysis contrasts with Equinox’s projections, which predicted that the deal would be “immediately” accretive to EPS and cash flow.

Still, RBC thinks the Equinox offer is worth the risk. “Although there are risks and issues with Equinox’s proposed offer, the bottom line is it has made a superior offer to Lundin shareholders.”

But to make it work Equinox may have to fend off some rival bidders. “We believe there is a good chance Equinox will acquire Lundin, but it may need to sweeten the deal and a third-party may enter the fray,” Mr. Breen noted, adding that there is a strong view that Lundin will formally offer itself for sale and open a data room.