Incumbent Zambian President Rupiah Banda fell to challenger Michael Sata in the country’s national election this week, with Sata being confirmed as the winner today.
Banda had presided over a significant uptick in foreign investment in the country’s mining industry, owing not only to the promise of the country’s ample copper resources, but also to a taxation and royalty regime that rank among the more favorable among major mining nations.
The victory of Sata, who has pledged to squeeze foreign miners for additional cash, marks a disappointment for First Quantum, which we expect will derive 73% of 2011 revenue from the country and will continue to depend on Zambia for a significant portion of its earnings, even after the launch of commercial operations in Australia and Finland.
Not surprisingly, First Quantum’s shares are down significantly today (minus 6% as we write), versus modest gains posted by copper-mining peers Freeport-McMoRan FCX and Southern Copper SCCO . We are not revising our CAD 16 per share fair value estimate, as we believe the high cost of capital (15% cost of equity, 500-basis-point spread on debt) employed in our discounted cash flow model adequately captures the risk inherent to doing business in Zambia. Moreover, as we’ve seen in the months following the election of leftist Ollanta Humala to Peru’s highest office, bold campaign promises can give way to more practical considerations when the rubber hits the road.
The Toronto Star