"The bottom line, after having done some real investigation into the subject rather than guesstimating, I’m still left with having to make some educated guesses but we can say that the 29% effective rate over LOM mentioned by CEO Hochstein may turn out to be somewhat optimistic, but it's not going to be far out. If I had to bet (and I don’t) I’d be careful about making too many offset assumptions about the profit sharing to corporate tax, then not assume that IVA rebates will be in the post quickly, but there’s every reason to believe LUG in Ecuador will have an effective tax rate in the low 30s %. That’s pretty competitive to peer countries and if Ecuador can offer the stability and long-term miner-friendliness that President Correa espouses, they’ll be fine.
However, it doesn’t take away from the fact that even with this lower rate of tax in real terms, LUG.to at FDN has just offered up to the market a project with economics that don’t sparkle. And this after Ecuador reportedly made plenty of concessions to LUG during negotiations and is taking a much softer stance towards FDI projects such as this, which underscores just why Kinross decided to walk away in its time at FDN when Correa was playing hardball.
When I ran the numbers earlier this year in the NOBS report of IKN357 dated March 13th, I couldn’t help but come to the conclusion that under the circumstances, with a key Feas Study in the works and then the hunt for capital to build its mine afterwards, LUG.to shares looked expensive for what they were. Since then we’ve seen gold jump, the bull market for mining companies take off, LUG got a positive price jolt when Porter Stansberry pumped the stock to his big list of investors and now the FS is here. Next we have the capex raise which, if you believe the press will start at U$820m, may be a lot higher (16) and come in two phases, first U$120m to U$140m round of equity, then at U$700m commercial (probably debt) facility. That’s a lot of raise for a U$445m market cap company to support and the way in which the FS assumed a 5% discount rate isn’t helping the optics of the raise and its real burden on the project. What we do know for sure is that LUG is currently running on fumes and will HAVE to raise its cash soon, because for one thing it’s part of the terms of agreement with the government of Ecuador and for another, they’ve just taken out a $5m bridge loan with main sponsors the Lundins to tide treasury over. And $5m isn’t going to last very long here.
This weekend’s CAD$5.62 share price for 101.3m shares (and that new small bridge loan) still looks expensive, sorry and all that, it’s not for us smallfry retailers until we know how much the bigboy financiers are going to extract for their kind patronage. I expect the share price to continue weakening and $5.25, even under $5, looks in the cards. End."