Road to Recovery
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ROAD TO RECOVERY Metals & Mining September 2008 Corporate Directory Institutional Sales: Research: Paul Carter Ian Christie Executive Director Director, Research Direct Line: +61 8 9224 6864 Direct Line: +61 8 9224 6872 Email: [email protected] Email: [email protected] Chris Wippl Troy Irvin Senior Institutional Dealer Associate Director, Resources Direct Line: +61 8 9224 6875 Direct Line: +61 8 9224 6871 Email: [email protected] Email: [email protected] Ben Willoughby Tim Serjeant Institutional Dealer Analyst Direct Line: +61 8 9224 6876 Direct Line: +61 8 9224 6806 Email: [email protected] Email: [email protected] Corporate and Retail Sales: Registered Office Kevin Johnson Level 30 Executive Director Allendale Square Direct Line: +61 8 9224 6880 77 St Georges Terrace Email: [email protected] Perth WA 6000 Glen Colgan Telephone: +61 8 9224 6888 Executive Director Facsimile: +61 8 9224 6860 Direct Line: +61 8 9224 6874 Website: www.argonautlimited.com Email: [email protected] Geoff Barnesby-Johnson Corporate Contacts Senior Dealer Direct Line +61 8 9224 6854 Charles Fear Email [email protected] Executive Chairman Direct Line: +61 8 9224 6800 James McGlew Email: [email protected] Senior Dealer Direct Line: +61 8 9224 6866 Edward G. Rigg Email: [email protected] CEO & Managing Director Direct Line: +61 8 9224 6804 Andrew Venn Email: [email protected] Dealer Direct Line: +61 8 9224 6865 Michael Mulroney Email: [email protected] Executive Director Direct Line: +61 8 9224 6803 Ben Kay Email: [email protected] Dealer Direct Line: +61 8 9224 6859 Email: [email protected] Rob Hamilton Dealer Direct Line: +61 8 9224 6830 Email: [email protected] Argonaut is natural resources focused investment house that understands resources at a financial and technical level. Our expertise in natural resources has given us the ability to identify opportunities in the oil and gas and mining industries as well as the companies that service them. Argonaut Securities Research i Road to Recovery Contents This research piece is divided into three sections: Section 1: Key issues facing the Mining industry Section 2: An overview of selected commodities, including Copper, Nickel, Zinc, Iron Ore and Gold Section 3: Individual reports on 16 companies ROAD TO RECOVERY .......................................................................................... 1 Summary of Recommendations ....................................................................... 2 Sector Overview ............................................................................................ 3 Comparative Metrics ....................................................................................... 4 SECTION 1 - OVERVIEW................................................................................... 11 Future Drivers ............................................................................................. 12 Other Issues ............................................................................................... 15 Implications ................................................................................................ 18 SECTION 2 – COMMODITIES ............................................................................ 19 Copper ....................................................................................................... 20 Nickel ......................................................................................................... 24 Zinc ........................................................................................................... 27 Iron Ore ..................................................................................................... 30 Gold ........................................................................................................... 33 SECTION 3 - STOCKS........................................................................................ 37 Aditya Birla ................................................................................................. 38 Albidon ....................................................................................................... 42 Atlas Iron .................................................................................................... 46 Avoca Resources .......................................................................................... 50 CBH Resources ............................................................................................ 54 Dominion .................................................................................................... 58 Independence Group .................................................................................... 62 Jabiru Metals ............................................................................................... 66 Kagara ....................................................................................................... 70 Mincor ........................................................................................................ 74 Mirabela Nickel ............................................................................................ 78 Mount Gibson Iron ....................................................................................... 82 Panoramic................................................................................................... 86 Perilya ........................................................................................................ 90 Troy Resources ............................................................................................ 94 Western Areas ............................................................................................. 98 GENERAL DISCLOSURE AND DISCLAIMER ......................................................102 Argonaut Securities Research ii Road to Recovery THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY Argonaut Securities Research iii Road to Recovery Research Summary 4 September 2008 Road to Recovery Commodity prices and stocks have taken a battering over the last few months as global growth concerns come strongly to the fore. In Argonaut’s view fundamentals have taken a back seat to sentiment and this book endeavours to set that right. The timing is certainly appropriate. As the major western economies slow sharply with the contraction in credit, all eyes turn to China. Can the populous country remain immune to the demand shocks elsewhere and take up the slack? The answer to the first part of the question is obviously “no” – after all, China’s formidable growth has been spurred largely by exports. The so-called decoupling does not make much sense. However, the answer to the second part of the question is more than likely “yes”. China’s momentum is astounding, and even accounting for the inevitable slowdown, its growing dominance in the consumption of resources will ensure that any slack is readily absorbed. Remember that China is not just a short-term wonder – its growth has averaged 9.7% p.a. since 1980, with only two years out of 27 exhibiting growth rates of less than 5%. The bottom line is that even under the assumption of lower growth rates in China, the increase in demand for resources would still be significant in terms of global production. (And we haven’t started talking about India yet.) The supply side is not a simple matter either. Labour issues, a shortage of equipment and services, and (more recently) less forthcoming capital markets have emerged as serious constraints. These issues, together with declining grades and higher energy prices, have had a major impact on production costs. Commodity prices that would have provided fat margins only a couple of years ago now barely cover the marginal costs of new production. Add to that the fact that capital costs for new developments regularly blow out, and it shouldn’t come as a surprise that new supply is rarely delivered as expected. The world has changed markedly over the last year and companies are no longer able to rely on the rising tide of commodity prices. Stock selection is more critical than ever. Low cost producers are back in favour, while developers need to offer solid projects backed up by financing, infrastructure and reasonable timing. Explorers are off the boil, primarily because in the current environment, cash is king. Argonaut’s views on individual commodities are largely related to the supply side. As a result copper is expected to remain reasonably firm in the short term, while nickel and zinc are underpinned at current levels with prices near the marginal cost of new production. With major supply increases on the way, the big gains in iron ore have already been won, while gold gains support from ongoing financial and economic uncertainties. Argonaut’s key selections feature proven management offering significant cash flow generation from low cost quality assets with growth upside: u Jabiru Metals (JML) – High grade Jaguar operation running at nameplate capacity, expect lowest quartile cash costs, bringing the Stockman project in Victoria on line down the track u Mount Gibson Iron (MGX) – Clean and simple iron ore exposure, one of few cashing in on the buoyant iron ore pricing environment, exploration at Koolan Island to provide strong organic growth u Panoramic (PAN) – Tangible production growth profile, extensional drilling to increase mine life at both projects, a steal at current prices Argonaut Securities Research 1 Road