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 to Recovery Summary of Recommendations
Table 1: Stock Recommendations (Key picks highlighted)
Market Enterprise Share Company Code Valuation Rec Comments Cap. Value Price
Nickel
Rare new high margin nickel sulphide mine AlbidonALB 289 336 $1.75 $3.20 HOLD Ramp up risks in Zambia Mine life upside within the 2.5km long Munali Intrusion Track record of consistent production, high grades and low costs Independence GroupIGO 326 182 $2.79 $3.67 BUY Own 30% of the multi million oz remote Tropicana gold project Share price has fallen harder and faster than nickel producing peers Inexpensive on all valuation metrics Mincor MCR 320 210 $1.61 $2.80 BUY Long term production target of 20 years at 20ktpa nickel in ore Well-positioned to grow the nickel inventory and mine life Low cost open pit nickel production in Brazil from mid 2009 Mirabela MBN 570 524 $4.39 $8.48 BUY Resource target size exceeds 1 million tonnes contained metal Corporate appeal is significant Inexpensive on all valuation metrics PanoramicPAN 357 256$1.86 $4.71 BUY Tangible production growth profile Extensional drilling to increase mine life at both projects Ramping up to a production target of 35ktpa contained nickel Western Areas WSA 1,457 1,553 $8.69 $6.66 SELL Exploration highlights overshadow hard production data Trading at a lofty EV compared to nickel sulphide mining peers
Zinc/Copper
Trades on cheap earnings multiples, but has a history of disappointing Aditya Birla ABY 492 486 $1.57 $2.04 HOLD Additional mine life at Mt Gordon is crucial Remain cautious of high cost producers in the current environment Low grade / high cost resource base CBH ResourcesCBH 79 158 $0.09 $0.08 SELL Falling zinc prices have made life tough Embarked on an operational resizing at the Endeavour mine High grade Jaguar operation running at nameplate capacity Jabiru Metals JML 175 187 $0.35 $0.75 BUY Expect lowest quartile cash costs Gold Ramping up production at the Higginsville gold mine AvocaAVO 370 450 $1.66 $2.03 BUY Quality team developing a high grade underground ore body Significant mine life upside with $11m exploration budget A model of consistency DominionDOM 245 190 $2.39 $3.05 BUY Unheralded high grade, low cost producer with a strong balance sheet Continues to deliver as peers increasingly struggle Management team has earned its stripes in Brazil Troy TRY 128 66 $1.83 $2.69 BUY Healthy balance sheet with ~$60m cash and no debt Near-term iron ore opportunity Iron Ore Clean and simple strategy with a busy six months ahead Atlas IronAGO 611 468 $2.10 $2.30 HOLD Reliant on third party access and public infrastructure Production beyond 3Mtpa is contingent on additional port/rail access Uncomplicated story Mount GibsonMGX 1,705 1,814 $2.12 $3.12 BUY One of few cashing in on the buoyant iron ore pricing environment Exploration at Koolan Island to provide strong organic growth Figures in A$m unless stated otherwise Argonaut Securities Research 2 Road to Recovery Sector Overview Table 2: Argonaut’s Sector Views Key Points Argonaut Forecasts Base Metals u Mine production below capacity continues to keep a lid on inventories 4.00 u Production issues, associated with labour and power, are 3.50 an ongoing concern 3.00 u The power industry accounts for half of the demand from Copper US$/lb China (unlike the US where it comes primarily from the 2.50 building industry) 2.00 u Price forecasts reflect short term supply issues and 1.50 ongoing demand from China which offsets the slowdown 2009F 2010F 2011F 2012F elsewhere u The rapid rise in nickel inventories reflects a drop in 11.00 stainless steel production in the 2nd half of 2007 10.00 u New nickel supply is also on its way, although most 9.00 additions are from far less reliable laterite greenfields 8.00 Nickel u High nickel prices have also encouraged production of US$/lb nickel pig iron (but quality and costs are questionable) 7.00 u Prices should be underpinned by an improvement in the 6.00 stainless steel cycle, a slower than anticipated supply 5.00 response, and less emphasis on nickel pig iron 2009F 2010F 2011F 2012F 1.30 u Demand growth for zinc is expected to remain robust, 1.20 although the recent fall in the zinc price reflects the 1.10 widely held view of strong growth in new supply 1.00 u Argonaut suggests some caution is warranted with regard 0.90 Zinc US$/lb to new supply – even existing mines are battling at 0.80 current zinc prices 0.70 u Prices should stabilise, with production holes in years to 0.60 come underpinning the long term price 0.50 2009F 2010F 2011F 2012F Bulks u Enormous infrastructure requirements in China have 210 driven, and will continue to drive, the demand for steel 190 170 u Aggressive expansion plans from the majors ensure that 150 significant new supply of iron ore is on its way over the 130 Iron Ore next few years USc/dmtu 110 u The big price gains have already been won and Argonaut 90 expects the abnormal margins in the sector to be eroded 70 50 by lower prices in the medium term as the new supply 2009F 2010F 2011F 2012F comes on stream Lump Fines Precious Metals u Investment has been the main driver for gold in recent times on the back of US$ weakness, economic and 920 900 financial uncertainty and inflation threats 880 u Forecasting its price is difficult with demand dependent 860 on fickle investors and price elastic jewellery demand 840 Gold US$/oz 820 u It’s further complicated as, although mine supply is 800 falling, above-ground stocks can easily add to supply 780 u However, gold should be supported by increased 760 740 jewellery demand, its role as an investment alternative, 2009F 2010F 2011F 2012F and by a weak supply response Argonaut Securities Research 3 Road to Recovery Metrics Summary Table 3: Argonaut’s Earnings Estimates Market Enterprise Share Revenue EBITDA NPAT Operating CF Free CF Company CodeValuation Rec Cap. Value Price 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E Undiluted ASX Listed Nickel Albidon ALB 289 336 $1.75 $3.20 HOLD 77 227 245 35 130 128 14 73 71 20 114 83 -32 86 55 Independence Group IGO 326 182 $2.79 $3.67 BUY 138 121 146 83 58 77 51 33 47 46 35 49 11 9 -169 Mincor MCR 320 210 $1.61 $2.80 BUY 321 325 348 148 118 140 64 43 68 94 106 128 -34 37 69 Mirabela MBN 570 524 $4.39 $8.48 BUY n/a n/a 297 n/a -13 168 n/a -24 89 0 -33 115 n/a -348 -3 Panoramic PAN 357 256 $1.86 $4.71 BUY 232 323 353 113 148 174 53 66 102 90 114 125 30 75 99 Western Areas WSA 1,457 1,553 $8.69 $6.66 SELL 61 153 352 -37 84 226 -55 38 138 -25 54 207 -93 -150 141 Zinc/Copper Aditya Birla ABY 492 486 $1.57 $2.04 HOLD 664 616 686 222 162 233 105 77 124 198 153 207 127 80 167 CBH Resources CBH 79 158 $0.09 $0.08 SELL 159 128 363 -12 3 66 -29 -24 21 11 -20 35 -142 -401 16 Jabiru Metals JML 175 187 $0.35 $0.75 BUY 53 105 124 2 58 76 -10 24 43 -3 37 50 -38 17 25 Kagara KZL 686 770 $3.17 $2.98 HOLD 302 391 503 130 177 235 65 89 129 116 98 138 -31 2 81 Perilya PEM 85 29 $0.43 $0.57 HOLD 273 145 127 -107 16 -5 -140 -11 -29 -10 12 -10 -70 -18 -30 Gold Avoca AVO 370 450 $1.66 $2.03 BUY n/a 159 181 n/a 70 82 n/a 24 32 n/a 49 56 n/a 27 40 Dominion DOM 245 190 $2.39 $3.05 BUY 95 108 111 43 52 60 36 38 45 47 65 69 25 26 49 Troy TRY 128 66 $1.83 $2.69 BUY 10 90 159 -19 26 63 -20 15 47 -20 16 50 -38 42 37 Iron Ore Atlas Iron AGO 611 468 $2.10 $2.30 HOLD n/a 44 205 n/a 17 97 n/a 11 65 n/a 14 70 n/a -75 4 Mount Gibson MGX 1,705 1,814 $2.12 $3.12 BUY 433 848 1,233 364 648 985 113 304 517 46 325 412 -18 186 343 Figures in A$m unless stated otherwise Argonaut Securities Research 4 Road to Recovery Metrics Summary (continued) Table 4: Key Pricing Metrics Market Enterprise Share P/E (x)P/CF (x) P / EPS (cps)DPS (cps) Div Yield (%) CFPS (cps) Company Code Valuation Rec Cap. Value Price 2008 2009E 2010E 2008 2009E 2010E NAV (x) 2008 2009E 2008 2009E 2008 2009E 2008 2009E ASX Listed Nickel Albidon ALB 289 336 $1.75 $3.20 HOLD 25.2 5.0 6.7 14.7 2.5 3.5 0.5 7.3 37.9 0.0 0.0 0.0% 0.0% 10.4 58.9 Independence Group IGO 326 182 $2.79 $3.67 BUY 6.3 9.8 7.0 7.1 9.2 6.7 0.8 40.0 26.0 17.0 12.0 6.1% 4.3% 35.6 27.6 Mincor MCR 320 210 $1.61 $2.80 BUY 5.0 7.4 4.7 3.4 3.0 2.5 0.6 31.6 21.1 12.0 12.0 7.5% 7.5% 46.3 51.9 Mirabela MBN 570 524 $4.39 $8.48 BUY neg neg 6.7 neg neg 5.0 0.5 n/a -17.5 0.0 0.0 0.0% 0.0% n/a -24.2 Panoramic PAN 357 256 $1.86 $4.71 BUY 6.7 5.5 3.5 4.0 3.1 2.9 0.4 27.6 34.1 12.0 10.0 6.5% 5.4% 46.4 59.0 Western Areas WSA 1,457 1,553 $8.69 $6.66 SELL neg 37.9 10.6 neg 27.2 7.0 1.3 -31.1 21.7 0.0 0.0 0.0% 0.0% -13.9 30.2 Zinc/Copper Aditya Birla ABY 492 486 $1.57 $2.04 HOLD 4.7 6.4 4.0 2.5 3.2 2.4 0.8 33.5 24.6 10.0 10.0 6.4% 6.4% 63.0 48.7 CBH Resources CBH 79 158 $0.09 $0.08 SELL neg neg 3.9 7.3 neg 2.2 1.1 -3.4 -2.6 0.0 0.0 0.0% 0.0% 1.3 -2.2 Jabiru Metals JML 175 187 $0.35 $0.75 BUY neg 7.5 4.3 neg 4.7 3.5 0.5 -1.9 4.7 0.0 0.0 0.0% 0.0% -0.6 7.1 Kagara KZL 686 770 $3.17 $2.98 HOLD 10.6 7.7 5.3 5.9 7.0 5.0 1.1 28.3 38.7 12.0 2.0 3.8% 0.6% 50.6 42.3 Perilya PEM 85 29 $0.43 $0.57 HOLD neg neg neg neg 7.1 neg 0.8 -4.2 -5.5 1.0 0.0 2.3% 0.0% -5.0 6.0 Gold Avoca AVO 370 450 $1.66 $2.03 BUY neg 15.5 11.4 neg 7.5 6.6 0.8 n/a 10.2 0.0 0.0 0.0% 0.0% n/a 21.0 Dominion DOM 245 190 $2.39 $3.05 BUY 6.8 6.5 5.4 5.2 3.8 3.6 0.8 34.9 36.8 12.0 12.0 5.0% 5.0% 51.4 63.4 Troy TRY 128 66 $1.83 $2.69 BUY neg 8.3 2.7 neg 7.8 2.5 0.7 -27.4 21.2 0.0 0.0 0.0% 0.0% -28.0 22.5 Iron Ore Atlas Iron AGO 611 468 $2.10 $2.30 HOLD n/a 55.7 9.3 n/a 42.2 8.7 0.9 n/a 3.2 0.0 0.0 0.0% 0.0% n/a 4.3 Mount Gibson MGX 1,705 1,814 $2.12 $3.12 BUY 15.0 5.6 3.3 37.3 5.2 4.1 0.7 14.1 37.9 0.0 0.0 0.0% 0.0% 5.7 40.5 Figures in A$m unless stated otherwise Argonaut Securities Research 5 Road to Recovery Metrics Summary (continued) Figure 1: Market Capitalisation 2,000 1,800 1,600 1,400 1,200 1,000 800 Market Cap (A$m) Market 600 400 200 0 MGX WSA KZL AGO MBN ABY AVO PAN IGO MC R ALB DOM JML TRY PEM C BH Figure 2: Price/Net Asset Value (P/NAV) 1.4 1.2 Premium 1.0 Discount 0.8 0.6 P/NAV (x) 0.4 0.2 0.0 WSA CBH KZL AGO AVO DOM ABY IGO PEM TRY MGX MCR ALB MBN JML PAN Argonaut Securities Research 6 Road to Recovery Metrics Summary (continued) Figure 3: Price/Earnings (P/E) 56 38 20.0 15.0 10.0 P/E (x) P/E 5.0 0.0 AGO WSA AVO IGO TRY KZL JML MCR DOM ABY MGX PAN ALB MBN CBH PEM FY09 FY10 Figure 4: Price/Operating Cash Flow (P/CF) 42 27 12.0 10.0 8.0 6.0 P/CF (x) 4.0 2.0 0.0 AGO WSA IGO TRY AVO PEM KZL MBN MGX JML DOM ABY PAN MCR ALB CBH FY09 FY10 Argonaut Securities Research 7 Road to Recovery Comparatives Typically, higher EV to reserve / resource multiples reflect higher grades. However, note that this is simplistic and ignores other stock specific variables including costs, sovereign risk, mineralogy, deposit depth and management. Nickel Figure 5: EV/Reserve ($/t) Figure 6: EV/Resource ($/t) 18,000 4% 6,000 6% 15,000 5,000 5% 3% 12,000 4,000 4% 9,000 2% 3,000 3% 2,000 2% Ni) (% Grade 6,000 Ni) (% Grade EV/Reserve ($/t) 1% EV/Resource ($/t) 3,000 1,000 1% 0 0% 0 0% WSA IGO MCR ALB PAN MBN WSA IGO ALB PAN MCR MBN $/t %Ni $/t %Ni Notes: WSA has a perceived strong growth profile; IGO also has a 30% share in the 4Moz Tropicana JV (gold); ALB has execution risk associated with the first new nickel mine in Zambia; MBN is a disseminated nickel sulphide deposit (lower grade but significantly larger size). Zinc Figure 7: EV/Reserve ($/t) Figure 8: EV/Resource ($/t) 1,000 30% 100 20% 18% 25% 800 80 16% 14% 20% 600 60 12% 15% 10% 400 40 8% 10% 6% EV/Reserve ($/t) EV/Reserve EV/Resource ($/t) EV/Resource Grade (% Zn eqv) Zn (% Grade Grade (% Zn eqv) Zn (% Grade 200 20 4% 5% 2% 0 0% 0 0% TZN KZL JML CBH PEM KZL JML TZN CBH PEM $/t %Zn eqv $/t %Zn eqv Notes: TZN has recently commissioned the Angas zinc mine in South Australia and is developing the prospective Oued Amizour project in Algeria; JML has the highest grade amongst peers; CBH and PEM have announced major operational changes to their operations and trade at a steep discount. Argonaut Securities Research 8 Road to Recovery Comparatives (continued) Copper Figure 9: EV/Reserve ($/t) Figure 10: EV/Resource ($/t) 1,500 5% 1,000 4% 1,200 800 3% 3% 900 600 2% 600 400 1% EV/Reserve ($/t) EV/Resource ($/t) EV/Resource Grade (% Cu eqv) Cu (% Grade Grade (% Cu eqv) Cu (% Grade 1% 300 200 0 -1% 0 0% PNA EQN ABY AVM PNA EQN ABY AVM $/t % Cu eqv $/t % Cu eqv Notes: PNA also has a substantial gold resource and recently completed first sale of copper-gold concentrate from the Phu Kham Operation in Laos; EQN has experienced commissioning delays at Lumwana in Zambia; ABY is a high cost producer; AVM has a high grade resource base but is heavily discounted because of DRC sovereign risk. Gold Figure 11: EV/Reserve ($/oz) Figure 12: EV/Resource ($/oz) 800 8.0 400 10.0 7.0 9.0 320 8.0 600 6.0 7.0 5.0 240 6.0 400 4.0 5.0 3.0 160 4.0 Grade (g/t) Grade Grade (g/t) Grade 3.0 EV/Reserve ($/oz) 200 2.0 EV/Resource ($/oz) 80 2.0 1.0 1.0 0 0.0 0 0.0 AVO AXM DOM NCM SGX KCN LGL TRY RSG SBM AVO DOM SGX NCM CNT KCN LGL TRY RSG AXM SBM $/oz g/t $/oz g/t Notes: AVO and DOM have small, but high grade mineral inventories; AXM has a high grade, but high cost refractory operation; NCM achieves a size premium; TRY is still ramping up modest production in Brazil; LGL faces a sovereign risk discount with operations in PNG and Cote D’Ivoire; SBM has challenging development hurdles to overcome. Argonaut Securities Research 9 Road to Recovery Comparatives (continued) Iron Ore Figure 13: EV/Reserve ($/t) (DSO only) Figure 14: EV/Resource ($/t) (DSO only) 200 64% 30 64% 25 62% 62% 150 20 60% 60% 100 15 58% 58% Grade (%Fe) Grade 10 Fe) (% Grade EV/Reserve ($/t) EV/Reserve 50 EV/Resource ($/t) 56% 56% 5 0 54% 0 54% MMX MIS PMM AGO MGX FMG PMM MGX MMX MIS AGO FMG $/t %Fe $/t %Fe Notes: MMX and MIS have modest DSO production and are focused on developing capital intensive, infrastructure dependent magnetite projects; AGO has a small but expanding resource base. Argonaut Securities Research 10 Road to Recovery SECTION 1 Overview Argonaut Securities Research 11 Road to Recovery Future Drivers Supply Reasonably Predictable While supply is reasonably For a given commodity, future addition to supply is reasonably predictable. Even so, predictable … Argonaut has tended to be cautious on the supply side for reasons that are worth restating: u New mining projects have typically been significantly delayed, with cost blowouts a common feature u The anticipated additional supply in certain cases may now be marginal following large commodity price pull-backs u Reserves and grade in traditional low sovereign risk countries have been declining, often forcing new mines into higher risk, more challenging areas Supply issues have helped underpin Argonaut’s positive commodity outlook to date, and are discussed in more detail later under specific commodity commentary. Demand Now the Issue … demand has emerged as a major Not so predictable is demand. There is little doubt that major western economies are issue slowing sharply as the credit boom unwinds, so the question is whether the large developing countries can take up the slack. Views are polarised, with some arguing that China and India will power ahead on the back of strong domestic demand, regardless of events in the western world. The momentum in a country like China is formidable, and productivity gains as the population moves from farms into factories is likely to keep the strong growth trajectory intact. But more important from a commodities perspective is not so much the level of growth in a country like China, but to what extent growth relies on commodity imports to fuel it. China dominates the consumption China has grown over the last few years to dominate the consumption statistics for statistics for most commodities ... most commodities. As has been regularly pointed out though, consumption on a per capita basis still falls well below the norms in developed countries, implying continued strong expansion in demand for commodities as the country grows. … but will not be immune to the However, it should be remembered that: global slowdown u Domestic consumption and investment have partly been as a result of, and in response to, strong export led growth u A proportion of Chinese imports are required simply as inputs to generate exports Figure 15: GDP, Export and Import Growth GrowthinExports GrowthinImports NominalGDPGrowth 100% 80% 60% 40% 20% 0% Ͳ20% Source: National Bureau of Statistics of China Argonaut Securities Research 12 Road to Recovery So although private and public consumption and investment accounted for 93% of the country’s GDP in 2006, the gross level of exports and imports were significant in the overall GDP number. Figure 16: Waterfall Breakdown of China GDP 2006 30,000 25,000 20,000 15,000 (billions) Yuan 10,000 5,000 0 Source: National Bureau of Statistics of China While some slowdown in exports Given this, it is difficult to believe that a developing country like China will escape the and imports is likely … global slowdown unscathed, particularly as it becomes more serious and protracted. Argonaut therefore expects that for China in the near term: u Export growth will slow due to softer world demand u Import growth will also slow, but by a lesser extent as a portion of imports are still required to meet domestic consumption … domestic consumption and A fall in net exports will reduce China’s overall growth rate, but even so it is likely to investment should remain strong remain in the high single digits as consumption and investment growth remain strong. It’s worth noting that since 1980 real GDP growth in China has averaged 9.7% p.a., with only two years out of the 27 exhibiting growth rates of less than 5%. Given its size, even small changes Importantly, given China’s dominance in the demand for global commodities, even in demand from China can be under the assumption of lower import growth rates the increase in demand still would significant in terms of global be significant in terms of global production. production Table 5: Chinese Demand in a Global Context Additional Requirements % of Current @ 5.0% @ 10.0% @ 15.0% Data based on Global Cons’n / demand demand demand 2007 figures Cons’n / Imports growth growth growth Imports Iron Ore (mt) 384 46.0% 19 38 58 Copper (kt) 3,990 22.3% 200 399 599 Nickel (kt) 327 24.7% 16 33 49 Zinc (kt) 3,600 31.9% 180 360 540 Source: ABARE, National Bureau of Statistics of China, Argonaut To put this in context, if China were to consume 10% more of these commodities than it currently does, this would imply the need for: u 2.4 new copper mines the size of EQN’s Lumwana u 1.2 new nickel mines the size of MBN’s Santa Rita u 1.5 new zinc mines the size of Apex Silver’s San Cristobel Argonaut Securities Research 13 Road to Recovery Global Inventories While copper prices reflect stocks Global inventories for base metals, with the exception of nickel, remain at relatively at historic lows … low levels by historical standards and significant price volatility has been evident. For example, low stocks of copper (currently equivalent to ~3.3 days’ consumption) have kept prices high (as would be expected) for the last two years. Figure 17: Copper Stocks vs Price CopperStocks CopperPrice 1,200 10,000 9,000 1,000 8,000 800 7,000 6,000 (kt) 600 5,000 (US$/t) 4,000 Stocks 400 3,000 Price 200 2,000 1,000 0 0 2000 2002 2004 2006 2008 Source: IRESS Conversely a dramatic increase in nickel stocks (now equivalent to ~13 days’ …. the converse is true for nickel consumption) has seen the price fall 61% from its peak in Q2 2007. Figure 18: Nickel Stocks vs Price NickelStocks NickelPrice 60,000 60,000 50,000 50,000 40,000 40,000 (US$/t) (kt) 30,000 30,000 Price Stocks 20,000 20,000 10,000 10,000 0 0 2000 2002 2004 2006 2008 Source: IRESS Despite low zinc stocks, its price The relationship is not always that obvious though. In the case of zinc, the mere reflects anticipation of forthcoming anticipation of increased future supply has been enough to pull prices back 61%, supply despite current stock levels being equivalent to just over 5 days consumption. Figure 19: Zinc Stocks vs Price ZincStocks ZincPrice 900 5,000 800 4,500 700 4,000 600 3,500 3,000 (kt) 500 (US$/t) 2,500 400 2,000 Stocks Price 300 1,500 200 1,000 100 500 0 0 2000 2002 2004 2006 2008 Source: IRESS Argonaut Securities Research 14 Road to Recovery Other Issues Constraints The mining sector is presently Following decades of underinvestment in the mining sector, the supply response to constrained ... higher prices has been hampered by numerous constraints: u Labour – There is plenty of work in the mining sector, but not enough people. This has been particularly noticeable in Australia, but is also evident elsewhere, particularly as miners look further and further afield for additional … by labour issues … reserves. The Minerals Council of Australia has identified that there will need to be a 9% increase per year until 2015 to fulfil the needs of the industry and meet shortages in skilled labour. This equates to an additional requirement of 70,000 employees. Figure 20: Mining Industry Labour Market in Australia (2002 – 2007) Wages & Salaries People Employed 150 12000 140 10000 130 120 8000 110 6000 100 Wages ($m) Wages People ('000) People 90 4000 80 2000 70 60 0 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Source: ABS … shortages of equipments and u Equipment & Services – The sudden increase in demand for equipment and services … services has also caught providers on the hop. Data shows that significant delays in getting equipment are endemic across the mining industry. Figure 21: Delivery Times for Key Items Source: ABARE, Rio Tinto … and reduced access to capital u Access to Capital – This has also emerged as a constraint, as the credit crunch takes its toll on the ability to raise new debt and equity, as well as its cost. While large, diversified producers like BHP and RIO are generating more cash than they know what to do with, smaller companies at a development or exploration stage will not be finding life so easy. This has obvious implications for consolidation within the mining sector. Argonaut Securities Research 15 Road to Recovery Production Costs Constraints have had a significant The constraints in the supply of people, services, equipment and capital in the face of impact on costs … burgeoning demand have pushed up their costs considerably. In addition to this, there are still further cost pressures: u Grades – As reserves at the best deposits get depleted, additional mining … as have declining grades ... inventory typically exhibits lower grades and greater complexity. As a result many Australian companies are now looking beyond the borders for the next big deposit. Figure 22: Australia’s Declining Ore Grades Source: CSIRO … and increased energy costs u Energy Costs – The rapidly increasing cost of energy provides further cost pressure and margin squeeze. Worst affected will be those companies that have high on-site power generation costs, long-distance haulage, long and deep declines, a high ore work index, and excessive pumping and ventilation requirements. Figure 23: West Texas Oil Price 160 140 120 100 80 (US$/bbl) 60 Price 40 20 0 2000 2002 2004 2006 2008 Source: IRESS Cost pressures overall are significant, and the very high margins from a couple of years ago will, in most cases, have been severely eroded. In some instances this will help underpin prices as new marginal supply becomes less economic. When commodity prices were rising sharply, the higher cost producers had the most leverage. Now the reverse is true – with declining margins, the low cost producers will be the winners. Argonaut Securities Research 16 Road to Recovery Low cost producers are best With costs now a major focus the following chart provides an indication of which positioned in the current companies covered in this review are best positioned to withstand a declining price environment environment. High margin businesses deserve to trade at a premium to peers. Figure 24: Cash Margins 90% 80% 70% 60% 50% 40% 30% EBITDA margin (%) margin EBITDA 20% 10% 0% MGX ALB JML WSA MBN DOM IGO PAN KZL AVO AGO MCR TRY ABY PEM CBH FY09 FY10 Source: Companies, Argonaut It should be noted that WSA, JML and MBN are in the process of ramping up their respective operations. Cash margins are based on feasibility and not steady state production figures. Argonaut Securities Research 17 Road to Recovery Implications Stock selection is more important The world has changed. Companies are no longer able to rely on the rising tide of than ever commodity prices. In the current environment, stock selection is more critical than ever. With this in mind, Argonaut provides a checklist suggesting what to avoid and what to look for. Table 6: The Argonaut Checklist Look For: Be Cautious Of: Producers: Lower cost producers, High cost producers – Costs preferably with the margins are more likely to advantage of scale fall than widen Developers: Companies that do not have Ready access to power, access (or a firm plan to Infrastructure water, ports, road / rail and gain access) to all services infrastructure needs Developers who have solid Companies that do not have Stage of projects (backed up by at a firm development plan and Project least a scoping study) and have big hurdles to firm plans for financing overcome Reasonable capex Hefty capex requirements Capex requirements – such as magnetite iron ore Requirements remembering that costs will and nickel laterites likely blow out Companies that are able to Lengthy time frame to take advantage of a window production – the opportunity Timing of opportunity (e.g. iron ore could be missed (e.g. iron before 2010) ore after 2010) Explorers: A significant cash position, Companies running low on which will see the Company cash – they will battle to Cash Position through the next few raise further funds and / or quarters at least dilute existing shareholders Quality management, Exploration exploration expertise, well Limited news-flow, poor Potential located, near-term drilling, quality tenements continuous news flow General: Cash is king in the present Producers who are getting Cash Flow environment, as is a solid margins and cash flow balance sheet squeezed Excellent management – Unproven or inexperienced Management they are likely to be tested management, money- in the short term miners Significant M&A activity as cash rich companies grow M&A Activity Acquirers overpaying reserves through acquiring beaten down stocks Individual Commodity Forecasts Each commodity faces a unique set of supply issues and these, and the consequent price implications, are discussed for each commodity in the following section. Argonaut Securities Research 18 Road to Recovery SECTION 2 Commodities Argonaut Securities Research 19 Road to Recovery Copper Supply issues continue to keep Copper has remained at or near record highs during the first half of 2008, as supply stocks at low levels … issues continue to keep inventories at low levels, despite a softening in demand from Europe and the US. Figure 25: Copper Stocks vs Price CopperStocks CopperPrice 1,200 10,000 9,000 1,000 8,000 800 7,000 6,000 (kt) 600 5,000 (US$/t) 4,000 Stocks 400 3,000 Price 200 2,000 1,000 0 0 2000 2002 2004 2006 2008 Source: IRESS Production Continues to Disappoint … with strike action and power Mine production has been significantly below capacity for the last few years. This was issues the main causes particularly evident in 2007 and is even more so thus far in 2008. Reasons include: u Power and water issues in Chile u Ongoing strike action at large South American mines u Weather related shut-downs in China Figure 26: Mine Capacity Utilisation 95.0% 90.0% 85.0% 80.0% 75.0% 2002 2003 2004 2005 2006 2007 Jan08 Feb08 Mar08 Source: ICSG If copper mines were to produce Supply unconstrained by power, strike and other disruptions would be significantly at capacity it would have a higher, and this possibility does provide a potential downside risk to the copper price. significant impact on supply If capacity utilisation increased from 2007 levels of 87.5% to 92.0% for example, this would result in an increase in copper supply of 800,000t (equivalent to the output of the third largest world copper mine – Grasberg). However, recent history suggests this is unlikely. Six of the top 9 copper mines are located in South America (primarily Chile) and nearly 50% of world production comes from this region (Chile 36%). Given their size, disruptions at any one of these mines have a serious impact on overall production. Production issues associated with labour disputes are expected to continue in Chile and Mexico, at least in the short term, while power is an ongoing global concern. Argonaut Securities Research 20 Road to Recovery Table 7: Top Copper Mines, 2006 Capacity % of Mine Name Country Owners (‘000 t) Total Escondida 1,311 7.4% Chile BHP, RIO, Japan Escondida Codelco Norte 957 5.4% Chile Codelco Grasberg 750 4.3% Indonesia PT Freeport, RIO Collahuasi 450 2.6% Chile Anglo, Xstrata, Mitsui, Nippon Morenci 430 2.4% US Freeport McMoran, Sumitomo Taimyr Peninsula 430 2.4% Russia Norilsk El Teniente 418 2.4% Chile Codelco Antamina 400 2.3% Peru BHP, Teck, Xstrata, Mitsubishi Los Pelambres 335 1.9% Chile Antofagasta, Nippon, Mitsubishi Source: ICSG Over the past few years analysts have typically underestimated the impact of supply disruptions, which have now become the rule rather than the exception. Figure 27: Overestimation of Short Term Production Average over- estimation over past 6 years: 3.3% Source: RIO Supply Issues Ongoing Supply issues look like being an Looking ahead Argonaut sees little reason to expect supply to surprise on the upside: ongoing problem u Capacity utilisation is likely to remain constrained as a result of the aforementioned labour and power issues. u Two thirds of the anticipated capacity increase in 2009 comes from geopolitical hotspots in South America and Africa. As examples: The biggest near term contributor to additional supply is the ramp-up of Freeport's Cerro Verde project (290ktpa) in Peru, where threats of nationalism always lurk Two large projects (KOV – 250ktpa and Tenke Fungurume – 114ktpa) are set to commence in the DRC, where sovereign risk is high The anticipated uplift in Zambian production may be threatened by recent changes to mining royalties and taxes u Global copper grades continue to fall to an average of around 0.7% Cu. Chilean grades have dropped to 0.75%, while the best grades of >2% are found in high risk areas such as the DRC. Argonaut Securities Research 21 Road to Recovery Figure 28: Primary Copper Head Grade Source: Xstrata, Brook Hunt Demand Driven by China China now dominates global Demand from China's construction and power generation sectors continues to outweigh consumption … the negative ramifications of the US housing industry downturn. China’s consumption now dominates global consumption and is more than double that of the US. Figure 29: Major Copper Consumers China 25% Other 38% USA 12% Italy 5% Germany Korea,South Japan 8% 5% 7% Source: ICSG … with the power industry accounting for half of demand Unlike the US, where the building industry accounts for half the copper demand, the power industry accounts for half of China's demand. Around 90GW of generating capacity is expected to be added to the Chinese power grid this year. Continued urbanisation and industrialisation will underpin China’s consumption for years to come as it follows the growth path of more developed nations. Figure 30: Intensity of Refined Copper Use Long way to go Source: ICSG, IMF, US Census Bureau Argonaut Securities Research 22 Road to Recovery Price Forecasts Price forecasts reflect short term Argonaut’s price forecasts reflect short term supply issues and ongoing demand from supply issues China offsetting a slowdown elsewhere. The longer term price assumption of $2.00/lb reflects the increased costs of marginal producers following a strong ramp up in costs, which in part reflects lower grades from some of the worlds’ top producers. Figure 31: Argonaut Copper Price Forecasts (US$/lb) 4.00 3.50 3.00 2.50 2.00 1.50 2009F 2010F 2011F 2012F Source: Argonaut Argonaut Securities Research 23 Road to Recovery Nickel Price Has Plummeted The nickel price has plummeted, The nickel price has taken a pounding in recent times, dropping 61% from its peak in with increasing inventory … May 2007, and 19% so far this year. At the same time, nickel inventories have jumped dramatically, climbing nine-fold from the critically low levels in May 2007 which had forced the nickel price briefly above $50,000/t ($22.70/lb). In comparison, the current price is $21,000/t ($9.53/lb). Figure 32: Nickel Stocks vs Price NickelStocks NickelPrice 60,000 60,000 50,000 50,000 40,000 40,000 (US$/t) (kt) 30,000 30,000 Price Stocks 20,000 20,000 10,000 10,000 0 0 2000 2002 2004 2006 2008 Source: IRESS ... reflecting a sharp drop off in As two thirds of all nickel produced goes into stainless steel, this rise in nickel stainless steel production late last inventories and the drop in price largely reflects stainless steel production, which year dropped sharply in the latter half of 2007. Production in the September quarter ‘07 was 22.5% lower than the March quarter ‘07, and even following a somewhat subdued recovery, stainless steel production in the March quarter ‘08 was still 2.9% lower than in the equivalent period in 2007. Figure 33: World Stainless Steel Production vs Nickel Stocks & Nickel Price WorldStainlessSteelProduction NickelStocks WorldStainlessSteelProduction NickelPrice 60 8.0 25.00 8.0 (mt) 7.5 7.5 (mt) 50 20.00 7.0 7.0 40 15.00 (US$/lb) (kt) 6.5 6.5 30 Production Production 6.0 6.0 Price 10.00 Stocks 20 Steel Steel 5.5 5.5 Nickel 5.00 10 5.0 5.0 Stainless 0 4.5 0.00 4.5 Stainless Source: ISSF, IRESS The sharp reduction in the nickel price not only reflects the softness in the stainless steel market, but also the fact that high nickel prices encouraged the substitution of: u Ferritic stainless steels for austenitic stainless steels (the former using more chromium and less nickel than the latter) u Increasing production of lower quality nickel pig iron (produced from low- grade, high-impurities laterite ores from the Philippines, Indonesia and New Caledonia) Stainless Steel Cycle to Improve The general view is that demand from stainless steel is set to rebound later this year and into 2009, resulting in strong future demand for nickel. ABARE anticipates nickel consumption in 2008 to climb 5.7% and a further 8.1% in 2009. Access Economics in its report to the Minerals Council of Australia indicated even stronger growth of 12.1% Argonaut Securities Research 24 Road to Recovery and 10.3% over these two years. In fact Access Economics predicts that nickel will show the most growth out of any of the base metals between now and 2020. There are risks to demand however: u Slower than expected world growth could derail the anticipated recovery in stainless steel demand u Smelters may switch to producing lower nickel content stainless steels u Increased recycling of stainless steel scrap Supply Coming, but not Without Risks Plenty new supply is reported to On ABARE’s numbers, nickel consumption will increase by 76,000t and 113,000t in be on its way … 2008 and 2009. In an effort to match this, a number of new mines are slated to come on stream over the next few years. Table 8: Selected Large Additions to Nickel Supply Project Company Country Type Ore Type Timing (‘000 t) Bucko Lake Crowflight Canada Greenfield Sulphide Commenced 6.0 Ravensthorpe BHP Australia Greenfield Laterite Commenced 45.0 Shakespeare Ursa Major Canada Greenfield Sulphide 3rd Qtr 08 5.0 Avebury Zinifex Australia Greenfield Sulphide 3rd Qtr 08 8.5 Munali Albidon Zambia Greenfield Sulphide 2nd Half 08 8.5 Moa Bay Sherritt Cuba Brownfield Laterite 2nd Half 08 13.0 Sotkamo Talvivaara Finland Greenfield Sulphide 4th Qtr 08 33.0 Goro Vale-Inco N Caledonia Greenfield Laterite 2009 60.0 Onca Puma Vale Brazil Greenfield Laterite 2009 57.0 Barro Alto Anglo Brazil Greenfield Laterite 2009 35.0 Tati Norilsk Botswana Greenfield Sulphide 2009 23.0 Santa Rita Mirabela Brazil Greenfield Sulphide 2009 20.0 Caldag Euro Nickel Turkey Greenfield Laterite 2009 20.0 Ambatovy Sherritt Madagascar Greenfield Laterite 2010 60.0 Ramu River CMCC PNG Greenfield Laterite 2010 33.0 Raglan Xstrata Canada Brownfield Sulphide 2011 24.0 Sulawesi PT Inco Indonesia Brownfield Laterite 2011 20.0 Source: ABARE, Companies, Various Industry Sources … but is not without risks given Argonaut has pointed out previously that there are risks to new supply. Of the new that most projects are laterite mines listed above, most are greenfield developments and nearly ¾ are laterite greenfield developments projects. In Argonaut’s view laterite mines remain unreliable sources of nickel as the deposits come with high technical and economic risks. Ravensthorpe for example, had capital costs blow out more than 3 times, and full production capacity significantly delayed. It would not be unreasonable to assume delays in at least a few of the other mines listed above. Meanwhile, lower risk nickel sulphide deposits remain scarce. Nickel Pig Iron an Unknown Quantity Nickel pig iron has rapidly become The elevated prices of the last few years have led to a new source of nickel supply in a new source of supply for steel the form of nickel pig iron (NPI). NPI is a form of ferronickel, but has much lower mills … nickel content than conventional ferronickel. China has been importing low grade nickel ores from mines in the Philippines, Indonesia and New Caledonia and using Argonaut Securities Research 25 Road to Recovery these to produce NPI, which can be used in the production of low nickel bearing stainless steel. As NPI is produced by smelting low grade ore in blast furnaces, the costs of producing it are significant due primarily to high power and coke prices. It is therefore only viable when nickel prices are high. Thus far it has been viewed by the market as swing capacity, to be produced when: u Nickel prices are high enough to make its production economic u Quality is not an issue Until recently the cost of production of NPI had generally been seen to provide a floor price for nickel, with costs estimated by various commentators to be between $8/lb and $12/lb. In its latest Australian Commodities publication ABARE suggested a nickel floor price of $22,000/t ($10/lb) based on the marginal cost of producing NPI. With the nickel price having recently fallen to well below the supposed “floor price”, these assumptions have now been called into question. One explanation that has been put forward is that the previously unvalued iron content in the NPI provides a credit that further reduces the costs of production. In addition, the quality issues may not be as serious as initially thought. Using slightly better quality ore with fewer impurities, and an electric arc furnace, it has been shown that NPI can be produced at a quality suitable for use in the production of 300 series (austenitic chromium-nickel) stainless steel. … but is costly to produce and of The quality and costs of production of NPI therefore provide some uncertainty and risk lower quality to forecast nickel supply and its price. Price Curve The price should be underpinned Argonaut has adjusted the short-term nickel price downward in response to current by new supply risks and a move spot pricing levels. However it is still felt that the price is underpinned by: away from nickel pig iron u A supply response slower than anticipated due to most new mines being laterites u A focus on traditional nickel supply, rather than the uncertain quality and viability of NPI Figure 34: Argonaut Nickel Price Forecasts (US$/lb) 11.00 10.00 9.00 8.00 7.00 6.00 5.00 2009F 2010F 2011F 2012F Source: Argonaut Argonaut Securities Research 26 Road to Recovery Zinc The debate is not so much focused With zinc stocks remaining at low levels, the fall in the zinc price of 60% since late on whether there will be a surplus 2006 (and 22% in 2008 to date) reflects the widely held view of strong forthcoming in coming years… supply growth. The debate is not so much focused on whether there will be a surplus in the coming years, but rather its extent. Figure 35: Zinc Stocks vs Price ZincStocks ZincPrice 900 5,000 800 4,500 700 4,000 600 3,500 3,000 (kt) 500 (US$/t) 2,500 400 2,000 Stocks Price 300 1,500 200 1,000 100 500 0 0 2000 2002 2004 2006 2008 Source: IRESS … but rather its extent From a market roughly in balance in 2007, ABARE expects zinc surpluses to be reflected in stock levels increasing to 3 weeks consumption cover in 2008 and a comfortable 3.9 weeks in 2009. Production is expected to exceed consumption by 240kt in 2009 on ABARE’s numbers and the current zinc price of US$0.85/lb reflects this view. Demand Growth Still Robust Demand growth to remain Not surprisingly, Asian economies underpin anticipated strong growth in zinc demand. robust… ABARE expects consumption to increase by 4.1% in 2008 and a further 4.5% in 2009, while Access Economics has indicated an even stronger growth rate of close to double digits in 2009. … despite declines in western This is despite declines in western consumption, and is primarily driven by zinc’s consumption widespread use in galvanising steel (for the construction and automotive industries), as a component in batteries, and its use in the production of coins and in a number of alloys. China is now responsible for nearly a third of global consumption with its massive ongoing investment in large infrastructure projects. Figure 36: Changing Consumption Patterns China 2002 19% 2007 China 32% Others 40% Others USA 48% 13% Japan 6% Germany USA India 6% 9% India SouthKorea 4% Japan SouthKorea Germany 3% 5% 5% 5% 5% Source: ILZSG Argonaut Securities Research 27 Road to Recovery But Supply Ramping Up Faster While a number of sizeable There are numerous mines adding to world mine capacity in the near term. Apex projects are underway… Mineral’s San Cristobel operation in Bolivia is the most notable and is in the process of increasing output over the next 2 years to reach a production level of 235ktpa. Other notable additions include Minera Milpo’s Cerro Lindo mine (capacity 110ktpa) and Lundin’s Aljustrel mine in Portugal (80ktpa). Table 9: Major Additions to Zinc Capacity 2007-2009 Project Company Country Timing (‘000 t) Cerro Lindo Minera Milpo Peru Commenced 110 Jaguar Jabiru Australia Commenced 34 Caribou Blue Note Canada Commenced 43 San Christobal Apex Silver Bolivia Commenced 235 Aljustrel Lundin Portugal Commenced 80 Sotkamo Talvivaara Finland Commenced 60 Perseverence Xstrata Canada Commenced 115 Angas Terramin Australia Commenced 60 Rasp CBH Australia Early 2009 37 Tulsequah Chief Redcorp Canada 2009 50 Penasquito Goldcorp Mexico 2009 189 Perkoa Aim Resources Burkina Faso On Hold 68 Panorama CBH Australia 2009 50 Aguas Tenidas PGM Ventures Spain 2009 50 Wolverine Yukon Zinc Canada 2009 50 Jabili ZincOx Yemen 2009 70 Dairi PT Bumi Indonesia 2009 115 Source: ABARE China is also expected to boost production in the near term, with the IZLSG expecting growth of around 10% p.a. in both 2008 and 2009. A Word of Caution Though … mines typically take longer to It’s easy to model additional supply on a spreadsheet, but real life is not that simple. deliver than expected Argonaut notes the following issues: u Not all the mines slated to add to production will do so (for example Aim Resources has already indicated that Perkoa will not be given the go-ahead) u Current marginal cost producers will be coming under significant pressure at the current zinc price: Teck Cominco intends to shutdown the now unviable 80ktpa Lennard Shelf mine Lundin recently announced that Aljustrel is not viable at current zinc prices CBH and PEM have both announced major retrenchments recently u The potential for interference with the zinc market (for example if taxes were introduced to discourage Chinese exports, or if there were deliberate production cuts) u Argonaut’s long held view that new mines typically take longer to deliver than expected and cost more than anticipated Argonaut Securities Research 28 Road to Recovery Price Impact Expect prices to stabilise… Although the zinc price looks to have reacted before the event, it appears likely that significant new supply in the short term will keep downward pressure on prices. Thereafter though, Argonaut expects the price to stabilise. This reflects: u Current zinc mines reaching the end of their lives u The fact that marginal producers are barely economic at current prices (it is estimated that the lowest margin producers’ face costs at or above $0.90/lb u A steady decline in grades from existing mines u Big holes in production occurring longer term (for example when Century finishes in 2016, production of 400kt falls away) … with significant production It is worth remembering that if China alone increases its consumption by a mere 5% growth required to meet the extra production required is equivalent to 1.5 new San Cristobel’s. While this sort consumption in the years ahead of growth is being met over the next two years, it is a big ask to do so in the longer term on a continuous basis. Figure 37: Argonaut Zinc Price Forecasts (US$/lb) 1.30 1.20 1.10 1.00 0.90 0.80 0.70 0.60 0.50 2009F 2010F 2011F 2012F Source: Argonaut Argonaut Securities Research 29 Road to Recovery Iron Ore China’s Industrialisation Drives Steel Production China is driving steel production In the early stages of industrialisation infrastructure is built at a rapid pace. This growth… necessitates significant steel usage, and China has been a strong driver of the growth in steel production in recent times. Figure 38: Steel Production Since 1990 (Mt) China Japan US RestofWorld 1,600 1,400 1,200 1,000 800 600 400 200 0 Source: IISI …and now accounts for ~38% of China’s steel production more than trebled between 2001 and 2007 and ABARE global production estimates that production will increase a further 44mt (9%) in 2008. This year China is expected to account for 37.7% of global steel production (up from 8.6% in 1990). Most of this steel will be consumed internally to meet the country’s enormous infrastructure requirements. Figure 39: Steel Production and Consumption 2008F (kt) Production Consumption 600 500 400 300 200 100 0 EU US China Japan India Restof World Source: ABARE Iron ore prices have soared 400% Not surprisingly as steelmakers have competed for a limited supply of iron ore, prices over the last five years have climbed dramatically. Taking the latest iron ore contract settlements into account, iron ore prices are up 400% over the last five years. Figure 40: Hamersley Benchmark Iron Ore Prices 250 Lump Fines 200 150 USc/dmtu 100 50 0 JFY03/04 JFY04/05 JFY05/06 JFY06/07 JFY07/08 JFY08/09 Argonaut Securities Research 30 Road to Recovery Growth Not Over Yet The strong demand growth is set Over the next decade it is likely that the global steel industry will continue to grow 2 to continue with China and India strongly, with China and India accounting for around /3 of this growth. ABARE expects leading the way steel consumption in China will increase around 10% p.a. in both 2008 and 2009. This implies continued strong growth in the demand for iron ore. Access Economics expects iron ore consumption per capita in China to increase from around 450kg to 600-700kg in the next decade, resulting in total iron ore consumption climbing to be more than 50% higher than current levels by 2020. Figure 41: Iron Ore Imports by Destination (2009F) Other EU 19% 18% Japan 14% China 49% Source: ABARE ABARE expects Chinese iron ore imports to grow 10.7% and 8.1% in 2008 and 2009. This amounts to an additional demand of 89mtpa and 75mtpa in each of these two years. Figure 42: Iron Ore Imports EU Japan China RestofWorld 1,200 1,000 800 600 400 200 0 2006 2007 2008F 2009F Source: ABARE Supply’s on Its Way Supply is dominated by Valé, BHP The top three producers of iron ore – Valé, Rio Tinto and BHP Billiton – account for and Rio around 35% of the world’s iron ore output. More importantly, they control >75% of the seaborne trade. These major producers all have aggressive expansion plans over the next 5 years: …who have aggressive expansion u Valé is planning on increasing production over 50% to 450mtpa plans in place u RIO is aiming to nearly double production to 350mtpa u BHP is targeting in excess of 235mtpa, up nearly 75% High iron ore prices have not only induced the majors into significant expansion plans, but also encouraged a number of smaller players into production. FMG is the most notable, having recently commenced production with an initial target of 55mtpa. Argonaut Securities Research 31 Road to Recovery Figure 43: Iron Ore Exports Australia Brazil India RestofWorld 1,200 1,000 800 600 400 200 0 2006 2007 2008F 2009F Source: ABARE Additional exports of over 150mt between 2007 and 2009 are significant, with at least another 300mtpa coming from the big 3 by 2013. It’s also worth noting that iron ore production is also growing strongly within China, which is now the world’s second largest producer after Brazil. ABARE forecasts (lower quality) Chinese iron ore production to increase 13% to 375mt in 2008 and by 9% to around 410mt in 2009 (although this will still only meet about half of China’s overall needs). The Big Price Gains Already Won Prices underpinned in the short Reflecting a combination of strong demand, as well as the fact that projects invariably term… fail to deliver on time for a number of reasons, Argonaut expects iron ore prices to remain underpinned in the short term. …until the substantial supply However the forthcoming supply in the medium term is substantial. To put these response comes online numbers in context, if China were to grow import demand at 10% p.a. every year for the next 5 years, the country would need to import an additional 230mtpa in 2012 over and above 2007 import levels. Expansion plans strongly suggest that this capacity will be available. The big price gains have already In Argonaut’s view the big price gains have already been won. Iron ore contracts have been won recently been agreed and following a year of much slower world growth, it will be harder for the iron ore majors to argue for further increases next year (especially given the substantial margins they already operate on). Argonaut expects that in the medium term the abnormal margins in the sector will be steadily eroded by lower prices. Figure 44: Argonaut Iron Ore Price Forecasts (USc/dmtu) 210 190 170 150 130 110 90 70 50 2009F 2010F 2011F 2012F Lump Fines Source: Argonaut Argonaut Securities Research 32 Road to Recovery Gold Gold has enjoyed solid support in The gold price has climbed 87% in US$ terms and 65% in A$ terms over the last 3 recent times… years, with key support coming from the metal’s role as a financial asset. Figure 45: Gold Price ($/oz) Price(US$) Price(A$) 1,200 1,100 1,000 900 800 700 600 500 400 300 200 1993 1995 1997 1999 2001 2003 2005 2007 Source: IRESS Investment the Driver …driven by demand for jewellery… Demand for gold is dominated by jewellery fabrication (around 69% of total demand on average over the period 2002 – 2006), with >20% of total jewellery demand coming from India. Jewellery demand is highly responsive to the gold’s price and volatility, and has noticeably weakened at recent higher gold prices. Figure 46: Demand (2002-2006) Figure 47: Jewellery Demand & Prices Jewellery GoldPrice(EndQuarter) Industry 750 1,000 12% 950 700 900 (t) 650 850 600 800 (US$/oz) Demand Investment 750 19% 550 700 Price 500 650 Gold Jewellery 600 450 550 400 500 Jewellery 69% Sources: WGC, GFMS, IRESS …and its perception as a “store of However investment demand for gold has grown rapidly in recent years, largely value” in uncertain times reflecting the growth in exchange traded funds and similar products. This has reflected investor’s perception of gold as a “store of value” at a time of: u US$ weakness u Economic and financial uncertainty u Inflation threats Other factors to have influenced investment demand include: u Gold’s diversification benefits (negatively correlated with equities) u Producer de-hedging, which has resulted in extra demand for gold in order to buy back or unwind hedge positions (Newcrest, Barrick and Newmont having had a significant impact) Argonaut Securities Research 33 Road to Recovery Figure 48: Gold Investment Demand (t) RetailInvestment ETF's InferredInvestment TotalInvestment 400 300 200 100 0 Ͳ100 Ͳ200 Source: WGC, GFMS Mine Supply Falling Underinvestment has contributed Underinvestment during the 1990’s means there are relatively few major projects in to a declining mine supply… the pipeline. This suggests that a significant mine supply response to higher prices is still some way off. Furthermore, traditional producers are declining in importance, with the contribution to total production from South Africa, Australia, Canada and the US falling from 54% to 35% in only 10 years. Figure 49: Declining Mine Supply & Increasing Sovereign Risk Source: Barrick, GFMS …with gold production in Australia In Australia for example, gold is on struggle-street, with Surbiton Associates recently slumping to multi year lows reporting that Australian gold production slumped to its lowest level in 19 years in the March quarter. Despite the increasing gold price, it’s been hard to find winners, with the road from explorer to producer proving particularly challenging. There have been numerous casualties, with reasons for failures including: u Delusional attempts to re-start tired assets u Declining grades u Increasing cash costs u A strong A$ u Resource estimation issues u Operational difficulties Argonaut Securities Research 34 Road to Recovery Recyclable gold confuses the Confusing the supply issue however is the fact that virtually all the gold ever mined supply issue… (estimated at ~158kt) still exists above ground in various forms (mostly as jewellery) and is recoverable by being melted down. Figure 50: Above Ground Stocks of Gold Unaccounted 2% Industrial 12% Jewellery 52% Investment 16% Official Sector 18% Source: WGC, GFMS …coupled with Central Banks A large proportion of total supply comes from Central Banks, who have been net sellers selling gold reserves…. of gold since 1989. Over the last 3 years this has added around 1,500t to overall gold supplies. Sales are covered by the Central Bank Agreement on Gold (CBGA), which stipulates that annual sales must not exceed 500t. This source of supply has been questioned recently as some Central Banks have indicated that their attitudes towards holding gold reserves may be changing as part of an overall diversification strategy away from the US$. A significant portion of US Treasuries in issue are held by China and Japan, whose gold holdings as a percentage of overall reserves are tiny at 1.1% and 2.3% respectively. …making up for any shortfalls in Most recycled gold comes from jewellery and is largely dependent on economics – as mine production the price has risen over the last few years, jewellery demand has fallen and the supply of recycled gold has climbed. This, together with Central Bank sales, has made up for any shortfalls in mine production. Figure 51: Gold Supply (t) MineProduction NetProducerHedging OfficialSectorSales OldGoldScrap TotalSupply 1,200 1,000 800 600 400 200 0 Ͳ200 Ͳ400 Source: WGC, GFMS Argonaut Securities Research 35 Road to Recovery Price Forecasts Forecasting the price of gold is Argonaut believes that forecasting the price of gold is fraught with danger, with: fraught with danger… u Demand dependent on the short-term views of investors and price elastic jewellery demand u Annual supply not solely reliant on annual production, but conceivably on all the gold ever produced Expected trends for the underlying drivers are shown below, the colour of the arrows indicating whether the trend is positive (green), negative (red) or neutral (blue). Table 10: Argonaut’s Gold View Expected Comment Trend Demand Jewellery Demand falls at higher, volatile prices Investment Weaker US$, inflation, financial uncertainty Industrial Steady, but insignificant, increase De-hedging Has occurred, will now taper off Supply Mines Slow supply response, not yet evident Central Banks Diversification away from US$ Recycled Increases at higher prices …but ongoing instability should In the short-term, much will depend on the extent of global financial and economic underpin the price in the short uncertainty. In Argonaut’s view, ongoing instability through the remainder of 2008 term and into 2009 will underpin the gold price. In the longer term, gold is likely to remain a viable investment alternative to the US$ and US$ denominated assets, while demand for jewellery will benefit from growing wealth in traditional markets like India and the Middle East, as well as potentially from China. An uninspiring supply response from gold producers caps the positive outlook. Argonaut’s price forecasts reflect this view, with a short-term price assumption of US$900/oz falling to a flat US$800/oz in the medium to longer term. Figure 52: Argonaut Gold Price Forecasts (US$/oz) 920 900 880 860 840 820 800 780 760 740 2009F 2010F 2011F 2012F Source: Argonaut Argonaut Securities Research 36 Road to Recovery SECTION 3 Stocks Argonaut Securities Research 37 Road to Recovery Research Aditya Birla 4 September 2008 HOLD Current Price: $1.57 Time to shine Valuation: $2.04 Ticker: ABY Aditya Birla Minerals Limited (ABY) is the largest pure copper producer currently on the Sector: Materials ASX. However, since listing in May 2006, the Company has continually disappointed the market with operational difficulties affecting production ramp up at Nifty and Mt Gordon, Shares on Issue (m): 313.4 resulting in high cash costs and margin erosion. Market Cap ($m): 492.0 Net Cash ($m): 6.3 The June quarter was very disappointing and a tough iniation for new management. Enterprise Value ($m): 485.7 Production at Nifty was hampered by the Varanus Island gas explosion. Lower head grade, ball mill repairs, crusher shutdown and maintenance on the concentrator plant certainly 52 wk High/Low: $4.30 $1.41 didn’t help. Mt Gordon continues to suffer due to a lack of mine life. Consequently, the 12m Av Daily Vol (m): 1.53 mill is operating at roughly two thirds of its capacity. Key Metrics A ‘beefed up’ $22m exploration budget for FY09 as well as significant capital expenditure 08A 09F 10F at Mt Gordon is a positive step. The development of Phase 1 Mining at Esperanza South P/E (x) 4.7 6.4 4.0 will be eagerly anticipated by the market, as it will determine the extent to which further EV/EBITDA 2.2 3.0 2.1 reserves can be delineated to feed Mt Gordon’s under-utilised mill. Financials: 08A 09F 10F The Company has set its sights on doubling production to ~160ktpa in three years. Revenue ($m) 664.2 616.2 685.7 Operational improvements and organic growth alone will not be enough to achieve this – EBITDA ($m) 221.8 161.9 232.6 further growth must come from acquisition. Perilya’s (PEM) nearby Mt Oxide project is still NPAT ($m) 105.0 77.1 124.4 at the pre-feasibility stage, but looms as an obvious ‘bolt on.’ Net Assets ($m) 518.6 613.1 730.4 A solid September quarter from Nifty and exploration success at Mt Gordon will be the key share price catalysts in the coming months. Nifty will benefit from a continuous gas supply Op CF ($m) 197.6 152.5 206.6 and results from drilling along the Mammoth Fault and ‘G’ Lens at Mt Gordon will be made Per Share Data: available in the coming weeks 08A 09F 10F EPS (cps) 33.5 24.6 39.7 ABY appears an attractive investment proposition given it: DPS (cps) 10.0 10.0 10.0 Div Yield 6.4% 6.4% 6.4% × Trades on undemanding P/E and EV/EBITDA forward multiples CFPS (cps) 63.0 48.7 65.9 Share Price Graph × Offers significant leverage to the copper price $4.50 20.0 However, the Company has been a serial under achiever and whilst Argonaut expects to $4.00 see operational improvements in the coming quarters we continue to remain cautious of 16.0 high cost producers in the current environment. $3.50 $3.00 12.0 $2.50 HOLD $2.00 8.0 $1.50 $1.00 4.0 $0.50 $0.00 0.0 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Analysts: Tim Serjeant Troy Irvin Argonaut Securities Research 38 Road to Recovery Overview Largest pure copper producer on Aditya Birla Minerals (ABY) is the largest pure copper producer on the ASX, focused on ASX the production and sale of copper in concentrate at its 100% owned operations at Nifty (65km west of Telfer, WA) and Mt Gordon (120km north of Mt Isa, Queensland). ABY is 51% owned by Hindalco, one of Asia’s largest integrated Aluminium producers. Hindalco forms just one part of the broader Aditya Birla Group, an Indian conglomerate capped at ~US$30 billion. Changes to key personnel in In April, long serving Chief Executive Officer and Managing Director Sanjay Loyalka recent months resigned. Mr Loyalka was an integral part in developing the Company’s operations within Australia and executing the ASX listing. He has been replaced by Sunil Kulwal. Ramakrishna Maruwada has recently taken on the job of Chief Financial Officer following the departure of Sanjay Bhartia in May 2008. Nifty the main game Nifty Sulphide ‘Flagship’ Nifty operations ABY’s ‘flagship’ copper operation, Nifty, is located approximately 350km south east of located near Telfer in WA Port Hedland and 65km west of Newcrest’s (NCM) Telfer operations in the East Pilbara region of Western Australia. Underground operation The orebody is accessed via a decline which surfaces adjacent to the 2.5Mtpa concentrator facility. Mined ore is trammed to an underground gyratory crusher and brought to surface via a dedicated conveyor system. Concentrate produced is trucked to Port Hedland and stored in a purpose built 18kt facility before being shipped to Hindalco’s 500Mtpa smelting and refining operation in Dahej, India. Capacity to produce at 60ktpa Nifty has nameplate capacity of 2.2Mtpa (ore) for 60ktpa but is yet to consistently produce at that rate. Production for FY08 of 53.4kt was a significant improvement on previous years, however, the concentrator continues to provide ongoing challenges. Nifty Oxide Cathode production to be given a With the open pit operation dwindling, cathode production at Nifty Oxide has been new lease on life given a new lease on life via a $25m Heap Leach re-treatment project. The project involves washing the current heaps to remove fines before restacking the coarse material. It could realise ~30kt of copper cathode production over the subsequent seven years, beginning in June 2009. Mt Gordon the catalyst for re-rating Located in north west Mt Gordon, (formerly Gunpowder) was purchased as a going concern in November Queensland’s rich copper belt 2003 from the receivers appointed to Western Metals Limited (WMT). Ore is trucked to the surface where it is blended, crushed and fed into a SAG mill ahead of a standard flotation process. Concentrate is trucked to Cloncurry, railed to Townsville and shipped to Dahej. Mt Gordon is a now the key focus Mt Gordon has notoriously been a difficult operation. Production has been contrained in for management recent times by: × An under-utilised mill × A lack of delineated reserves (mine life) × Availability of fresh water Argonaut Securities Research 39 Road to Recovery Significant capital devoted to Mt Gordon is a key focus for management as it makes a concerted effort to expand the improving throughput and grade life of the project. A number of initiatives have been implemented in recent months, consistency… including: × Plans to spend $31m on improving haulage capacity via a hoist and vent shaft × Change in mining method from sublevel caving to open stoping, allowing improved production consistency and grades × Increase throughput to nameplate capacity of 1.85Mtpa via increased mining rate at Mammoth underground (haul shaft) and incremental production from Esperanza South (vent shaft opens up significant new exploration potential at Pluto and Esperanza Deeps) × Developing a conceptual four year mining plan … to structurally lower costs and It is anticipated the shafts will be fully operation by the second half of CY09 with the extend mine life aim of structurally lowering mining costs and substantially increasing mine life potential at depth. Acquisition on the cards Lofty production target to be met ABY has set its sights on doubling production over the next three years to ~160ktpa, as by exploration and acquisition it seeks to guarantee further supply for Hindalco’s hungry copper smelter. Even with Nifty ‘firing on all cylinders’ and the mill at Mt Gordon fully utilised, a significant gap in the production growth profile would still exist. Further additions to production must come from a combination of exploration and acquisition. Near-term production growth Production growth in the near-term will be driven by × Better throughput at Nifty sulphide operation × Increased haulage capacity at Mt Gordon × Successful development and mining of Phase 1 at Esperanza South Exploration Nifty and Mt Gordon remain Generating strong free cash flow and near debt-free, ABY is in a position to ramp-up its largely under-explored exploration spend with the ~$22m slated for FY09 focused on depth extensions to known ore bodies and regional exploration. Summary ABY appears an attractive investment proposition given it: × Trades on undemanding P/E and EV/EBITDA forward multiples × Offers significant leverage to the copper price However, the Company has been a serial under achiever and whilst Argonaut expects to see operational improvements in the coming quarters we continue to remain cautious of high cost producers in the current environment. HOLD Argonaut Securities Research 40 Road to Recovery Aditya Birla Equities Research Analyst: Tim Serjeant Recommendation HOLD Sector Materials Current Price $1.57 Issued Capital (m) 313.4 DCF Valuation $2.04 Market Cap(m) $492.0 All Ords (XAO) 5,030 Updated 04-September-2008 Profit & Loss (A$m) 31 Mar 2008A 2009E 2010E Financial Summary 2008A 2009E 2010E Sales Revenue 664.2 616.2 685.7 Reported Earnings Other Income 6.6 4.4 2.2 Net Profit ($m) 105.0 77.1 124.4 Operating Costs 438.3 431.2 440.7 EPS ($) 0.33 0.25 0.40 Exploration Exp 4.7 21.5 8.3 PER (x) 4.7 6.4 4.0 Corporate/Admin 6.0 6.1 6.2 Normalised Earnings EBITDA 221.8 161.9 232.6 Net Profit ($m) 105.0 77.1 124.4 Depn & Amort 61.9 52.2 57.0 EPS (cents) 0.1 0.33 0.25 0.40 EBIT 159.9 109.7 175.6 EPS Growth (%) n/a -26.5 61.4 Net Interest Paid 9.3 -0.4 -2.2 PER (x) 4.7 6.4 4.0 Operating Profit 150.6 110.1 177.7 Cashflow Tax expense 45.4 33.0 53.3 Operating Cashflow ($m) 197.6 152.5 206.6 Minorities 0.0 0.0 0.0 GCFPS ($) 0.6 0.5 0.7 NPAT 105.0 77.1 124.4 PCF (x) 2.5 3.2 2.4 Normalised NPAT 105.0 77.1 124.4 Dividend Dividend ($) 0.10 0.10 0.10 Yield (%) 6%6%6% Cash Flow (A$m) 2008A 2009E 2010E Franking % 0%0%0% Operating Cashflow 197.6 152.5 206.6 - Capex (+asset sales) -71.7 -73.0 -40.0 -Other Investing CF 1.2 0.0 0.0 Free Cashflow 127.1 79.5 166.6 Financial Ratios 2008A 2009E 2010E - Dividends 0.0 (31.3) (31.3) Balance Sheet Ratios + Equity raised 0.0 0.0 0.0 Total Debt / Equity (%) 1.3% 0.0% 0.0% + Debt drawdown (- repaid) (119.0) (6.6) 0.0 Profitability Ratios Net Change in Cash 8.1 41.6 135.3 Net Profit Margin (%) 16% 13% 18% Cash at End Period 12.9 72.1 207.4 Return on Assets (%) 25% 16% 26% Return on Equity (%) 20% 13% 17% Balance Sheet (A$m) 2008A 2009E 2010E Total Assets 651.4 749.0 879.4 Total Debt 6.6 0.0 0.0 Valuation Summary A$m A$/sh Total Liabilities 132.8 136.0 149.0 Nifty Sulphide 547.9 1.75 Shareholders Funds 518.6 613.1 730.4 Nifty Oxide 23.0 0.07 Mt Gordon 72.4 0.23 Maroochydore 0.0 0.00 Production Summary (kt) 2008A 2009E 2010E Corporate -35.1 -0.11 Cu in concentrate (kt) Exploration 25.0 0.08 Nifty Sulphide 53.4 49.8 54.6 Cash 12.9 0.04 Nifty Oxide (Cu Cathode) 5.1 3.0 2.6 Debt -6.6 -0.02 Mt Gordon 23.9 22.7 26.6 Group Production (kt) 82.4 75.5 83.8 Total @ 10% Discount Rate 640 2.04 Total Cash Cost (US$/lb) 2.02 2.32 2.01 Reserves & Resources (as at 31 March 2008) Directors Reserves Mt Cu% kt Name Position Nifty Sulphide 22.0 2.5% 550 Debu Bhattcharya Non-Executive Chairman Nifty Oxide 7.3 1.1% 80 Sunil Kuwal MD & CEO Heap Leach Inventory 16.0 0.2% 32 Mysore Prasanna Non-Executive Director Mt Gordon 2.9 2.3% 66 Dr Suresh Bhargava Non-Executive Director Maurice Anghie Non-Executive Director Resources Narayan Krishnan Non-Executive Director Nifty Sulphide 35.0 2.6% 899 Nifty Oxide 10.3 1.1% 114 Mt Gordon 22.5 2.4% 544 Substantial Shareholders % Maroochydore (50%) 50% 20.6 0.8% 165 Hindalco Industries Ltd 51.0% Barclays 5.0% COPPER PRODUCTION REALISED PRICE & COST PROFILE 100.0 4.00 80.0 3.50 60.0 3.00 2.50 40.0 US$/lb Cu Produced (kt) Cu Produced 2.00 20.0 1.50 1.00 0.0 FY08A FY09E FY10E FY11E FY08A FY09E FY10E Nifty Sulphide Mt Gordon Nifty Oxide (Cu Cathode) Price Recieved Cash Cost Argonaut Securities Research 41 Road to Recovery Research Albidon 4 September 2008 HOLD Current Price: $1.75 Concentrate production underway Valuation: $3.20 Ticker: ALB Albidon (ALB) is ramping up production at the 100% owned Munali underground Sector: Materials mechanised nickel sulphide mine in Zambia to a planned 10ktpa by January 2009. Shares on Issue (m): 165.2 Market Cap ($m): 289.0 Mining continues to exceed budget with almost six weeks of ore stockpiled on the ROM pad Net Cash (Debt) ($m): -46.5 at the end of the June quarter. Stoping operations will commence in the September Enterprise Value ($m): 335.5 quarter, with stripping of the hanging wall material. 52 wk High/Low: $5.10 $1.75 12m Av Daily Vol (m): 0.37 Munali produced first nickel-copper-cobalt-PGM concentrate in July. The current focus is to complete commissioning of the concentrator and to increase production to full capacity. Key Metrics 09F 10F 11F P/E (x) 23.1 4.4 5.2 Munali promises to be a high margin nickel business. Cash costs are expected to be EV/EBITDA (x) 10.6 2.9 3.3 ~US$2.50/lb. This is low compared to peers due primarily to high by-product credits from a bag of 'goodies' including copper, cobalt, platinum and palladium. The current JORC Financials: reserve is 6.7Mt @ 1.2% Ni / 0.2% Cu / 0.07% Co and 0.8g/t PGM. 09F 10F 11F Revenue (US$m) 70.6 202.3 190.8 EBIT (US$m) 24.7 97.6 81.0 Near mine exploration within the 2.5km long Munali Intrusion is promising. The current NPAT (US$m) 12.5 65.3 55.7 mine plan is based on the Enterprise deposit which remains open. A resource estimate has been completed at Voyager (just 450m northwest of Enterprise). An extensive ground Net Assets (US$m) 92.3 173.5 201.1 geophysical survey has commenced. The near mine exploration effort including further drilling of the Intrepid and Defiant targets will increase once steady state production is Op CF (US$m) 18.0 101.4 64.7 achieved. Per Share Data: 09F 10F 11F ALB offers a number of appealing features: EPS (cps) 7.3 37.9 32.3 DPS (cps) 0.0 0.0 0.0 Div Yield 0.0% 0.0% 0.0% × A scarce new high margin nickel sulphide mine CFPS (cps) 10.4 58.9 37.6 × Resource upside within the 2.5km long Munali Intrusion Share Price Graph $6.00 25.0 × Exploration upside across a range of commodities in a number of different African countries (Zambia – nickel and uranium, Botswana - nickel, Tunisia - zinc, $5.00 20.0 Tanzania – nickel and platinum, and Malawi - nickel) $4.00 15.0 Argonaut acknowledges the significant gap between the $3.20 valuation and the current share price. However, given the risk that additional capital will be required to complete the $3.00 ramp up of Zambia’s first nickel mine, the stock is rated a HOLD. Munali is lower grade 10.0 than many underground nickel sulphide peers. Early development ore grades have been $2.00 0.7-0.8% Ni. Conservative investors may wait for ALB to deliver forecast mining and 5.0 milling production rates and grades. $1.00 $0.00 0.0 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 HOLD Analyst: Troy Irvin Argonaut Securities Research 42 Road to Recovery Overview ALB is ramping up production at Albidon (ALB) is ramping up production at the 100% owned Munali underground the Munali nickel sulphide mine mechanised nickel sulphide mine in Zambia to a planned 10ktpa by January 2009. in Zambia to a planned 10ktpa by January 2009 The mine is located approximately 1 hour drive south from the capital city Lusaka on a sealed highway. Argonaut visited the site in February 2008. The Managing Director is Dale Rogers. Dale is a Mining Engineer with over 20 years experience, including senior management positions in the nickel sector at WMC’s (now BHP Billiton) Kambalda and Mount Keith mines, and Kalgoorlie Nickel Smelter. First concentrate produced at Munali Mining continues to exceed Mining continues to exceed budget with almost six weeks of ore stockpiled on the ROM budget pad at the end of the June quarter. Stoping operations will commence in the third quarter, with stripping of the hanging wall material. First nickel-copper-cobalt-PGM Munali produced first nickel-copper-cobalt-PGM concentrate in July. The current focus is concentrate produced in July… to complete commissioning of the concentrator and to increase production to full capacity. …a stockpile of concentrate is A stockpile of concentrate is being built for sale to the Jinchuan Group under an being built for sale to the attractive LOM off-take agreement: Jinchuan Group under an attractive LOM off-take × 70% metal payable (compared to usual 63-65%) × Concentrate sold at mine gate (mitigates freight / logistics risks) Figure 1: Munali concentrate shed All figures and tables are sourced from ALB unless stated otherwise High margin business Building a high margin nickel Munali promises to be a high margin nickel business. Cash costs are expected to be business with very low cash ~US$2.50/lb. This is low compared to peers due primarily to high by-product credits costs driven by by-product from a bag of 'goodies' including copper, cobalt, platinum and palladium. credits The total amount of nickel hedged is 11,294t at an average price of US$10.71/lb. This represents approximately 25% of the nickel expected to be produced over the five year hedging period. Argonaut Securities Research 43 Road to Recovery Mine life upside Near mine exploration within the At the planned ore production rate of 1.2Mtpa current reserves provide a mine life of 2.5km long Munali Intrusion is almost six years. However near mine exploration within the 2.5km long Munali promising Intrusion is promising. The current mine plan is based on the Enterprise deposit which remains open. A resource estimate has been completed at Voyager (just 450m northwest of Enterprise). Figure 2: Munali Intrusion An extensive ground geophysical survey has commenced. The near mine exploration effort including further drilling of the Intrepid and Defiant targets will increase once steady state production is achieved. New Zambian mining tax regime Argonaut conservatively In April the Zambian Government changed the mining tax regime for copper producers. adjusted ALB’s corporate tax and Corporate tax increased from 25% to 30%, and mineral royalties increased from 0.6% royalty rates to match the new to 3%. copper regime ALB’s Development Agreement with the Zambian Government features an incentive corporate tax rate of 25%, and an incentive royalty rate of 0.6% (both extending to 2012). Although it appears the above changes do not apply to nickel, given the uncertainty Argonaut conservatively adjusted ALB’s corporate tax rate and royalty rate upwards to match the new corporate tax and royalty rate. Chirundu uranium JV ALB has committed to funding its ALB has a 30% interest in the Zambian project where operator African Energy recently share of the Chirundu uranium completed a positive Pre-Feasibility Study. Resource modelling on the Njame and BFS Gwabe uranium deposits has confirmed a current resource of >9.5mlb U3O8. ALB has committed to funding its share of the Bankable Feasibility Study now underway. Summary ALB offers a scarce new high margin nickel sulphide mine, resource upside within the 2.5km long Munali Intrusion and exploration upside across a range of commodities in a number of different African countries. Conservative investors may wait Argonaut acknowledges the significant gap between the $3.20 valuation and the for ALB to deliver forecast current share price. However, given the risk that additional capital will be required to mining and milling production complete the ramp up of Zambia’s first nickel mine, the stock is rated a HOLD. Munali rates and grades is lower grade than many underground nickel sulphide peers. Early development ore grades have been 0.7-0.8% Ni. Conservative investors may wait for ALB to deliver forecast mining and milling production rates and grades. HOLD Argonaut Securities Research 44 Road to Recovery Albidon Equities Research Analyst: Troy Irvin Recommendation HOLD Sector Materials Current Price $1.75 Issued Capital (m) 165.2 DCF Valuation $3.20 Market Cap(m) $289.0 All Ords (XAO) 5,030 Updated 4-September-08 Profit & Loss (US$m) 31 December 2008E 2009E 2010E Financial Summary 2008E 2009E 2010E Sales Revenue 70.6 202.3 190.8 Reported Earnings Other Income 0.6 1.7 1.9 Net Profit (US$m) 12.5 65.3 55.7 Operating Costs 31.5 78.3 82.5 EPS (US cents) 7.337.932.3 Depn & Amort 6.8 18.4 19.2 PER (x) 23.1 4.4 5.2 Exploration and evaluation expenditure 4.2 5.7 5.8 Normalised Earnings Corporate/Admin 4.0 4.1 4.2 Net Profit (US$m) 12.5 65.3 55.7 Other 0.0 0.0 0.0 EPS (US cents) 30.7 7.337.932.3 EBIT 24.7 97.6 81.0 EPS Growth (%) 421.0 (14.7) Interest Paid 5.8 4.3 1.4 PER (x) 23.1 4.4 5.2 Operating Profit 19.0 93.3 79.6 Cashflow Tax expense 6.4 28.0 23.9 Operating Cashflow (US$m) 18.0 101.4 64.7 Minorities 0.0 0.0 0.0 GCFPS (cents) 10.4 58.9 37.6 NPAT 12.5 65.3 55.7 PCF (x) 16.8 3.0 4.7 Normalised NPAT 12.5 65.3 55.7 Dividend Dividend (US cents) 0.0 0.0 0.0 Yield (%) 0.0 0.0 0.0 Franking % 100% 100% 100% Cash Flow (US$m) 2008E 2009E 2010E Operating Cashflow 18.0 101.4 64.7 - Capex 35.0 8.9 5.2 Financial Ratios 2008E 2009E 2010E - Exploration & Evaluation 12.0 16.3 16.6 Balance Sheet Ratios - Asset purchases (+ asset sales) 0.0 0.0 0.0 Total Debt / Equity(%) 65 17 0 Free Cashflow (29.1) 76.2 42.9 Interest Cover (x) 4.3 22.5 56.0 - Dividends 0.0 0.0 0.0 Acid test ratio (x) 2.9 4.8 6.4 + Equity Raised 0.0 0.0 0.0 + Debt Drawdown (Repaid) 0.0 (30.0) (30.0) Profitability Ratios Net Change in Cash (29.1) 46.2 12.9 Net Profit Margin (%) 17.7 32.3 29.2 Cash at End Period 24.1 70.3 83.2 Return on Assets (%) 18.3 63.6 59.1 Return on Equity (%) 13.6 37.6 27.7 Balance Sheet (US$m) 2008E 2009E 2010E Valuation Summary US$m US$/sh Total Assets 159.4 223.8 220.2 Munali 465.7 2.70 Total Debt 60.0 30.0 0.0 Forward Sales 23.4 0.14 Total Liabilities 67.1 50.2 19.1 Corporate -11.8 -0.07 Shareholders Funds 92.3 173.5 201.1 Chirundu Uranium JV 11.4 0.07 Other Exploration 25.0 0.15 Unpaid Capital 13.2 0.08 Cash Estimate 13.5 0.08 Debt -60.0 -0.35 Production Summary 2008E 2009E 2010E 2011E Nickel Production (kt) 3.4 9.9 10.4 11.4 Total @ 10% discount rate 480 2.79 11.4 USD:AUD 0.87 Ni Cash Cost - net of credits (US$/lb) 2.89 2.67 3.22 3.43 A$m A$/sh Ni Total Cost (US$/lb) 4.17 3.87 4.41 3.43 Total @ 10% discount rate 552 3.20 Ni Price Realised (US$/lb) 10.28 10.76 9.94 Directors Name Position John Shaw Chairman Dale Rogers Managing Director Munali Reserves & Resources Alasdair Cooke Executive Director Mt Ni (%) Cu (%) Co (%) PGM (g/t) Ni (kt) Paul Chapman Executive Director Reserves Chris de Guingand Non-Executive Director Enterprise Deposit 6.7 1.23 0.2 0.07 0.8 82 Valentine Chitalu Non-Executive Director Total 6.7 1.23 0.2 0.07 0.8 82 Resources Enterprise Deposit 9.1 1.23 0.2 0.07 0.9 112 Substantial Shareholders % Voyager Deposit 1.2 0.90 0.1 0.05 1.1 11 African Lion Selection 20.5% Total 10.3 1.19 0.16 0.07 0.9 123 Jinchuan 5.6% NICKEL PRODUCTION NICKEL PRICE ASSUMPTIONS AND CASH COSTS 12.0 12.00 10.0 10.00 8.0 8.00 6.0 US$/lb 6.00 4.0 US$/lb Contained Metal (kt) Metal Contained 4.00 2.0 Contained Metal (kt) Metal Contained 2.00 0.0 2008E 2009E 2010E 2011E 2008E 2009E 2010E 2011E NickelNickel Price Price CashCash Cost Cost Argonaut Securities Research 45 Road to Recovery Research Atlas Iron 4 September 2008 HOLD Current Price: $2.10 First cab off the rank Valuation: $2.30 Ticker: AGO Atlas Iron (AGO) is an emerging iron ore producer, operating in the heart of Western Sector: Materials Australia’s Pilbara region. The Company has an extensive ~10,000km² tenement package largely within a 150km radius of port access facilities at Port Hedland. AGO is set to Shares on Issue (m): 291.0 become the first amongst the aspiring Pilbara iron ore juniors to commence production, Market Cap ($m): 611.1 with expected first shipment from its Pardoo direct shipping ore (DSO) operation in Net Cash ($m): 143.4 December 2008. Enterprise Value ($m): 467.7 Pardoo is set to produce at an initial rate of 1Mtpa before ultimately ramping up to at an 52 wk High/Low: $4.37 $1.21 annualised rate of 3Mt. A pre-feasibility study (PFS) has recently been completed on a 12m Av Daily Vol (m): 1.27 second DSO project, Abydos, which is slated to produce 3Mtpa from December 2009. The Company is hopeful of an eventual expansion to 9Mtpa as the resource base expands. AGO Key Metrics is also progressing a PFS on its 100% owned Ridley Magnetite deposit. 08E 09F 10F P/E (x) n/a 55.7 9.3 The Atlas strategy is clean and simple, with a focus on discovering and exporting EV/EBITDA (x) n/a 27.4 4.8 commercial hematite (DSO) ore as quickly and as cheaply as possible. As such, AGO will Financials: be hoping to crystallise the value of its capital intensive Ridley Magnetite deposit in a 08E 09F 10F similar manner to the recent deal struck by Cape Lambert with China Metallurgical Group Revenue ($m) n/a 44.1 205.4 Corporation (MCC). EBITDA ($m) n/a 17.1 96.9 NPAT ($m) n/a 11.0 65.4 In an endeavour to minimise capital investment, AGO is reliant on access to third party and public infrastructure. This strategy however carries with it production risk, as much of Net Assets ($m) n/a 172.5 208.4 the planned expansion beyond 3Mtpa is contingent upon agreement with: Op CF ($m) n/a 14.5 70.1 u Fortescue Metals Group (or other third parties) to facilitate exports, leveraging off Per Share Data: existing rail and port infrastructure; and/or 08E 09F 10F EPS (cps) n/a 3.2 19.2 DPS (cps) n/a 0.0 0.0 u Negotiating with the WA Government and Port Hedland Port Authority (PHPA) to Div Yield n/a 0.0% 0.0% obtain an additional quota from the proposed public access berth at Utah Point, CFPS (cps) n/a 4.3 20.6 subject to available capacity Share Price Graph The construction of Utah Point is critical for not only Atlas, but a number of other aspiring $4.50 30.0 juniors in the Pilbara region. Argonaut notes that Utah was anticipated to be operational in mid 2009, but that has since been deferred to early 2010. Any further slippage would $4.00 invariably result in a delay to the proposed production ramp up. 24.0 $3.50 $3.00 Very few companies have a busier six months ahead. Milestones to look out for in the 18.0 $2.50 coming months include: $2.00 12.0 u Resolving outstanding environmental approvals ahead of first production at Pardoo $1.50 $1.00 6.0 u Additional reserve/resource upgrades at Pardoo, Abydos and Ridley $0.50 u Pre-feasibility study (PFS) for the Ridley Magnetite deposit $0.00 0.0 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 u Off-take agreements Atlas will be the “first cab off the rank” amongst the aspiring Pilbara juniors and look set to capitalise on the buoyant iron ore pricing environment. The Company has developed a clean and simple strategy and assembled a strong executive and operational team to execute it. However, the path from developer to producer is a precarious one. Production beyond 3Mtpa is contingent and given the current risk averse environment, Argonaut rates the stock a HOLD. Analysts: Tim Serjeant HOLD Troy Irvin Argonaut Securities Research 46 Road to Recovery Overview Extensive land holding in the Atlas Iron Limited (AGO) is a $610m iron ore company, operating in the heart of heart of the Pilbara Western Australia’s Pilbara region. AGO has an extensive ~10,000km² tenement package largely within a 150km radius of port access facilities at Port Hedland. An experienced operational and AGO have assembled an impressive operational and executive team, with a strong iron executive team assembled ore background, led by Managing Director David Flanagan. David is a geologist with relevant experience in mining, exploration and project development. On the cusp of production Atlas is on the cusp of production, with its Pardoo DSO operation set to ship first ore by Christmas 2008 at an initial rate of 1Mtpa. Ultimately, AGO expects Pardoo to produce at an annualised rate of 3Mtpa. A pre-feasibility study (PFS) has recently been completed on a second DSO project, Abydos, which is slated to produce 3Mtpa from December 2009. The Company is hopeful of an eventual expansion to 9Mtpa as the resource base expands. AGO is also progressing a PFS on its 100% owned Ridley Magnetite deposit. Figure 1: Project Development Pipeline Pardoo Abydos Ridley Type Hematite Hematite Magnetite Resource (Mt) 24.1 15.1 1,318.0 Grade (%Fe) 56.0% 56.9% 36.8% Distance to Port (km) 75 125 - 150 75 Transport Road Rail/Road Pipeline/Rail Production Rate (Mtpa) 1.0 - 3.0 3.0 - 9.0 up to 15.0* Port Facilities FMG/PHPA FMG/PHPA FMG/PHPA *concentrate PHPA - Port Hedland Port Authority, subject to port access agreements Source: AGO, Argonaut Aggressive exploration focus AGO is well funded following a successful $100m equity raising in April 2008. The Company has embarked on an aggressive drilling campaign, with up to 8 rigs on site in the June quarter in a quest to prove up further reserves and resources. The Company is anticipating spending up to $25m pa on exploration over the next couple of years. Figure 2: Targeted DSO Resources Growth Source: AGO Access to infrastructure the key FMG will ship the first 1Mt from In a bid to ‘cash-in’ on the current buoyant iron ore pricing arrangements, AGO is Pardoo reliant on third parties to facilitate the transportation of its iron ore. AGO have recently come to terms with Fortescue Metals Group (FMG), who have agreed to ship the first 1Mt of ore from Pardoo at its Anderson Point berth. Argonaut Securities Research 47 Road to Recovery 3Mtpa from Utah Point in 2010 Post 2009 however, AGO is reliant on the construction of the new public access facilities and beyond at Utah Point (“Utah”) in Port Hedland to achieve its stated production goals. Atlas has pre-paid $15m in port charges to secure access for up to 3Mtpa over a five period. The public access berth at Utah is currently under construction, with capacity of 15-19Mtpa slated from February 2010. Production ramp up is contingent The construction of Utah is critical for not only Atlas, but a number of other aspiring on obtaining additional capacity juniors in the Pilbara region. Argonaut notes that Utah was anticipated to be operational in mid 2009, but that has since been deferred to early 2010. Any further slippage would invariably delay the production ramp up. Additional production beyond the 3Mtpa allocation at Utah is contingent upon; u Memorandum of Understanding (MOU) with FMG to facilitate exports of 3Mt, leveraging off its existing rail and port infrastructure u Negotiating with the WA Government and Port Hedland Port Authority (PHPA) to obtain an additional quota at Utah Point, subject to available capacity A ‘mine gate sale’ with FMG could AGO will need one, if not both of these arrangements to materialise if it is to achieve circumvent the need for stated production targets. Argonaut notes a potential ‘mine gate sale’ with FMG, similar additional port access to that negotiated between Iron Ore Holdings (IOH) and Rio Tinto (RIO) could circumvent the need for infrastructure access. Challenges The path from developer to producer is a precarious one. With it come a number of inherent risks. Environmental First production from Pardoo AGO has been diligent with its handling of environmental issues, spending ~$5m over delayed the last three years. Unfortunately, that did not stop an appeal lodged with the Environmental Protection Authority (EPA), delaying first production from Pardoo. Pricing Off take uncontracted…selling at Production is currently uncontracted. The Company hopes to secure an offtake partner spot may be lucrative but is a by mid November ahead of first shipment from Pardoo. AGO has indicated they will risk seek to sell a portion of fines production at spot, to capture the current differential between contract prices and the Hamersley Benchmark. Whilst this may provide initial earnings upside, Argonaut expects this gap to close in the longer term as the much anticipated expansions from the “Big 3”, BHP, Rio and Valé comes onstream. Resource Current resource grade of 56.3% Average resource grade of 56.3% is currently acceptable, but below that of peers. Pardoo ore in particular has a high phosphorous content, which may attract penalty (up to ~5% discount to benchmark). Phosphorous imparts brittleness to the steel. Model parameters Conservative valuation to A conservative production ramp-up is contemplated to compensate for the compensate for risks ahead infrastructure sharing arrangements. Argonaut will look to review this as events unfold. Only current DSO resources and grades have been modelled, with a peer multiple applied to value anticipated resource growth through exploration. Ridley (magnetite) is given a nominal in situ value of $0.50/tonne. Operating costs of A$50/t, below that of proven 8Mtpa producer Portman (PMM) are used to derive a valuation of $2.30 per share. HOLD Argonaut Securities Research 48 Road to Recovery Atlas Iron Equities Research Analyst: Tim Serjeant Recommendation HOLD Sector Materials Current Price $2.10 Issued Capital (m) 291.0 Valuation $2.30 Market Cap (m) 611.1 All Ords (XAO) 5,030 Updated 04-September-2008 Profit & Loss ($m) 30 June 2009E 2010E 2011E Financial Summary 2009E 2010E 2011E Sales Revenue 44.1 205.4 512.7 Reported Earnings Other Income 6.0 2.6 5.6 Net Profit ($m) 11.0 65.4 162.8 Operating Costs 22.7 101.8 266.8 EPS (cents) 3.2 19.2 47.9 Exploration Written Off 6.3 5.1 4.2 PER (x) 55.7 9.3 3.8 Corporate/Admin 4.0 4.1 4.2 Normalised Earnings Other 0.0 0.0 0.0 Net Profit ($m) 11.0 65.4 162.8 EBITDA 17.1 96.9 243.1 EPS (cents) 3.2 19.2 47.9 Depn & Amort 0.7 3.5 10.5 EPS Growth (%) n/a 496.2 149.0 EBIT 16.4 93.4 232.6 PER (x) 55.7 9.3 3.8 Interest Paid 0.0 0.0 0.0 Cashflow Operating Profit 16.4 93.4 232.6 Operating Cashflow ($m) 14.5 70.1 164.8 Tax expense 5.4 28.0 69.8 GCFPS (cents) 4.3 20.6 48.5 Minorities 0.0 0.0 0.0 PCF (x) 49.2 10.2 4.3 NPAT 11.0 65.4 162.8 Dividend Normalised NPAT 11.0 65.4 162.8 Dividend (cents) 0.0 0.0 0.0 Yield (%) 0%0%0% Franking (%) 0%0%0% Cash Flow ($m) 2009E 2010E 2011E Operating Cashflow 14.5 70.1 164.8 - Capex 58.1 39.9 32.5 Financial Ratios 2009E 2010E 2011E - Exploration & Evaluation 31.4 25.7 21.0 Balance Sheet Ratios - Asset purchases (+ asset sales) 0.0 0.0 0.0 Total Debt / Equity (%) 0% 0% 0% Free Cashflow (75.0) 4.5 111.3 - Dividends 0.0 0.0 0.0 Profitability Ratios + Equity raised 0.0 0.0 0.0 Net Profit Margin (%) 25% 32% 32% + Debt drawdown (- repaid) 0.0 0.0 0.0 Return on Assets (%) 14% 47% 86% Net Change in Cash (75.0) 4.5 111.3 Return on Equity (%) 6% 31% 54% Cash at End Period 68.3 72.8 184.1 Balance Sheet ($m) 2009E 2010E 2011E Valuation Summary A$m A$/sh Total Assets 185.7 270.0 454.4 Pardoo DSO 175.6 0.60 Total Debt 0.0 0.0 0.0 Abydos DSO 30.2 0.10 Total Liabilities 13.2 61.6 153.8 Ridley Magnetite 242.5 0.83 Shareholders Funds 172.5 208.4 300.6 Corporate -17.2 -0.06 DSO Exploration 60.3 0.21 Listed Investments 8.0 0.03 Unpaid Capital 25.4 0.09 Production Summary (Mt) 2009E 2010E 2011E 2012E Cash Estimate 143.4 0.49 Iron Ore Shipped (Mt) Debt 0.0 0.00 Pardoo Hematite 0.5 1.6 3.0 3.0 Abydos Hematite 0.0 0.4 2.0 3.0 Total @ 10% Discount Rate 668 2.30 Group Production 0.5 2.0 5.0 6.0 Iron Ore Cash Cost (US$/t) 45 44 42 39 Iron Ore Total Cost (US$/t) 47 45 43 41 Iron Ore Price Realised (US$/t) 88 87 80 63 Directors Name Position David Nixon Non-Executive Chairman David Flanagan Managing Director Reserves & Resources (as at 30 July 2008) Jyn Sim Baker Non-Executive Director David Hannon Non-Executive Director DSO Reserves Mt %Fe %SiO2 %P Geoff Clifford Non-Executive Director Pardoo 7.4 57.3% 6.7% 0.13% Abydos 7.4 58.1% 5.6% 0.05% Total 14.8 57.7% 6.1% 0.09% DSO Resources Mt %Fe %SiO2 %P Pardoo 24.1 56.0% 8.0% 0.11% Major Shareholders % Abydos 15.1 56.9% 6.9% 0.06% IMC Resources 19.9% Total 39.2 56.3% 7.6% 0.09% Black Rock 6.2% Hunter Hall 6.0% Magnetite Resources Mt %Fe %SiO2 %P LinQ Group 5.3% Ridley 1,318.0 36.8% 40.9% 0.08% DSO PRODUCTION PROFILE REALISED PRICE & COST PROFILE 6.0 100 5.0 80 4.0 60 3.0 US$/t 40 Shipped (Mt) 2.0 20 1.0 0.0 0 FY09E FY10E FY11E FY09E FY10E FY11E FY12E Pardoo Hematite Abydos Hematite Cash Cost Ave Price Realised Argonaut Securities Research 49 Road to Recovery Research Avoca Resources 4 September 2008 BUY Current Price: $1.66 Rare winner from struggle street Valuation: $2.03 Ticker: AVO Argonaut considers Avoca Resources (AVO) to be the stand-out Australian gold story of the Sector: Materials past three years. The argument has always been simple – good people developing the high grade Trident ore body (5.3g/t reserve). Shares on Issue (m): 222.9 Market Cap ($m): 369.9 The AVO team has proven to be capable across a number of disciplines – discovering, Net Cash (Debt) ($m): -80.2 Enterprise Value ($m): 450.1 developing and now digging up the Trident deposit. The 1Mtpa Higginsville CIL plant was constructed on time and under the $49m budget. This is a commendable result given the 52 wk High/Low: $2.91 $1.52 current tendency of peer mining projects to slip due to cost and time pressures. In July 12m Av Daily Vol (m): 0.66 AVO poured first gold from the Trident. The operation is now ramping up to a production rate of 160-190kozpa. Mine production will be boosted when the first of the large Western Key Metrics Zone stopes comes on line in October / November. 09F 10F 11F P/E (x) 15.5 11.4 9.1 EV/EBITDA (x) 6.4 5.5 5.5 Although the reserve figure supports a mine life of less than four years, the gold inventory and mine life should increase. Significant upside remains with numerous high grade Financials: intersections sitting outside the current Trident resource outline. Three underground 09F 10F 11F diamond drilling rigs are currently working on site. Project infrastructure will support a 10 Revenue ($m) 159.4 180.6 181.4 year mine life. EBIT ($m) 40.7 49.8 58.7 NPAT ($m) 23.9 32.3 40.6 An $11m annual exploration budget is focused on: Net Assets ($m) 115.2 147.5 188.1 Op CF ($m) 49.2 56.0 54.9 u 6km Higginsville Line of Lode – Limited drilling beneath mined open pits at Two Boys, Fairplay, Vine and Graveyard (Trident is the only well tested position Per Share Data: beneath a pit) 09F 10F 11F EPS (cps) 10.2 13.8 17.4 u Chalice DPS (cps) 0.0 0.0 0.0 Div Yield0.0%0.0%0.0% CFPS (cps) 21.0 23.9 23.5 u Regional – Musket and Wills Share Price Graph AVO has a $71m senior debt facility with $23m undrawn. $3.50 25.0 Aussie gold stocks are on struggle street due to rising costs, operational issues and $3.00 20.0 resource estimation challenges. Winners have been few and far between. However AVO is $2.50 shaping up as the winner all gold investors are scouring the bourse for. Argonaut’s BUY recommendation is justified by: 15.0 $2.00 u Quality management $1.50 10.0 $1.00 u High grades 5.0 $0.50 u Exploration upside $0.00 0.0 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 u Lack of domestic gold competition u Unhedged BUY Analyst: Troy Irvin Argonaut Securities Research 50 Road to Recovery Overview Gold producer focused on Avoca Resources (AVO) is a gold producer focused on becoming the next Australian becoming the next Australian mid-tier gold mining company. AVO is currently ramping up production at the mid-tier gold mining company Higginsville Gold Project as well as exploring a 2,700km² tenement holding between the >15Moz St Ives and >6Moz Norseman fields in Western Australia. Managing Director Rohan Williams is a Geologist with over 18 years experience, and was previously Chief Geologist of WMC Limited's St Ives Gold operation. Previous exploration successes include the 1Moz Belleisle gold deposit at St Ives, the Daisy gold deposit at Central Norseman and the Coronet Nickel mine at Kambalda. Ramping up Trident production Plant constructed on time and The 1Mtpa CIL plant was constructed on time and under the $49m budget. This is a under budget… commendable result given the current tendency of peer mining projects to slip due to cost and time pressures. In the June quarter AVO completed a number of key infrastructure projects including a 160 person accommodation village, the mine office … first gold poured in July… administration building and a 10MW dual diesel, gas-fired power station. In July AVO poured first gold from the Trident deposit. … now ramping up to a The operation is now ramping up to a production rate of 160-190kozpa. Mine production rate of 160-190 kozpa production will be boosted when the first of the large Western Zone stopes comes on line in October / November. Figure 1: Trident planned stoping and development layout All figures and tables are sourced from AVO unless stated otherwise Costs Targeting cash costs in the ‘low- AVO’s August 2008 presentation at Diggers and Dealers targets a cash cost of ‘low-mid mid A$400s’ A$400s’. Given recent cost pressures this figure could rise significantly unless the grade surprises strongly on the upside. Argonaut assumes FY09 cash costs in the high A$400’s/oz based on a head grade of 5.6g/t (overcall of 5%). However until a track record of steady state production is achieved it will be difficult to know how the costs are performing. One expense item to monitor is energy. Higginsville is not on grid power and electricity is supplied from a 10MW diesel fired power station. The cost of power is expected to be at least 30c/kWh, depending upon diesel prices. The power station is gas capable however the price of gas at the mine gate offers no current advantage over diesel. Trident ore has a work index of 18kWh/t. Argonaut Securities Research 51 Road to Recovery Increasing mine life The mine life is expected to Total current gold reserves at Trident are 580koz at an average high grade of 5.3g/t. increase well above the current Trident resources are 927koz at 5.8g/t. four year reserve Although the reserve figure supports a mine life of less than four years, the gold inventory and mine life should increase. Significant upside remains with numerous high grade intersections sitting outside the current Trident resource outline. A recent example is the discovery of the Artemis Lodes (high grade Athena-like mineralisation Project infrastructure will down plunge of Trident at a vertical depth of 750m). Three underground diamond support a 10 year mine life drilling rigs are currently working on site. Project infrastructure will support a 10 year mine life. $11m annual exploration budget AVO can boast of a number of Recent exploration highlights include the Artemis discovery (discussed above), and recent exploration highlights positive shallow infill drilling results at Wills (potential open pit just 25km north of the within trucking distance of the Higginsville plant). Chalice (30km west of the plant) is also shaping up well with the plant discovery of a new lode position in the footwall, and strong drill results at Deeps 2. Exploration is focused on: u 6km Higginsville Line of Lode – Limited drilling beneath mined open pits at Two Boys, Fairplay, Vine and Graveyard (Trident is the only well tested position beneath a pit) u Chalice u Regional – Musket and Wills Figure 2: 6km Trident to Graveyard trend Put options Recently purchased put options AVO offers an unhedged exposure to the gold price. The company recently purchased for 438,933 ounces at a strike put options for 438,933 ounces at a strike price of $830/oz (guarantees a minimum price of $830/oz gold price for a 34 month period). Summary AVO is shaping up as a winner Aussie gold stocks are on struggle street due to rising costs, operational issues and due to quality management, high resource estimation challenges. Winners have been few and far between. However AVO grades, and exploration upside is shaping up as the winner all gold investors are scouring the bourse for. Argonaut’s BUY recommendation is justified by: u Quality management u High grades u Exploration upside u Lack of domestic gold competition u Unhedged BUY Argonaut Securities Research 52 Road to Recovery Avoca Resources Equities Research Analyst: Troy Irvin Recommendation BUY Sector Materials Current Price $1.66 Issued Capital (m) 222.9 DCF Valuation $2.03 Market Cap (m) $369.9 All Ords (XAO) 5,030 Updated 04-September-2008 Profit & Loss ($m) 30 June 2009E 2010E 2011E Financial Summary 2009E 2010E 2011E Sales Revenue 159.4 180.6 181.4 Reported Earnings Other Income 0.8 1.5 2.1 Net Profit ($m) 23.9 32.3 40.6 Operating Costs 83.0 93.2 94.8 EPS (cents) 10.2 13.8 17.4 Depn & Amort 29.4 31.9 22.7 PER (x) 15.5 11.4 9.1 Exploration Written Off 2.0 2.1 2.1 Normalised Earnings Corporate/Admin 5.0 5.1 5.2 Net Profit ($m) 23.9 32.3 40.6 Other 0.0 0.0 0.0 EPS (cents) 5.9 10.2 13.8 17.4 EBIT 40.7 49.8 58.7 EPS Growth (%) 35.1 25.6 Interest Paid 6.6 3.6 0.7 PER (x) 15.5 11.4 9.1 Operating Profit 34.2 46.2 58.0 Cashflow Tax expense 10.3 13.9 17.4 Operating Cashflow ($m) 49.2 56.0 54.9 Minorities 0.0 0.0 0.0 GCFPS (cents) 21.0 23.9 23.5 NPAT 23.9 32.3 40.6 PCF (x) 7.9 6.9 7.1 Normalised NPAT 23.9 32.3 40.6 Dividend Dividend (cents) 0.0 0.0 0.0 Yield (%) 0.0 0.0 0.0 Franking % 100 100 100 Cash Flow ($m) 2009E 2010E 2011E Operating Cashflow 49.2 56.0 54.9 - Capex 12.0 6.2 4.2 Financial Ratios 2009E 2010E 2011E - Exploration & Evaluation 10.1 10.3 10.5 Balance Sheet Ratios - Asset purchases (+ asset sales) 0.0 0.0 0.0 Total Debt / Equity(%) 62 22 0 Free Cashflow 27.1 39.5 40.2 Interest Cover (x) 6.2 13.7 89.9 - Dividends 0.0 0.0 0.0 Acid test ratio (x) 1.1 1.3 1.7 + Equity raised 0.0 0.0 0.0 + Debt drawdown (- repaid) (40.0) (31.8) 0.0 Profitability Ratios Net Change in Cash -12.9 7.7 40.2 Net Profit Margin (%) 15.0 17.9 22.4 Cash at End Period 28.8 38.6 57.5 Return on Assets (%) 24.8 33.0 41.7 Return on Equity (%) 20.8 21.9 21.6 Balance Sheet ($m) 2009E 2010E 2011E Total Assets 193.2 189.6 198.1 Valuation Summary A$m A$/sh Total Debt 71.8 31.8 0.0 Trident 329.4 1.48 Total Liabilities 78.0 42.1 10.0 Forwards 0.0 0.00 Shareholders Funds 115.2 147.5 188.1 Corporate -8.6 -0.04 Non Trident Resources 61.3 0.28 Exploration 140.0 0.63 Unpaid Capital 11.1 0.05 Production Summary 2009E 2010E 2011E Cash (30 June 2008) 1.6 0.01 Trident (koz) 159 177 177 Debt -81.8 -0.37 Total 159 177 177 Total @ 7% discount rate 453 2.03 Gold Cash Cost (US$/oz) 470 441 418 2012E Gold Total Cost (US$/oz) 637 591 518 177 Gold Price Realised (US$/oz) 900 850 800 Directors Name Position Robert Reynolds Non-Executive Chairman Reserves & Resources Rohan Williams Managing Director Stephanie Unwin Non-Executive Director Reserves Mt g/t Moz David Quinlivan Non-Executive Director Trident 3.4 5.3 0.58 Jan Castro Non-Executive Director Resources Mt g/t Moz Trident 5.0 5.8 0.93 Fairplay 3.6 1.8 0.21 Substantial Shareholders % Palaeochannels 1.4 2.0 0.09 Pala Investment Holdings 17.8% Chalice 0.5 5.3 0.08 Commonwealth Bank 8.7% Other 1.3 1.2 0.05 JP Morgan Chase and Co 6.2% Total 11.8 3.6 1.36 Trident (koz) GOLD PRODUCTION REALISED PRICE AND COST PROFILE 180 1000 175 900 800 170 700 600 165 500 koz 160 400 300 US$/oz 155 200 150 100 0 145 2009E 2010E 2011E 2009E 2010E 2011E Gold price Cash cost Argonaut Securities Research 53 Road to Recovery Research CBH Resources 4 September 2008 SELL Current Price: $0.09 That zincing feeling Valuation: $0.08 Ticker: CBH CBH Resources (CBH) is a base metals mining company aiming to operate three mines by Sector: Materials 2009: Shares on Issue (m): 879.5 Market Cap ($m): 79.2 × Endeavour, NSW (zinc/lead) – Established underground mine Net Cash ($m): -79.3 Enterprise Value ($m): 158.4 × Rasp, NSW (zinc/lead/silver) – New underground mine 52 wk High/Low: $0.61 $0.08 12m Av Daily Vol (m): 2.40 × Panorama, WA (zinc/copper) – Open pit in development Key Metrics CBH reported a net loss after tax of $29.1m for FY08 compared to a profit of $38.7m for 08A 09F 10F the previous year. The poor result reflected a 32% reduction in sales revenue from the P/E (x) -2.7 -3.4 3.9 Endeavour Mine at a time when cost of production remained constant. EV/EBITDA (x) -12.9 45.4 2.4 Financials: The Endeavour mine is fighting for its life. Falling zinc prices have forced the mine into a 08A 09F 10F new operating plan. In an attempt to breakeven Endeavour has: Revenue ($m) 158.6 128.5 362.9 EBIT ($m) -20.8 -6.0 48.7 NPAT ($m) -29.0 -23.8 20.6 × Cut its workforce by two-thirds over the past two months Net Assets ($m) 156.1 132.3 152.8 × Will reduce planned ore output to 940ktpa, down from a target of 1.3mtpa Op CF ($m) 10.8 -20.0 35.2 × Restrict mining to high grade areas Per Share Data: 08A 09F 10F EPS (cps) -3.4 -2.6 2.3 Geotechnical risk is increasing as the operation matures. Production never fully recovered DPS (cps) 0.0 0.0 0.0 from a stope failure back in October 2005. Div Yield 0.0% 0.0% 0.0% CFPS (cps) 1.3 -2.2 3.9 On a stand-alone basis the Rasp mine is uneconomic. The project becomes viable Share Price Graph assuming the ore is treated at PEM’s nearby underutilised Broken Hill concentrator. Unfortunately for CBH, PEM walked away from a merger in July. $0.70 30.0 $0.60 Panorama is barely viable. Disadvantages include the small size of the Sulphur Springs 24.0 deposit, low grades and a demanding 14:1 strip ratio due to the steep plunge. One ray of $0.50 hope is the potential co-production of pyrite from high grade sulphide tailings for use in sulphuric acid production. A scoping study is underway. 18.0 $0.40 $0.30 The low grade / high cost nature of the resource base has made CBH one of the first stocks 12.0 to sink as base metals prices have come back to earth. $0.20 6.0 $0.10 Even with the new operating plan at Endeavour, CBH faces a tough battle to keep its head above water while the current challenging market conditions persist. $0.00 0.0 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 SELL Analyst: Troy Irvin Argonaut Securities Research 54 Road to Recovery Overview Base metals company aiming to CBH Resources (CBH) is a base metals mining company aiming to operate three mines operate three mines by 2009 by 2009 - Endeavour, Panorama and Broken Hill. The Chief Executive Officer is Stephen Dennis. Stephen has held senior management positions with Brambles Australia (Regional Director of minerals transport), Minara (Group General Manager, then CFO) and MIM Holdings. Endeavour mine fighting for its life The performance of Endeavour CBH acquired the Endeavour mine from Pasminco in April 2003. The performance of the was impacted by a stope failure mine was severely impacted by a stope failure that occurred in October 2005. A that occurred in October 2005… massive void created during stope mucking collapsed. This event created a number of challenges - decline access was restricted, the paste fill line was ‘taken out’ and approximately 85,000t of blasted ore was sterilised. Production never quite recovered. …production never quite Figure 1: Endeavour mine quarterly production performance recovered Ore production Grade 350 9.0% Rated capacity 1.2mtpa 8.0% 300 7.0% 250 6.0% 200 5.0% n %Z ktpq MAJOR 4.0% 150 STOPE FAILURE 3.0% 100 2.0% 50 1.0% 0 0.0% Source: Argonaut Falling zinc prices have forced Endeavour is in trouble. Falling zinc prices have forced the mine into a new operating the Endeavour to cut its plan. In an attempt to breakeven, Endeavour has cut its workforce by two-thirds over workforce by two-thirds, reduce the past two months and will reduce planned ore output to 940ktpa, down from a planned ore output, and restrict target of 1.3mtpa. Mining will be restricted to high grade areas. mining to high grade areas Rasp unviable Rasp is located between PEM’s The Rasp project is part of Consolidated Mining Lease 7 (CML7) at Broken Hill. Rasp is South Mine and North Mine at located between Perilya’s (PEM) South Mine and North Mine. Broken Hill Figure 2: Long section of Broken Hill assets Source: PEM The Rasp mining plan is based on a virgin zinc lode called the Western Mineralisation. Current resources are 10.1mt @ 4.9% Zn and 3.5% Pb. The Western Mineralisation extends from 100 - 800m below surface and is open at depth. Argonaut Securities Research 55 Road to Recovery On a stand-alone basis the Rasp On a stand-alone basis the Rasp mine is uneconomic, assuming capital expenditure of mine is uneconomic $75m for a 750ktpa concentrator. However Rasp becomes viable assuming the ore is treated at PEM’s nearby underutilised Broken Hill concentrator. This is due to: × Lower capital costs - The $75m concentrator is no longer required × Lower operating costs – Attractive unit costs are expected as throughput at Underutilised Broken Hill plant PEM’s Broken Hill mill increases from the current 1.8mtpa closer to capacity of is the key but PEM walked away 2.8mtpa from a merger with CBH in July PEM walked away from a merger with CBH in July. Panorama unviable Sulphur Springs disadvantages Panorama is a copper-zinc VMS deposit that was acquired from Sipa Resources in May include the small deposit, low 2005. The project is located 160km by road south east of Port Hedland. CBH is grades and demanding strip planning to start construction this year. ratio The current plan involves open pit ore output of 1.25mtpa to produce 90ktpa zinc concentrate, and 80ktpa copper concentrate. Argonaut’s work indicates that Panorama is barely viable. The assessment assumes start-up capital expenditure of $275m. Project disadvantages include the small size of the Sulphur Springs deposit, low grades and a demanding strip ratio (14:1 due to the steep plunge). Low grade, high risk deposits The CBH assets are all lower The CBH assets are all lower grade deposits. Low grade deposits are the first to become grade deposits that are the first uneconomic in a falling zinc price environment. to feel the squeeze of falling zinc prices Figure 3: Zinc deposit grades (ASX-listed companies) 40 35 30 25 20 15 (at spot prices) 10 Resource gradeeq %Zn 5 0 Endeavour CBH Mehdiabad UCL Sulphur Springs CBH Tala Hamza TZN Hamza Tala Jaguar JML Jaguar Broken Hill PEM Stockman JML CBHHera Prairie Downs PDZ Mungana KZL Sorby Hills CBH Hills Sorby Manbarrum TNG Dairi HER Century ZFX Woodlawn TRO King Vol KZL Vol King Dugald River ZFX AIM Perkoa Angas TZN Angas Rosebery ZFX CBH Rasp Abra AIIAbra Source: Argonaut Struggling to keep head above water It is difficult to see how CBH can The low grade / high cost nature of the resource base has made CBH one of the first keep its head above water while stocks to ‘zinc’ as base metals prices have come back to earth. the current challenging market conditions persist Even with the new operating plan at Endeavour, CBH faces a tough battle to keep its head above water while the current challenging market conditions persist. SELL Argonaut Securities Research 56 Road to Recovery CBH Resources Equities Research Analyst: Troy Irvin Recommendation SELL Sector Materials Current Price $0.09 Issued Capital (m) 879.5 Argonaut Valuation $0.08 Market Cap (m) $79.2 All Ords (XAO) 5,030 Updated 04-September-2008 Profit & Loss ($m) 30 June 2008A 2009E 2010E Financial Summary 2008A 2009E 2010E Sales Revenue 158.6 128.5 362.9 Reported Earnings Other Income 24.7 -2.7 -11.1 Net Profit ($m) (29.0) (23.8) 20.6 Operating Costs 170.6 112.3 277.2 EPS (cents) (3.4) (2.6) 2.3 Depn & Amort 8.6 9.5 16.9 PER (x) (2.7) (3.4) 3.9 Exploration Written Off 0.9 1.9 0.8 Normalised Earnings Corporate/Admin 24.0 8.1 8.2 Net Profit ($m) (29.0) (23.8) 20.6 EBIT -20.8 -6.0 48.7 EPS (cents) 1.2 (3.4) (2.6) 2.3 Interest Paid 20.2 17.8 17.8 EPS Growth (%) Operating Profit -41.0 -23.8 30.9 PER (x) (2.7) (3.4) 3.9 Tax Expense / (Benefit) -12.0 0.0 10.3 Cashflow Abnormal Losses / Minorities 0.0 0.0 0.0 Gross Op. Cashflow ($m) 10.8 (20.0) 35.2 NPAT -29.0 -23.8 20.6 GCFPS (cents) 1.3 (2.2) 3.9 Normalised NPAT -29.0 -23.8 20.6 PCF (x) 7.2 (4.1) 2.3 Dividend Dividend (cents) 0.0 0.0 0.0 Yield (%) 0.0% 0.0% 0.0% Franking % 100 100 100 Cash Flow ($m) 2008A 2009E 2010E Operating Cashflow 10.8 -20.0 35.2 - Capex 103.4 374.0 16.4 - Exploration & Evaluation 50.5 7.5 3.1 - Asset Purchases (+ Asset Sales) -0.7 0.0 0.0 Financial Ratios 2008A 2009E 2010E Free Cashflow -142.4 -401.5 15.7 Balance Sheet Ratios - Dividends 0.0 0.0 0.0 Total Debt / Equity 130.9 154.4 107.5 + Equity Raised 1.0 0.0 0.0 Interest Cover -1.0 -0.3 2.7 + Debt Drawdown (Repayment) 28.1 0.0 -40.0 Acid test ratio 2.6 -9.0 -3.3 Net Change in Cash -113.3 -401.5 -24.3 Cash at End Period 125.1 -276.4 -300.7 Profitability Ratios Net Profit Margin (%) -18.3 -18.5 5.7 Return on Assets (%) -5.5 -1.0 7.4 Return on Equity (%) -18.6 -18.0 13.5 Balance Sheet ($m) 2008A 2009E 2010E Total Assets 506.5 330.2 353.1 Total Debt 204.3 204.3 164.3 Total Liabilities 350.5 197.9 200.2 Valuation Summary A$m A$/sh Shareholders Funds 156.1 132.3 152.8 Endeavour 46.2 0.05 Panorama 40.9 0.05 Rasp Mine 0.0 0.00 Hera 47.5 0.05 Mineral Hill 7.3 0.01 Production Summary 2008A 2009E 2010E Newcastle Shiploader 10.0 0.01 Contained Zinc (kt) 46 47 104 Exploration 20.0 0.02 Contained Lead (kt) 21 21 37 109 Listed Investments 4.7 0.01 Contained Copper (kt) 0 0 13 Unpaid Capital 3.2 0.00 Contained Silver (koz) 852 766 1152 Forwards 0.7 0.00 Corporate -29.0 -0.03 Zinc Cash Cost (US$/lb) 0.96 0.74 0.52 Cash 125.0 0.14 Debt -204.3 -0.23 Zinc Price Realised (US$/lb) 1.18 0.85 0.85 Total @ 10% discount rate 72 0.08 Reserves & Resources Directors Name Position Reserves Mt Zn % Zn kt James Wall Non-Executive Chairman Endeavour 17.9 5.5 985 Stephen Dennis Chief Executive Officer Sulphur Springs 10.0 3.7 370 Robert Besley Non Executive Director Total 27.9 4.9 1,355 Professor Ian Plimer Non Executive Director Robert Willcocks Non Executive Director Resources Lewis Marks Non Executive Director Endeavour 27.4 6.5 1781 Tatsuya Tejima Non Executive Director Sulphur Springs 15.5 4.4 682 Panorama JV 4.1 3.7 152 Rasp 10.1 4.9 495 Hera 2.2 4.2 92 Sorby Hills 10.7 0.6 64 Napier Range JV 0.6 8.4 50 Substantial Shareholders % Total 70.6 4.7 3,317 Toho Zinc 28.7 IOOF Holdings Limited 5.1 PRODUCTION PROFILE REALISED PRICE & COST PROFILE 120 1.40 100 1.20 1.00 80 0.80 60 0.60 US$/lb 40 0.40 Contained Metal (kt) 20 0.20 0 0.00 2008A 2009E 2010E 2008A 2009E 2010E Zinc Lead Copper Zinc Price Zinc Cash Cost Argonaut Securities Research 57 Road to Recovery Research Dominion 4 September 2008 BUY Current Price: $2.39 In a Dominion of its own Valuation: $3.05 Ticker: DOM In a sector recently known more for its failures than its fortunes, unheralded gold producer Sector: Materials Dominion Mining (DOM) continues to deliver at its Challenger gold mine in South Australia. DOM has produced in excess of 100koz pa whilst expanding its reserve base by 150% over Shares on Issue (m): 102.5 the last three years. Market Cap ($m): 244.9 Net Cash ($m): 55.2 Enterprise Value ($m): 189.7 The majority of Australian gold producers continue to be plagued by operational difficulties. Low grades, high costs, imposing strip ratios, resource estimation issues and a strong A$ have turned sentiment against the sector. 52 wk High/Low: $6.79 $1.91 12m Av Daily Vol (m): 0.26 Since mining began at Challenger in 2002, DOM has rarely put a foot wrong: Key Metrics 08A 09F 10F u Operational consistency P/E (x) 6.8 6.5 5.4 EV/EBITDA (x) 4.4 3.7 3.2 u High grade, low cost producer Financials: 08A 09F 10F u Strong balance sheet with $50m cash (no debt, minimal hedging) Revenue ($m) 97.6 111.1 116.5 EBITDA ($m) 43.4 51.9 59.6 u Dividend payer (12cps in FY08) NPAT ($m) 33.4 37.7 45.2 u Current Resource of 1.16moz justifies a further mine life of 10 years Net Assets ($m) 104.6 122.4 158.9 Op CF ($m) 46.7 65.0 68.8 As the casualty ward continues to mount, DOM is increasingly operating in a Dominion of its own. Per Share Data: 08A 09F 10F EPS (cps) 34.9 36.8 44.1 FY08 was another solid year, with gross revenue totalling $97m from the sale of 109koz Au DPS (cps) 12.0 12.0 12.0 at a cash operating cost of $367/oz. Div Yield 5.0% 5.0% 5.0% CFPS (cps) 51.4 63.4 67.2 The outlook for FY09 remains robust, with production expected to exceed 100koz pa for a fourth consecutive year. Cash costs will increase primarily due to: Share Price Graph $7.00 10.0 u Stoping and development of the lower grade M2 shoot $6.00 8.0 u Diesel prices, which account for ~ 18% of total site costs $5.00 6.0 DOM has been a model of consistency over a number of years. With $50m cash, no debt, a $4.00 solid dividend and 10 years of mine life ahead, investors seeking exposure to a proven gold producer should look no further. $3.00 4.0 $2.00 2.0 BUY $1.00 $0.00 0.0 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Analysts: Tim Serjeant Troy Irvin Argonaut Securities Research 58 Road to Recovery Overview A high grade, relatively low cost Dominion Mining (DOM) is a $240m Australian gold producer. Its flagship project is the Australian gold producer 100% owned Challenger gold mine located 740km north west of Adelaide in South Australia, which has been in production since October 2002. Challenger initially ran as an open pit operation before subsequently transitioning to full scale underground production in 2005. Today, Challenger remains one of the highest grade and lowest cost gold operations in Australia. DOM also has an extensive early stage exploration portfolio located in WA and SA. Transformed from junior Chairman Peter Joseph and Director Peter Alexander have been with the Company for explorer to proven producer over 25 years, transforming DOM from a junior explorer to proven producer. After ten years as Managing Director, Alexander stepped down from executive duties in February 2008 and was replaced by Jonathan Shellabear, a qualified geologist with extensive experience in the finance industry. Other key management personnel include Peter Bamford (General Manager - Operations) and Tony Poustie (General Manager - Exploration) who have played an integral part in DOM’s transformation. A model of consistency A model of consistency Challenger has produced just shy of 500koz at a LOM cash cost of ~A$365/oz and generated in excess of $300m of revenue. Figure 1: Challenger – a model of consistency 800 728 700 625 600 512 500 400 koz 292 294 300 190 200 108 108 109 71 61 100 37 44 0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 Reserves Production Source: DOM, Argonaut Current mine life of 10 years Following recent additions, global resources at Challenger now stand at 1.16moz based on resources grading 9.1 g/t, justifying a mine life at current production levels of 10 years. Current reserves stand at 728koz grading 7.4 g/t. The conversion of resources to reserve status at Challenger has historically been in the order of 94%. The future Production forecast > 100koz for Production for FY09 is forecast to exceed 100koz for a fourth straight year with higher a fourth straight year cash costs anticipated in the first half. This is due to stoping of the lower grade M2 material as well as allowing for the impact of diesel prices, which currently represents ~18% of total site costs. Argonaut has contemplated cash costs of A$430/oz for FY09. Targeting a further 400koz over An aggressive exploration strategy at Challenger since Janurary 2007 has delineated an the next 12-18 months additional 600koz of reserve at a discovery cost of $15/oz. DOM is targeting a further 400koz at a cost of $20/oz over the next 12-18 months. Surface drilling will continue to target depth extensions of M1 and M2 shoots. Underground exploration will focus on other well defined shoots, including the M3 and SEZ shoots which have been mined near surface as well as the under explored footwall and hanging wall shoots. Argonaut Securities Research 59 Road to Recovery Figure 2: Challenger’s future Source: DOM Challenges ahead Risks include increasing depth of Whilst DOM gains greater confidence in the Challenger ore body at depth, translating the ‘A grade’ M1 shoot (other those ounces into profit will be crucial. Ore sources outside the ‘A grade’ M1 shoot are shoots are lower grade and lower of lesser grade and realise fewer ounces per vertical metre (oz pvm), meaning oz pvm) additional tonnes will be required to maintain current production levels. To combat these challenges, a ventilation shaft (700m raise from surface) will be commissioned in mid 2009 to maximise productivity and provide flexibility when mining the M1 and M2 shoots at depth. An expansion study to ~130koz DOM is currently contemplating an expansion study which involves increasing the pa is being contemplated throughput rate of the mill from ~430ktpa to ~650ktpa. The final decision on the potential expansion, which may involve the installation of a haulage shaft, will be made at the end of 2008. Should it proceed, construction would take ~12 months with increased production levels of 130-140koz pa commencing during 2010. Other key challenges include; u Diesel prices u Liquidity – Top five shareholders control 45% of the register Key model parameters Argonaut values DOM at $3.05 Argonaut has modelled a 12 year LOM at Challenger to reflect the likelihood of further per share additions to the resource base. The valuation does not incorporate the potential mill expansion to ~650ktpa from 2010. Using Argonaut’s forecast gold and exchange rate assumptions, a valuation of $3.05 per share is derived. If a flat gold price of US$800/oz and an A$/US$ exchange rate of 0.85 was modelled, the valuation falls slightly to $3.03 per share. Summary In a Dominion of its own Whilst Australian gold producers continue to be plauged by operational difficulties, DOM has been a model of consistency over a number of years. With $50m cash, no debt and ~10 years of mine life ahead, DOM is trading comfortably below Argonaut’s valuation of $3.05 per share. BUY Argonaut Securities Research 60 Road to Recovery Dominion Mining Equities Research Analyst: Tim Serjeant Recommendation BUY Sector Materials Current Price $2.39 Issued Capital (m) 102.5 Valuation $3.05 Market Cap (m) $244.9 All Ords (XAO) 5,030 Updated 04-September-2008 Profit & Loss (A$m) 30 June 2007A 2008A 2009E 2010E Financial Summary 2007A 2008A 2009E 2010E Sales Revenue 80.7 95.1 107.6 111.5 Reported Earnings Other Income 1.1 2.6 3.5 5.1 Net Profit ($m) 51.7 33.4 37.7 45.2 Operating Costs (inc royalty) 38.2 45.2 46.1 47.7 EPS ($) 0.51 0.33 0.37 0.44 Exploration Exp 4.1 5.2 9.0 5.0 PER (x) 4.6 7.3 6.5 5.4 Corporate/Admin 2.2 3.8 4.1 4.2 Normalised Earnings EBITDA 37.2 43.4 51.9 59.6 Net Profit ($m) 27.8 35.8 37.7 45.2 Depn & Amort 14.3 12.0 14.2 14.4 EPS ($) 0.1 0.28 0.35 0.37 0.44 EBIT 22.9 31.3 37.7 45.2 EPS Growth (%) n/a 26.4 5.4 19.8 Gain/(Loss) on Sale of Assets 12.9 -2.4 0.0 0.0 PER (x) 8.6 6.8 6.5 5.4 Change in value of gold contracts 11.0 0.3 0.0 0.0 Cashflow Other 1.4 -2.7 0.0 0.0 Operating Cashflow ($m) 43.1 46.7 65.0 68.8 Net Interest Paid 0.0 0.0 0.0 0.0 GCFPS ($) 0.48 0.51 0.63 0.67 Operating Profit 45.4 25.9 37.7 45.2 PCF (x) 5.0 4.7 3.8 3.6 Tax expense/(benefit) -6.3 -7.5 0.0 0.0 Dividend NPAT 51.7 33.4 37.7 45.2 52.8 Dividend ($) 0.10 0.12 0.12 0.12 Normalised NPAT 27.8 35.8 37.7 45.2 52.8 Yield (%) 4% 5% 5% 5% Franking (%) 0% 0% 0% 0% Cash Flow (A$m) 2007A 2008A 2009E 2010E Financial Ratios 2007E 2008A 2009E 2010E Operating Cashflow 43.1 46.7 65.0 68.8 Balance Sheet Ratios - Capex (+asset sales) -13.6 -21.5 -30.0 -15.0 Total Debt / Equity(%) 1% 0% 0% 0% - Exploration Expenditure -6.3 -5.2 -9.0 -5.0 - Other -3.1 0.0 0.0 0.0 Profitability Ratios Free Cashflow 21.9 24.8 26.0 48.8 Net Profit Margin (%) 34% 38% 35% 41% - Dividends -4.0 -10.1 -12.3 -12.3 Return on Assets (%) 25% 25% 27% 25% + Equity raised 0.0 2.4 0.0 0.0 Return on Equity(%) 36% 34% 31% 28% + Debt drawdown (- repaid) 0.0 -0.2 0.0 0.0 Net Change in Cash 14.1 16.8 17.8 36.5 Cash at End Period 33.1 49.9 67.7 104.2 Valuation Summary A$m A$/sh Challenger 199.2 1.94 Exploration (Challenger) 35.0 0.34 Balance Sheet (A$m) 2007A 2008A 2009E 2010E Exploration (other) 15.0 0.15 Total Assets 93.1 123.9 141.7 178.2 Tax Losses 30.6 0.30 Total Debt 0.5 0.5 0.5 0.5 Corporate -23.7 -0.23 Total Liabilities 16.7 19.3 19.3 19.3 Unpaid Capital 1.0 0.01 Shareholders Funds 76.3 104.6 122.4 158.9 Cash & Bullion 55.6 0.54 Debt -0.4 0.00 Total @ 7% Discount Rate 312 3.05 Production Summary (koz) 2007A 2008A 2009E 2010E Challenger 108.2 109.4 107.5 109.2 Realised Price (US$/oz) 586 784 900 850 Cash Cost (US$/oz) 241 331 386 365 Directors Operating Margin (US$/oz) 345 454 514 485 Name Position Peter Joseph Chairman Jonathan Shellabear Managing Director Ross Coyle Executive Director Reserves & Resources Peter Alexander Non-Executive Director Reserves kt g/t koz John Gaskell Non-Executive Director Proven 522 7.3 122 Probable 2,551 7.4 605 TOTAL 3,073 7.4 727 Substantial Shareholders % Resources Yandal Invesments 12.5% Measured 453 9.1 133 P C Joseph 10.9% Indicated 2,387 8.8 678 Lujeta Pty Ltd 9.8% Inferred 1,134 9.6 349 GAM International Growth Fund 7.6% TOTAL 3,974 9.1 1,160 Commonwealth Bank 6.1% GROUP PRODUCTION PROFILE REALISED PRICE & COST PROFILE 1,200 125.0 12.0 1,000 10.0 100.0 800 8.0 75.0 600 6.0 US$/oz 50.0 4.0 400 Head Grade (g/t) Head Grade 25.0 Gold Production (koz) Production Gold 2.0 200 0.0 0.0 0 FY07A FY08A FY09E FY10E FY07A FY08A FY09E FY10E Realised Price Cash Cost Challenger Grade Argonaut Securities Research 61 Road to Recovery Research Independence Group 4 September 2008 BUY Current Price: $2.79 Valuation: $3.67 Havana rough trot Ticker: IGO Independence Group (IGO) achieved FY08 annual production of 9.3kt contained nickel (in Sector: Materials line with budget of 9.0kt). FY09 production goals are 230 – 250kt of ore to deliver 8.4 – 8.8kt contained nickel. Shares on Issue (m): 117.0 Market Cap ($m): 326.3 Net Cash ($m): 144.8 FY09 cost performance was commendable with an average result of A$4.12/lb. The only Enterprise Value ($m): 181.6 pressure came in the June Q when costs were hurt by lower head grades, difficulties in long-hole mining in 16/3-2 Nth block (now completed) and less ore tonnes delivered by 52 wk High/Low: $9.39 $2.33 selective hand held mining techniques. The mine has not been affected by the Western 12m Av Daily Vol (m): 0.65 Australian power shortages or the temporary closure of the Kalgoorlie Nickel Smelter. Key Metrics 08A 09F 10F Exploration highlights at Long included (true widths): P/E (x) 6.3 9.8 7.0 EV/EBITDA (x) 2.2 3.1 2.4 × 07 Shoot - Infill and extensional drilling intersected 3.5m @ 5.6%, 5.0m @ 4.5% and 3.2m @ 6.9% Ni Financials: 08A 09F 10F Revenue ($m) 137.6 121.1 146.3 × McLeay Shoot 3 - Extensional drilling intersected 5.0m @ 6.9% and 4.0m @ 11% EBIT ($m) 74.3 47.8 66.8 Ni NPAT ($m) 51.5 33.4 46.7 The above shoots remain open. McLeay Shoot 3 has now extended to 450m in plunge Net Assets ($m) 193.0 207.5 240.1 length and 60m in dip extent. Op CF ($m) 45.8 35.5 48.9 At the Tropicana JV the completion date of the pre-feasibility study has been pushed out to Per Share Data: March quarter 2009 (previously June 2008). 25m x 25m drilling to convert resources to 08A 09F 10F reserves is nearing completion. Water drilling has identified an aquifer 45km from EPS (cps) 40.0 26.0 36.4 Tropicana extending over an area of at least 30km x 30km. Pump testing is ongoing, DPS (cps) 17.0 12.0 12.0 Div Yield 6.1% 4.3% 4.3% however results to date indicate the aquifer is of adequate size to sustain the envisaged CFPS (cps) 35.6 27.6 38.1 operation. Share Price Graph IGO has been having a rough trot, shedding approximately two thirds of its value over the $10.00 25.0 last four months. The hefty gold premium previously awarded to IGO’s 30% share of the $9.00 4Moz Tropicana deposit has evaporated. Management has recently committed to an on- market share buy back program for ~10% of total issued capital. Argonaut values the $8.00 20.0 Long nickel mine plus current cash at $2.63 per share, with investors able to pick up the $7.00 ‘rest’ for $0.16 per share (including Tropicana and the exploration portfolio). $6.00 15.0 $5.00 Management has a track record of consistent production, high grades, low costs and $4.00 10.0 successful exploration at the mature Long mine. Although Tropicana faces a number of challenges (remote location, limited infrastructure, 2.0g/t grade, delayed pre-feasibility $3.00 study) it is a large discovery (potential 8-10Moz) that is worth significantly more than the $2.00 5.0 market is currently attributing. $1.00 $0.00 0.0 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 BUY Analyst: Troy Irvin Argonaut Securities Research 62 Road to Recovery Overview Focused primarily on nickel Independence Group (IGO) is a mining and exploration company focused primarily on production at the Long mine in nickel production at the Long mine. Long was purchased in September 2002 for $15m. Kambalda Figure 1: Long mine long section showing recent exploration highlights All figures and tables are sourced from IGO unless stated otherwise Managing Director Chris Bonwick is a Geologist with over 20 years experience, including senior management positions with Resolute, Samantha Gold and WMC. Chris has led teams that have successfully made virgin gold discoveries, including the Chalice, Redeemer and Indee deposits. The Company reported a NPAT of A$51.5m for FY08. Argonaut has forecast a full year NPAT of A$33.0m for FY09 from the production of 9.0kt contained nickel. Proven production track record at the Long mine Long has two key advantages Long has proven to be a company maker for IGO. The mine has two key advantages over Kambalda peers – higher over its Kambalda nickel competitors: grades, and next door to the Nickel West concentrator… × Higher nickel grades × Close proximity to the Nickel West concentrator- - IGO simply has to ‘throw the ore over the fence’, resulting in very low transport costs …leading to lower cash costs These advantages result in low cash costs on a $/lb payable nickel basis. Figure 2: Kambalda Nickel Miners – Reserve grades and cash costs % Ni US$/lb 3.8 6.00 3.6 5.50 3.4 3.2 5.00 3.0 4.50 2.8 FY08 Cash Costs 2.6 4.00 Nickel Reserve Grade 2.4 3.50 2.2 2.0 3.00 IGO PAN MCR Source: Argonaut Argonaut Securities Research 63 Road to Recovery Operational risk from IGO’s sole Operational risk is increasing. IGO has the disadvantage of only one production source production source is increasing (Long) with mining conditions becoming more challenging: as the mine gets deeper and working areas spread out × Increased depth - Geotechnical risks including seismicity increase due to the rock becoming more stressed × Increased lateral extent of production - Mining areas are moving further north and south, resulting in increasing trucking costs and increased tramming times Despite the challenges, management has a proven track record of consistent production, high grades, low costs and successful exploration at the mine. Long exploration Recent exploration highlights at Recent exploration highlights at Long include (true widths, both shoots remain open): Long include high grade extensional drill results at the 07 × 07 Shoot - Infill and extensional drilling hits of 3.5m@ 5.6%, 5.0m @ 4.5% Shoot and the McLeay 3 Shoot and 3.2m @ 6.9% Ni × McLeay Shoot 3 - Extensional hits of 5.1m @ 6.9% and 4.0m @ 11% Ni McLeay Shoot 3 has now extended to 450m in plunge length and 60m in dip extent. Figure 3: McLeay Shoot 3 significant nickel intercepts outside reserves Tropicana gold JV (IGO 30%) Tropicana is a large >4Moz gold The Tropicana JV is located approximately 350km north east of Kalgoorlie. In discovery open down plunge November 2007 70% owner AngloGold Ashanti announced a maiden resource of 62.8mt at 2.01 g/t Au for 4.1Moz (0.6 g/t Au cut-off grade) from the Tropicana/Havana area. The resource only included mineralisation potentially exploitable via open-pit mining. Both the Tropicana/Havana zones remain open down plunge. PFS is expected to be completed The completion date of the pre-feasibility study (PFS) has been pushed out to March in the March quarter 2009 quarter 2009 (previously June 2008). IGO is free-carried until the end of the PFS. Summary IGO is having a rough trot and is IGO has been oversold, shedding approximately two thirds of its value over the last now a steal four months. The hefty gold premium previously awarded to IGO’s 30% share of the 4Moz Tropicana deposits has evaporated. Argonaut values the Long nickel mine plus current cash at $2.63 per share, with investors able to pick up the ‘rest’ for just $0.16 per share (including Tropicana and the exploration portfolio). BUY Argonaut Securities Research 64 Road to Recovery Independence Group NL Equities Research Analyst: Troy Irvin Recommendation BUY Sector Materials Current Price $2.79 Issued Capital (m) 117.0 Valuation $3.67 Market Cap (m) $326.3 All Ords (XAO) 5,030 Updated 04-September-2008 Profit & Loss ($m) 30 June 2008A 2009E 2010E Financial Summary 2008A 2009E 2010E Sales Revenue 137.6 121.1 146.3 Reported Earnings Other Income 11.5 7.1 2.5 Net Profit ($m) 51.5 33.4 46.7 Operating Costs 64.2 56.3 57.6 EPS (cents) 40.0 26.0 36.4 Depn & Amort 8.8 10.0 10.0 PER (x) 6.3 9.8 7.0 Exploration Exp / Written Off 2.5 8.1 8.2 Normalised Earnings Corporate/Admin 6.0 6.0 6.2 Net Profit ($m) 51.5 33.4 46.7 Other -6.7 0.0 0.0 EPS (cents) 30.7 88.9 40.0 26.0 36.4 EBIT 74.3 47.8 66.8 EPS Growth (%) (55.0) (35.0) 39.8 Interest Paid 0.1 0.1 0.1 PER (x) 6.3 9.8 7.0 Operating Profit 74.1 47.7 66.7 Cashflow Tax expense 22.6 14.3 20.0 Operating Cashflow ($m) 45.8 35.5 48.9 Minorities 0.0 0.0 0.0 GCFPS (cents) 35.6 27.6 38.1 NPAT 51.5 33.4 46.7 PCF (x) 7.8 10.1 7.3 Normalised NPAT 51.5 33.4 46.7 Dividend Dividend (cents) 17.0 12.0 12.0 Yield (%) 6.1 4.3 4.3 Franking % 100% 100% 100% Cash Flow ($m) 2008A 2009E 2010E Financial Ratios 2008A 2009E 2010E Operating Cashflow 45.8 35.5 48.9 Balance Sheet Ratios - Capex 2.5 10.1 201.6 Total Debt / Equity(%) 0.3 0.3 0.3 - Exploration & Evaluation 30.5 16.1 16.4 Interest Cover (x) 561 863 1207 - Asset purchases (+ asset sales) 1.3 0.0 0.0 Acid test ratio (x) 4.6 10.5 -1.1 Free Cashflow 11.4 9.3 (169.2) - Dividends 19.6 21.1 14.0 Profitability Ratios + Equity Raised 2.8 0.0 0.0 Net Profit Margin (%) 37.4 27.6 31.9 + Debt Drawdown (Repaid) (1.271) 0.0 0.0 Return on Assets (%) 69.8 34.5 23.7 Net Change in Cash (6.6) (11.8) (183.2) Return on Equity(%) 26.7 16.1 19.5 Cash at End Period 145.4 133.6 (49.6) Balance Sheet ($m) 2008A 2009E 2010E Valuation Summary A$m A$/sh Total Assets 251.8 272.0 232.5 Long 192.4 1.50 Total Debt 0.6 0.6 0.6 Share of Tropicana JV (7% Discount Rate) 43.0 0.34 Total Liabilities 58.9 64.6 -7.7 Forward Sales -9.4 -0.07 Shareholders Funds 193.0 207.5 240.1 Corporate -17.8 -0.14 Exploration 100.0 0.78 Unpaid Capital 1.1 0.01 Investments 17.3 0.13 Cash 145.4 1.13 Production Summary 2008A 2009E 2010E 2011E Debt -0.6 0.00 Nickel Production (kt) 9.3 9.0 9.0 9.0 Total @ 10% discount rate 471 3.67 Ni Cash Cost - net of credits (US$/lb) 3.70 4.06 3.86 4.20 Ni Total Cost (US$/lb) 4.66 4.98 4.71 Ni Price Realised (US$/lb) 10.06 8.92 10.00 Directors Name Position Rodney Marston Non-Executive Chairman Chris Bonwick Managing Director Kelly Ross Executive Director Reserves & Resources (30 Jun 07) John Christie Non-Executive Director Oscar Aamodt Non-Executive Director Reserves mt % Ni Ni (kt) Victor/Long 1.10 3.6 39.6 Substantial Shareholders % Resources mt % Ni Ni (kt) JP Morgan Chase 9.8% Victor/Long 1.55 5.1 79.2 Barclays Global 9.6% Orion Asset Management 5.4% NICKEL PRODUCTION REALISED PRICE AND COST PROFILE 10.0 14.00 9.0 12.00 8.0 7.0 10.00 6.0 5.0 8.00 4.0 US$/lb 6.00 3.0 Contained Metal (kt) Metal Contained 2.0 4.00 1.0 2.00 0.0 2008A 2009E 2010E 2011E 2008A 2009E 2010E Nickel Price Cash Costs Argonaut Securities Research 65 Road to Recovery Research Jabiru Metals 4 September 2008 BUY Current Price: $0.35 Jaguar mine life extension is the key Valuation: $0.75 Ticker: JML Jabiru Metals’ (JML) 100% owned Jaguar operation hit nameplate capacity last quarter. Sector: Materials After initial teething problems in the plant, metallurgical performance is much improved. Shares on Issue (m): 499.2 Market Cap ($m): 174.7 Zinc concentrate grades, copper concentrate grades and zinc recoveries are in line with Net Cash ($m): -12.3 BFS targets (48%, 24% and 78% respectively). Copper recoveries are around 76% and Enterprise Value ($m): 187.1 will improve towards the BFS target of 87% as the copper head grade increases (at Jaguar copper grades increase with depth and zinc grades decrease). 52 wk High/Low: $1.70 $0.26 12m Av Daily Vol: 1.63 Jaguar is a small but high grade VMS deposit. At current spot prices the mine will derive Key Metrics more revenue from copper than from zinc. Unit costs are dropping as plant throughput 08F 09F 10F stabilises at nameplate capacity. Steady state cash costs will be low due to attractive P/E (x) n/a 7.5 4.3 copper and silver credits. EV/EBITDA 88.3 3.2 2.4 Financials: Due to the excellent advance rates achieved in the underground decline, JML has an 08F 09F 10F opportunity to take advantage of the current high copper price. The Company plans to Revenue ($m) 53.4 105.1 123.9 stope higher copper grade ore at depth next year. EBITDA ($m) 2.1 57.8 76.5 NPAT ($m) -9.6 24.2 42.7 Extending the mine life is the key to Jaguar. Following the $52m placement back in May at Net Assets ($m) 101.3 125.5 168.2 $0.80 JML is well funded to aggressively work on a number of opportunities identified within trucking distance of the plant. Over the next 12 months JML aims to spend $12m at Op CF ($m) -3.1 37.2 50.2 Jaguar, and $12m at Stockman. Per Share Data: The target is to deliver more than 10 years of production by finding repetitions of the 08F 09F 10F EPS (cps) -1.9 4.7 8.2 Jaguar and Teutonic Bore VMS deposits, and bringing the Stockman project in Victoria on DPS (cps) 0.0 0.0 0.0 line in FY12. Div Yield0.0%0.0%0.0% CFPS (cps) -0.6 7.1 9.6 JML is Argonaut’s preferred zinc and copper stock due to: Share Price Graph × Quality management $1.80 25.0 $1.60 × High grade projects 20.0 $1.40 × Large cash balance $1.20 15.0 $1.00 × Tangible production growth profile $0.80 10.0 $0.60 BUY $0.40 5.0 $0.20 $0.00 0.0 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Important Disclosures Argonaut owns/controls 600,000 JML shares Analyst: Troy Irvin Argonaut Securities Research 66 Road to Recovery Overview The 100% owned Jaguar Jabiru Metals (JML) is aiming to become a ‘leading, specialised base metals company operation hit nameplate capacity producing strong free cash flow’. The 100% owned Jaguar operation hit nameplate last quarter capacity last quarter. In 2007 JML won the tender for the Stockman project in north eastern Victoria (formerly Benambra). Stockman presents a second production opportunity three or four years down the track. The Managing Director is Gary Comb. Gary is a Mechanical Engineer with over 25 years experience in the Australian mining industry, and was previously the CEO of BGC Contracting Pty Ltd. Jaguar small but top quality Jaguar is a quality VMS deposit Jaguar is a small but high grade VMS deposit. The JORC reserve is 1.7Mt @ 11.3% Zn / with high reserve grades (11.3% 3.0% Cu / 0.7% Pb and 115g/t Ag. Zn and 3.0% Cu) Jaguar is slated to deliver steady-state production of >30ktpa zinc and >10ktpa copper over a four and a half year minimum mine life. The mine is in a rare position with the current decline providing access to more than 12 months of ore. The medium term target remains an increase of operating stopes to six in order to provide production flexibility including optimum blending of ore. After initial teething problems in After initial teething problems in the plant, metallurgical performance is much the plant metallurgical improved. Zinc concentrate grades, copper concentrate grades and zinc recoveries are performance is much improved in line with BFS targets (48%, 24% and 78% respectively). Copper recoveries are around 76% and will improve towards the BFS target of 87% as the copper head grade increases (at Jaguar copper grades increase with depth and zinc grades decrease). Figure 1: Plant moving in the right direction RECOVERIES AND CON GRADES Zn Recovery (%) Cu Recovery (%) Zn Concentrate Grade (% Zn) Cu Concentrate Grade (% Cu) 80% 70% 60% 50% 40% 30% 20% 10% 0% SEPQ 07 DECQ 07 MARQ 08 JUNQ 08 Source: Argonaut Low unit costs Cash costs will be low due to Unit costs are dropping as plant throughput stabilises at nameplate capacity. Steady attractive by-product credits state cash costs will be low due to attractive copper and silver credits. Opportunity to increase copper exposure Opportunity to stope some Due to the excellent advance rates achieved in the underground decline JML has an higher copper grade ore at depth opportunity to take advantage of the current high copper price and stope some higher copper grade ore at depth (included next years production schedule). Argonaut Securities Research 67 Road to Recovery Extending the Jaguar mine life Extending the mine life is the A number of opportunities within trucking distance of the plant have been identified: key × Jaguar depth – Three mineralised holes underneath Jaguar require follow-up × Jaguar footwall – Potential extraction of Stringer material × Teutonic Bore extensions × New pods to the north and south of the Jaguar plant e.g. Snowy’s Well × Treatment of 600kt of low grade, partly oxidised surface stockpiles Stockman – potential second mine Two VMS deposits 3.5 km apart The project includes two VMS deposits 3.5 km apart within a 166km² tenement area: – Wilga and Currawong × Wilga - Single lens, historic mineral inventory 3.3Mt @ 3.4% Cu / 0.5% Pb / 6.1% Zn / 36g/t Ag / 0.5 g/t Au, partially mined by Denehurst × Currawong - Five stacked lenses, historic mineral inventory 9Mt @ 2% Cu / 0.8% Pb / 4.2% Zn / 39 g/t Ag / 1.2 g/t Au, virgin deposit A scoping study is underway A scoping study is underway. Current work includes confirmation of the previous resource estimate and metallurgy, definition of infrastructure requirements, estimation of capital cost estimates and preliminary mine engineering and design. The concept is a 1Mtpa underground operation producing multiple concentrates. Key risks include environmental Key risks will include environmental challenges in a relatively inexperienced mining challenges, topography and location, topography and structural complexity in the Currawong deposit. Early structural complexity in the diamond drilling has identified a new 16m wide massive sulphide lens at Currawong Currawong deposit and demonstrates potential growth in the metal inventory. Preferred zinc and copper stock Argonaut’s preferred zinc and Credible management and a tangible high grade production growth profile make JML copper stock Argonaut’s preferred zinc and copper stock. Figure 2: Jabiru conceptual production profile Source: JML BUY Argonaut Securities Research 68 Road to Recovery Jabiru Metals Equities Research Analyst: Troy Irvin Recommendation BUY Sector Materials Current Price $0.35 Issued Capital (m) 499.2 Argonaut Valuation $0.75 Market Cap (m) $174.7 All Ords (XAO) 5,030 Updated 04-September-2008 Profit & Loss ($m) 30 June 2008E 2009E 2010E Financial Summary 2008E 2009E 2010E Sales Revenue 53.4 105.1 123.9 Reported Earnings Other Income 2.0 3.3 2.8 Net Profit ($m) (9.6) 24.2 42.7 Operating Costs 41.3 39.4 38.9 EPS (cents) (1.9) 4.7 8.2 Exploration Written Off 5.0 5.1 5.2 PER (x) 7.2 4.1 Corporate/Admin 7.0 6.1 6.2 Normalised Earnings EBITDA 2.1 57.8 76.5 Net Profit ($m) (9.6) 24.2 42.7 Depn & Amort 11.618.012.6EPS (cents) 35.6 (1.9) 4.7 8.2 EBIT (9.5) 39.8 63.9 EPS Growth (%) 76.4 Interest Paid 4.3 5.2 2.8 PER (x) 7.5 4.3 Operating Profit (13.8) 34.6 61.0 Cashflow Tax Expense / (Benefit) (4.1) 10.4 18.3 Gross Op. Cashflow ($m) (3.1) 37.2 50.2 Abnormal Losses / Minorities 0.0 0.0 0.0 GCFPS (cents) (0.6) 7.1 9.6 NPAT (9.6) 24.2 42.7 PCF (x) (57.2) 4.9 3.6 Normalised NPAT (9.6) 24.2 42.7 Dividend Dividend (cents) 0.0 0.0 0.0 Yield (%) 0.0%0.0%0.0% Franking % 100 100 100 Cash Flow ($m) 2008E 2009E 2010E Operating Cashflow (3.1) 37.2 50.2 - Capex 25.010.115.0 Financial Ratios 2008E 2009E 2010E - Exploration & Evaluation 10.0 10.1 10.3 Balance Sheet Ratios - Asset Purchases (+ asset sales) 0.0 0.0 0.0 Total Debt / Equity (%) 53.6 43.2 32.2 Free Cashflow (38.1) 17.0 24.8 Interest Cover (x) (2.2) 7.6 22.6 - Dividends 0.0 0.0 0.0 Acid Test Ratio (x) 6.0 3.9 3.1 + Equity Raised 0.0 0.0 0.0 + Debt Drawdown (Repaid) 18.3 (10.0) (30.0) Profitability Ratios Net Change in Cash (19.8) 7.0 (5.2) Net Profit Margin (%) (18.1) 23.0 34.5 Cash at End Period 41.9 48.9 43.7 Return on Assets (%) (6.8) 27.0 39.2 Return on Equity (%) (9.5) 19.3 25.4 Balance Sheet ($m) 2008E 2009E 2010E Cash 41.9 48.9 43.7 Valuation Summary A$m A$/sh Total Assets 181.2 196.6 206.4 Jaguar 195.6 0.38 Total Debt 54.2 54.2 54.2 Teutonic Bore 47.2 0.09 Total Liabilities 79.9 71.1 38.2 Stockman 116.1 0.22 Shareholders Funds 101.3 125.5 168.2 Unpaid Capital 2.9 0.01 Forwards 0.0 0.00 Corporate 0.0 (0.02) Production Summary 2008E 2009E 2010E 2011E Listed Investments 1.5 0.00 Contained Zinc (kt) 16.1 25.9 26.6 26.6 Exploration 50.0 0.10 Contained Copper (kt) 2.9 8.3 10.6 10.6 Cash (30 June 2008) 41.9 0.08 Contained Silver (moz) 0.3 0.9 0.9 0.9 Debt (54.2) (0.10) Zinc Cash Cost (US$/lb) 0.84 -0.37 -0.57 Total @ 10% discount rate 390 0.75 Zinc Total Cost (US$/lb) 1.20 -0.03 -0.36 Zinc Price Realised (US$/lb) 1.14 0.85 0.85 Directors 26.6 Name Position Barry Bolitho Non-Executive Chairman Gary Comb Managing Director Reserves & Resources Estimate Mt Cu% Zn% Ag g/t Michael Marriot Non-Executive Director Jaguar Ross Kestel Non-Executive Director Reserves 1.7 3.1 11.3 115 Resources 1.6 3.4 12.9 132 Tectonic Bore Resources 1.7 1.2 1.1 27 Substantial Shareholders % Benambra (Non-JORC) Palmary Enterprises 27.4 Resources 12.3 2.4 4.7 38 191 209 CONTAINED METAL PRODUCTION COPPER AND ZINC PRICE ASSUMPTIONS 30.0 3.60 1.40 3.50 1.20 25.0 3.40 1.00 20.0 3.30 3.20 0.80 15.0 3.10 0.60 3.00 10.0 0.40 2.90 5.0 0.20 Payable Metal (kt) Metal Payable 2.80 0.0 2.70 0.00 2008E 2009E 2010E 2011E 2008A 2009E 2010E 2011E Zinc Copper Copper Zinc Argonaut Securities Research 69 Road to Recovery Research Kagara 4 September 2008 HOLD Current Price: $3.17 Tougher assignment Valuation: $2.98 Ticker: KZL Kagara (KZL) is a base metals mining company with the goal of increasing production to Sector: Materials 100ktpa contained zinc and 35-40 ktpa contained copper by the end of this decade. Shares on Issue (m): 216.4 Market Cap ($m): 686.0 In FY08 KZL produced 26.3kt contained copper, 40.9kt contained zinc and 9.4kt contained Net Cash ($m): -84.3 lead (in line with targets of 27kt, 40kt and 10kt). The copper target was downgraded from Enterprise Value ($m): 770.2 30kt in March due to production disruptions following seasonal rains in North Queensland. 52 wk High/Low: $6.90 $2.63 Current production is derived from three base metals processing facilities at Mt Garnet 12m Av Daily Vol (m): 1.30 (polymetallic and copper) and Thalanga (copper) in North Queensland. Key Metrics 08A 09F 10F Construction of a fourth plant at Mungana near Chillagoe commenced during the June P/E (x) 10.6 7.7 5.3 quarter. Production is scheduled to commence in April 2009 with zinc output expected to EV/EBITDA (x) 5.9 4.3 3.3 more than double to 100kt by 2010. Financials: 08A 09F 10F Low cash costs of US$0.55/lb zinc and US$1.37/lb copper were achieved in FY08 delivering Revenue ($m) 302.3 391.3 502.8 attractive margins. Although cost performance has been commendable it must be EBIT ($m) 101.5 135.5 192.7 maintained. Rising energy prices are squeezing margins across the mining industry. KZL’s NPAT ($m) 65.0 89.4 129.4 business is relatively energy intensive. Ore is mined from a number of small but high grade deposits and is trucked over significant distances to centralised processing facilities. Net Assets ($m) 235.6 309.9 424.2 Op CF ($m) 116.3 97.7 138.0 Despite the large resource reported at Admiral Bay in August (72Mt @ 3.1% Zn / 2.9% Pb / 18g/t Ag) Argonaut anticipates significant mining challenges: Per Share Data: 08A 09F 10F EPS (cps) 28.3 38.7 56.0 × Deep (>1,300m below surface) with high operating temperatures DPS (cps) 12.0 2.0 12.0 × Remote (140km south of Broome in the Canning Basin) Div Yield 3.8% 0.6% 3.8% CFPS (cps) 50.6 42.3 59.7 × Require capital expenditure approaching $2b Share Price Graph × Targeting challenging 10Mtpa mining rate from a deep and flat ore body $8.00 15.0 $7.00 Aggressive exploration has enabled KZL to grow its base and precious metals inventories 12.0 every year since 2003. $6.00 $5.00 9.0 Last quarter initial resources were announced at the Victoria prospect (polymetallic, 4km from Mungana), and Lounge Lizard (nickel, Forrestania). Both resources are currently $4.00 being extended. A current drill program aims to deliver a 40-50Mt gold-copper porphyry 6.0 $3.00 resource at Red Dome (less than 10km from Mungana). $2.00 3.0 Despite currently deriving more revenue from copper, KZL’s growth prospects are heavily $1.00 tilted towards the struggling zinc price lead by Mungana and the challenging Admiral Bay. $0.00 0.0 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 HOLD Analyst: Troy Irvin Argonaut Securities Research 70 Road to Recovery Overview Medium term goal of increasing Kagara (KZL) is a base metals mining company with the medium term goal of production to 100ktpa contained increasing production to 100ktpa contained zinc and 35-40ktpa contained copper. zinc and 40ktpa contained copper Key executives are Geologists Kim Robinson (Executive Chairman) and Joseph Treacy (Executive Director). Kim has 30 years industry experience, including 10 years as Executive Chairman of Forrestania Gold. Joseph has 29 years experience including directorships of listed companies Kalmet Resources, Cove Mining and GME Resources. In FY08 KZL produced 26.3kt contained copper, 40.9kt contained zinc and 9.4kt contained lead (in line with targets of 27kt, 40kt and 10kt). The copper target was downgraded from 30kt in March due to production disruptions following seasonal rains. North Queensland operations Current production is derived Current production is derived from three base metals processing facilities at Mt Garnet from three base metals (polymetallic and copper) and Thalanga (copper) in North Queensland. processing facilities in North Queensland Figure 1: North Queensland base metals operations All figures and tables are sourced from KZL unless stated otherwise Construction of a fourth plant at Construction of a fourth plant at Mungana near Chillagoe commenced during the June Mungana is underway with quarter. Production is scheduled to commence in April 2009. production anticipated from April 2009 Cost performance Low cash cost producer Low cash costs of US$0.55/lb zinc and US$1.37/lb copper were achieved in FY08 delivering attractive margins. Although cost performance has been commendable it must be maintained. Rising energy prices are squeezing margins across the mining Relatively energy intensive industry. KZL’s business is relatively energy intensive. Ore is mined from a number of business with grade on its side small but high grade deposits and is trucked over significant distances to centralised processing facilities at Mt Garnet and Thalanga (copper plant). Argonaut Securities Research 71 Road to Recovery Admiral Bay challenging Despite the large resource upside Despite the large resource reported in August (72Mt @ 3.1% Zn / 2.9% Pb / 18g/t Ag) at Admiral Bay Argonaut Argonaut anticipates significant mining challenges: anticipates significant mining challenges × Deep (>1,300m below surface) with high operating temperatures × Remote (140km south of Broome in the Canning Basin) × Require capital expenditure approaching $2b × Targeting challenging 10Mtpa mining rate from a deep and flat ore body Figure 2: Admiral Bay schematic long section $35m exploration budget Aggressive exploration has Aggressive exploration has enabled KZL to grow its base and precious metals delivered impressive growth in inventories every year since 2003. base and precious metals inventories Last quarter initial resources were announced at the Victoria prospect (polymetallic, 4km from Mungana), and Lounge Lizard (nickel, Forrestania). Both resources are currently being extended. A current drill program aims to deliver a 40-50mt gold- copper porphyry resource at Red Dome (less than 10km from Mungana). Tight balance sheet Tight balance sheet due to heavy KZL’s balance sheet is tight with cash of $15m and interest bearing liabilities of $100m. investing cash out flows Due to heavy investing cash outflows the Company has struggled to generate significant free cash flow. Although the zinc price peaked in late 2006, KZL reported free cash flow of just $3.2m in FY07. FY08 free cash flow was -$31m. The leaner zinc prices now facing zinc miners will make successful free cash flow generation an even tougher assignment. HOLD Argonaut Securities Research 72 Road to Recovery Kagara Equities Research Analyst: Troy Irvin Recommendation HOLD Sector Materials Current Price $3.17 Issued Capital (m) 216.4 DCF Valuation $2.98 Market Cap (m) $686.0 All Ords (XAO) 5,030 Updated 04-September-2008 Profit & Loss ($m) 30 June 2008A 2009E 2010E Financial Summary 2008A 2009E 2010E Sales Revenue 302.3 391.3 502.8 Reported Earnings Other Income 7.1 0.5 3.9 Net Profit ($m) 65.0 89.4 129.4 Operating Costs 174.5 208.7 265.3 EPS (cents) 28.3 38.7 56.0 Depn & Amort 28.4 41.9 42.8 PER (x) 10.6 7.7 5.3 Exploration Expensed 1.1 1.8 1.8 Normalised Earnings Corporate/Admin 4.0 4.0 4.1 Net Profit ($m) 65.0 89.4 129.4 EBIT 101.5 135.5 192.7 EPS (cents) 18.7 42.1 28.3 38.7 56.0 Interest Paid 7.1 7.8 7.8 EPS Growth (%) (32.8) 36.8 44.8 Operating Profit 94.4 127.7 184.9 PER (x) 10.6 7.7 5.3 Tax Expense / (Benefit) 29.4 38.3 55.5 Cashflow Abnormal Losses / Minorities 0.0 0.0 0.0 Gross Op. Cashflow ($m) 116.3 97.7 138.0 NPAT 65.0 89.4 129.4 GCFPS (cents) 50.6 42.3 59.7 Normalised NPAT 65.0 89.4 129.4 PCF (x) 6.3 7.5 5.3 Dividend Dividend (cents) 12.0 2.0 12.0 Yield (%) 3.8% 0.6% 3.8% Cash Flow ($m) 2008A 2009E 2010E Franking % 100% 100% 100% Operating Cashflow 116.3 97.7 138.0 - Capex 88.7 60.2 20.6 - Exploration & Evaluation 49.1 35.3 36.0 - Asset Purchases (+ Asset Sales) 9.3 0.0 0.0 Financial Ratios 2008A 2009E 2010E Free Cashflow (30.8) 2.2 81.5 Balance Sheet Ratios - Dividends 25.9 15.1 15.1 Total Debt / Equity 42.5 32.3 23.6 + Equity Raised 5.8 0.0 0.0 Interest Cover 014.417.4 + Debt Drawdown (Repayment) 52.2 0.0 0.0 Acid test ratio 1.0 1.2 1.9 Net Change in Cash 1.4 (12.8) 66.3 Cash at End Period 15.8 3.0 69.3 Profitability Ratios Net Profit Margin (%) 21.5 22.8 25.7 Return on Assets (%) 17.7 19.9 25.4 Return on Equity (%) 27.6 28.8 30.5 Balance Sheet ($m) 2008A 2009E 2010E Total Assets 589.7 683.4 826.7 Total Debt 100.1 100.1 100.1 Total Liabilities 354.1 373.5 402.5 Valuation Summary A$m A$/sh Shareholders Funds 235.6 309.9 424.2 Mt Garnet Polymetallic 112.1 0.49 Mt Garnet Copper 46.6 0.20 Thalanga Copper 105.3 0.46 Mungana 297.6 1.29 Production Summary 2008A 2009E 2010E Red Dome 87.6 0.38 Contained Zinc (kt) 40.9 63.8 100.1 102.1 Forward Sales 3.2 0.01 Contained Copper (kt) 26.3 33.3 37.6 Exploration 130.0 0.56 Contained Lead (kt) 9.4 10.4 15.1 Cash 15.8 0.07 Listed Investments 8.8 0.04 Zinc Cash Cost (US$/lb) 0.55 0.36 0.28 Unpaid Capital 0.0 0.00 Zinc Total Cost (US$/lb) 0.64 0.50 0.34 Corporate -17.8 -0.08 Zinc Price Realised (US$/lb) 1.10 0.86 0.85 Debt -100.1 -0.43 Copper Cash Cost (US$/lb) 1.45 1.34 1.29 Copper Total Cost (US$/lb) 1.61 1.66 1.55 Total @ 10% Discount Rate 689 2.98 Copper Price Realised (US$/lb) 3.23 3.44 3.19 Directors Reserves & Resources Name Position Kim Robinson Executive Chairman Reserves Mt Zn Eq % Zn Eq (kt) Joe Treacy Executive Director Zinc 4.8 17.0 808 Mark Ashley Non Executive Director Copper 2.0 13.2 261 Ross Hutton Non Executive Director Total 6.7 15.9 1,069 Dr John Linley Non Executive Director Resources Zinc 77.9 11.5 8,969 Copper 1.8 17.3 309 Gold 53.9 2.0 1,095 Substantial Shareholders % Nickel 5.7 11.7 672 Korea Zinc 14.1 Total 139.4 7.9 11,045 Kim Robinson 8.4 PRODUCTION PROFILE ZINC & COPPER PRICE ASSUMPTIONS 1.40 3.60 120.0 3.50 1.20 100.0 3.40 1.00 80.0 3.30 0.80 3.20 60.0 0.60 3.10 40.0 3.00 Zinc (US$/lb) Zinc 0.40 2.90 Copper (US$/lb) Contained(kt) metal 20.0 0.20 2.80 0.0 0.00 2.70 2008A 2009E 2010E 2008A 2009E 2010E 2011E Zinc Copper Lead Zinc Copper Argonaut Securities Research 73 Road to Recovery Research Mincor 4 September 2008 BUY Current Price: $1.61 Valuation: $2.80 20 years @ 20K Ticker: MCR MCR continues to demonstrate prowess in finding and building nickel sulphide mines in Sector: Materials Kambalda. In July the first ore parcel was delivered to surface at the McMahon mine. McMahon is the Company’s seventh nickel mine with production delivered on time and on Shares on Issue (m): 198.8 budget (just eight months after decision to mine). The other six mines are Otter-Juan, Market Cap ($m): 320.1 Durkin, Coronet, Mariners, Miitel, and Redross. Net Cash ($m): 110.1 Enterprise Value ($m): 210.0 MCR’s long term production target of 20 years at 20ktpa nickel in ore (“20 years @ 20K”) 52 wk High/Low: $5.19 $1.51 is tangible given that: 12m Av Daily Vol (m): 1.19 Key Metrics × MCR controls almost 50% of the rich Kambalda nickel sulphide district 08A 09F 10F P/E (x) 5.0 7.4 4.7 EV/EBITDA (x) 1.4 1.8 1.5 × Kambalda has delivered around 40ktpa over its life (except for a dip in the late 1990’s / early 2001’s when the nickel price slumped below US$2/lb) Financials: 08A 09F 10F Operating seven mines mitigates production risk. For example a rock fall or a failed stope Revenue ($m) 321.0 325.0 347.7 EBIT ($m) 92.5 61.7 97.3 blast in one mine has a minimal impact on overall production. MCR’s operations NPAT ($m) 64.0 43.1 67.9 management structure comprises two teams (North Division and South Division). Net Assets ($m) 238.5 257.7 301.8 Average cash costs for FY08 were just under US$6.50/lb allowing for attractive margins of Op CF ($m) 93.9 105.6 127.5 around US$2.50/lb even at the current lower spot nickel price. Argonaut is forecasting a reduction in cash costs to under US$6/lb driven by increased productivity. 10% of metal Per Share Data: output over the next two years is hedged at an attractive average price exceeding 08A 09F 10F US$16/lb. EPS (cps) 31.6 21.1 33.4 DPS (cps) 12.0 12.0 12.0 Div Yield 7.5% 7.5% 7.5% MCR is well-positioned to grow the nickel inventory and mine life: CFPS (cps) 46.3 51.9 62.7 × Definition of significant down plunge extensions using innovative underground Share Price Graph directional drilling technique (e.g. at Otter Juan each 150m extension is one years production at Otter Juan) $6.00 25.0 $5.00 × Drilling at the shallow and underexplored Bluebush Line tenements 20.0 $4.00 × Identification of two USNOB (Ultra-Sized Nickel Ore Body) targets (high-grade ore 15.0 bodies containing more than 200kt of nickel), the first one parallel to Otter Juan $3.00 × Aggressive exploration budget with $18m committed to the largest tenement 10.0 $2.00 portfolio in the nickel rich Kambalda region 5.0 $1.00 Assuming a recovery in the nickel price to US$10/lb, Argonaut values MCR at $2.80 per share. $0.00 0.0 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 MCR’s balance sheet is in excellent order with $112m cash and minimal debt. BUY Analyst: Troy Irvin Argonaut Securities Research 74 Road to Recovery Overview Focused on nickel production, Mincor (MCR) is a nickel mining company focused on production, development and development and exploration exploration activities in the Kambalda district of Western Australia. activities in the Kambalda district Managing Director David Moore is a Geologist. David gained experience in mineral exploration, business development and strategic planning with Billiton and Iscor, before founding Mincor in 1999 through the ASX listing of Iscor's exploration assets. In 2000 David founded Tethyan Copper Company Limited and generated significant shareholder returns from start-up until a friendly takeover by Barrick and Antofagasta in 2006. MCR reported a 37% decrease in NPAT for FY08 to $64m. This was despite record annual production of 16.6kt contained nickel and improved cash costs of $6.40/lb. 20 years @ 20K Skilled at finding and building MCR continues to demonstrate prowess in finding and building nickel sulphide mines in nickel sulphide mines the Kambalda. In July the first ore parcel was delivered to surface at the McMahon mine. McMahon is the Company’s seventh nickel mine with production delivered on time and on budget (just eight months after decision to mine). The other six mines are Otter-Juan, Durkin, Coronet, Mariners, Miitel, and Redross. Sound basis for production MCR’s long term production target of 20 years at 20ktpa nickel in ore (“20 years @ target of “20 years @ 20K” 20K”) is tangible given that: × MCR controls almost 50% of the rich Kambalda nickel sulphide district × Kambalda has delivered around 40ktpa over its life (except for a dip in the late 1990’s / early 2001’s when the nickel price slumped below US$2/lb) Figure 1: King of Kambalda All figures and tables are sourced from MCR unless stated otherwise Low production risk Operating seven mines Operating seven mines mitigates production risk eg. A rockfall or a failed stope blast in mitigates production risk one mine has a minimal impact on overall production. MCR’s operations management structure comprises two teams (North Division and South Division) each with a Resident Manager who reports to Steve Cowle (Chief Operating Officer). Argonaut Securities Research 75 Road to Recovery Attractive margins despite lower nickel price Attractive margins of around Average cash costs for FY08 were just under US$6.50/lb allowing for attractive margins US$2.50/lb even at the current of around US$2.50/lb even at the current lower spot nickel price. Argonaut is lower spot nickel price forecasting a reduction in cash costs to under US$6/lb driven by increased productivity: × More ore from the higher grade Northern Dome × Increased application of long holes in the Southern Dome × Continued improvements at Mariners × Miitel back on track in early FY09 with the start of Miitel South (split ore sources with Miitel South and Miitel North will assist production rate) 10% of output over the next 10% of output over the next two years is hedged at an average price exceeding two years is hedged at an US$16/lb. average price exceeding US$16/lb Resource, reserve and mine life growth Well-positioned to grow the MCR is well-positioned to grow the nickel inventory and mine life: nickel inventory and mine life × Definition of significant down plunge extensions using innovative underground directional drilling technique (e.g. each 150m extension is one year of production at Otter Juan) × Drilling at the shallow and underexplored Bluebush Line tenements × Identification of two USNOB (Ultra-Sized Nickel Ore Body) targets (containing more than 200kt of high grade nickel), the first one parallel to Otter Juan × Aggressive exploration budget with $18m committed to the largest tenement portfolio in the nickel rich Kambalda region Figure 2: Innovative underground directional drilling technique Oversold MCR has been oversold MCR has been oversold and is exceptionally cheap unless the nickel price heads significantly further south. Argonaut considers this unlikely due to: × The scarcity of nickel sulphides × The ongoing poor form of nickel laterites that despite promising a significant supply response, continue to under deliver × Increasing cost of nickel pig iron output due to surging coke and energy prices BUY Argonaut Securities Research 76 Road to Recovery Mincor Equities Research Analyst: Troy Irvin Recommendation BUY Sector Materials Current Price $1.61 Issued Capital (m) 198.8 Valuation $2.80 Market Cap (m) $320.1 All Ords (XAO) 5,030 Updated 04-September-2008 Profit & Loss ($m) 30 June 2008A 2009E 2010E Financial Summary 2008A 2009E 2010E Sales Revenue 321.0 325.0 347.7 Reported Earnings Other Income 8.3 5.8 7.1 Net Profit ($m) 64.0 43.1 67.9 Operating Costs 158.4 194.8 196.8 EPS (cents) 31.6 21.1 33.4 Depn & Amort 55.6 56.1 42.3 PER (x) 5.0 7.4 4.7 Exploration Expensed 12.9 8.1 8.2 Normalised Earnings Corporate/Admin 10.0 10.1 10.3 Net Profit ($m) 64.0 43.1 67.9 Foreign Exchange Loss 0.0 0.0 0.0 EPS (cents) 15.1 49.9 31.6 21.1 33.4 EBIT 92.5 61.7 97.3 EPS Growth (%) (36.7) (33.1) 57.8 Interest Paid 0.6 0.2 0.2 PER (x) 5.0 7.4 4.7 Operating Profit 91.9 61.5 97.1 Cashflow Tax Expense 27.9 18.5 29.1 Gross (Op.) Cashflow ($m) 93.9 105.6 127.5 Minorities 0.0 0.0 0.0 GCFPS (cents) 46.3 51.9 62.7 NPAT 64.0 43.1 67.9 PCF (x) 3.5 3.1 2.6 Normalised NPAT 64.0 43.1 67.9 Dividend Dividend (cents) 12.0 12.0 12.0 Yield (%) 7.5 7.5 7.5 Franking % 100 100 100 Cash Flow ($m) 2008A 2009E 2010E Operating Cashflow 93.9 105.6 127.5 - Capex 37.4 48.7 37.6 Financial Ratios 2008A 2009E 2010E - Exploration 35.3 20.2 20.6 Balance Sheet Ratios - Asset Purchases (+ Asset Sales) 55.2 0.0 0.0 Total Debt / Equity (%) 1.0 0.9 0.8 Free Cashflow (34.1) 36.7 69.4 Interest Cover (x) 161.5 297.6 469.1 - Dividends 23.7 23.8 23.9 Acid test ratio (x) 3.1 1.7 2.0 + Equity Raised 1.8 0.0 0.0 + Debt Drawdown (Repaid) (1.0) 0.0 0.0 Profitability Ratios Net Change in Cash (56.9) 12.9 45.5 Net Profit Margin (%) 19.9 13.2 19.5 Cash at End Period 112.5 125.4 171.0 Return on Assets (%) 42.7 26.8 40.2 Return on Equity (%) 26.8 16.7 22.5 Balance Sheet ($m) 2008A 2009E 2010E Valuation Summary A$m A$/sh Total Assets 329.0 355.4 413.1 Miitel 31.4 0.15 Total Debt 2.4 2.4 2.4 Redross 19.3 0.09 Total Liabilities 90.5 97.6 111.3 Mariners 52.6 0.26 Shareholders Funds 238.5 257.7 301.8 Carnilya Hill 95.2 0.47 McMahon / Durkin / Ken / Otter Juan 92.4 0.45 Bluebush 60.0 0.29 Forward Sales 2.8 0.01 Production Summary 2008A 2009E 2010E Corporate -23.0 -0.11 Total Nickel Production (kt) 16.6 19.6 19.6 Exploration 125.0 0.61 Unpaid Capital 4.3 0.02 Ni Cash Cost - net of credits (US$/lb) 5.74 5.93 5.58 5.54 Cash Estimate 112.5 0.55 Ni Total Cost (US$/lb) 9.03 8.63 7.68 Debt -2.4 -0.01 Ni Price Realised (US$/lb) 12.14 10.08 10.05 Total @ 10% discount rate 570 2.80 Reserves & Resources 5.54 Nickel Reserves Resources Directors Mt % Ni Ni (kt) Mt % Ni Ni (kt) Name Position Mariners 0.39 2.7 10.6 0.78 4.0 31.1 David Humann Non-Executive Chairman Redross 0.18 2.9 5.3 0.28 3.7 10.3 David Moore Managing Director Miitel 0.97 2.5 24.7 1.10 3.6 39.9 Jack Gardener Non-Executive Director Wannaway 0.03 2.3 0.8 0.07 2.6 1.9 Ian Burston Non-Executive Director North Dordie 0.04 1.2 0.5 0.15 1.5 2.2 Carnilya Hill 0.34 2.9 9.8 0.23 4.9 11.3 Otter-Juan 0.29 3.9 11.1 0.40 4.9 19.8 McMahon / Ken 0.39 4.0 15.7 Durkin 0.37 5.0 18.8 Substantial Shareholders % Gellaty 0.03 3.4 1.0 Barclays Global Investors 10.3 Bluebush Line 0.63 3.3 20.8 Barclays Group 9.3 Total 2.24 2.8 62.8 4.44 3.9 172.8 TOTAL NICKEL PRODUCTION REALISED PRICE AND COST PROFILE 25.0 14.00 12.00 20.0 10.00 15.0 8.00 6.00 10.0 US$/lb 4.00 Contained Metal (kt) Metal Contained 5.0 2.00 0.00 0.0 2008A 2009E 2010E 2011E 2008A 2009E 2010E Nickel Cash Cost Argonaut Securities Research 77 Road to Recovery Research Mirabela Nickel 4 September 2008 BUY Current Price: $4.39 Frightening scale Valuation: $8.48 Ticker: MBN Mirabela’s (MBN) Santa Rita deposit in Brazil is a monster. It is the largest green fields Sector: Materials nickel sulphide discovery world-wide in the last 12 years with current JORC reserves exceeding 500,000t of contained Ni. This is the third largest nickel sulphide reserve world- Shares on Issue (m): 129.8 wide after Mount Keith and Voisey’s Bay. Market Cap ($m): 569.7 Net Cash (Debt) ($m): 45.9 Enterprise Value ($m): 523.8 Large nickel sulphide deposits are rare. The quality of Santa Rita is highlighted by CVRD Inco’s retention of a 9.2% shareholding. The project is infrastructure rich (power, water, 52 wk High/Low: $7.95 $3.87 ports, sealed roads and labour all in close proximity). 12m Av Daily Vol (m): 0.12 Low cost open pit nickel production is expected from mid 2009. Nickel output will ramp-up Key Metrics to 27,000tpa by mid 2010. 09F 10F 11F P/E (x) -25.1 6.7 3.1 Santa Rita is still growing. Ongoing drilling in the Southern High Grade Zone has taken the Financials: Santa Rita project to a new level. Compared to typical intersections used in the current 09F 10F 11F reserve estimate (84mt @ 0.61% Ni) the new hits are: Revenue ($m) 0.4 297.0 410.6 EBIT ($m) -13.5 132.7 253.1 NPAT ($m) -23.6 88.8 192.0 × Approximately three times wider Net Assets ($m) 242.4 340.5 521.4 × 15% higher grade Op CF ($m) -32.7 114.8 240.7 × More consistent Per Share Data: 09F 10F 11F × Predominantly in pyroxenite (therefore increasing overall metallurgical recovery) EPS (cps) -17.5 65.7 142.1 DPS (cps) 0.0 0.0 0.0 Div Yield 0.0% 0.0% 0.0% The new results are significant because they demonstrate the potential for further CFPS (cps) -24.2 85.0 178.1 extensions of open pit resources and reserves, and a ‘bolt-on’ low cost, bulk underground mining option down the track. Share Price Graph $8.00 6.0 An upgrade to the open pit resource is expected in the September quarter and a maiden underground resource is slated for the December quarter 5.0 $6.00 MBN is targeting an in-pit resource in excess of 1 million t contained Ni. 4.0 $4.00 3.0 With construction 60% complete, equity financing in place, a US$280m senior debt package secured and the first of two off-take agreements negotiated Santa Rita is rapidly 2.0 being de-risked. $2.00 1.0 The recent track record of new base metals projects indicates that the main challenge will be commissioning the plant on time and on budget. $0.00 0.0 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Argonaut values the ‘million tonne monster’ at $8.48. Corporate appeal is significant given the unique asset and short term five year off-take. BUY Important Disclosures Analyst: Argonaut acts as corporate advisor for Mirabela and receives fees commensurate Troy Irvin with this service Argonaut Securities Research 78 Road to Recovery Overview Focused on the development of Mirabela Nickel (MBN) is an Australian mining company focused on the development of the Santa Rita nickel sulphide the Santa Rita nickel sulphide project in Brazil. project in Brazil Managing Director Nick Poll is an ex-WMC Geologist and Corporate Development Consultant with 5 years Brazilian operating experience. Corporate Director Craig Burton is an experienced commercial executive and a founding shareholder in a number of resources success stories including nickel sulphide miners Panoramic and Albidon. Santa Rita Commissioning is on track for a Development at the infrastructure rich site commenced in October 2007. mid-2009 start-up, with Commissioning of the plant is on target for mid-2009 start-up, with production production expected to increase expected to increase to a rate of 27ktpa contained nickel. to a rate of 27ktpa nickel Figure 1: Location of Santa Rita All figures and tables are sourced from MBN unless stated otherwise Largest green fields nickel Santa Rita is the largest green fields nickel sulphide discovery world-wide in the last 12 sulphide discovery world-wide years with a maiden JORC reserve exceeding 500kt of contained Ni at a grade of in the last 12 years 0.61%. And the resource continues to And the resource continues to grow. The Southern Deeps is especially enticing, grow delivering ‘project best’ drill hits and still open at depth. MBN is targeting an in-pit resource in excess of 1 million t contained Ni. Table 2: Million tonne monster in the making Current Target kt Santa Rita Target Mt % Ni Mt Contained Ni Primary Resource (In-pit) 130 150-170 0.60 900-1,020 Underground Resource Nil 50-150 0.80 400-1,200 TOTAL 130 200-320 1,300-2,200 Plus: Secondary Resource (In-pit) 47 50-60 0.30 140-150 Source: Argonaut Argonaut Securities Research 79 Road to Recovery Off-take agreement with Votorantim Votorantim will purchase 50% MBN has entered into a five-year off-take agreement with Votorantim under which the of the nickel concentrate at the private Latin American industrial conglomerate will purchase 50% of the nickel mine gate until the end of 2014 concentrate produced at Santa Rita until the end of 2014. The concentrate will be purchased at the mine gate (mitigating freight and logistics risks). The remaining 50% of concentrate is the subject of advanced negotiations. Funding Equity financing was completed in June 2007 with US$160m allocated to the Santa Rita project. Senior debt financing package The Company has also entered into a US$80m bridge financing facility with Barclays secured for US$280m and Credit Suisse to fund ongoing construction. The Banks have agreed to underwrite a US$280m term loan facility, subject to standard conditions including syndication. Drawdown under the US$280m facility is expected to take place before year end where upon the US$80m bridge facility will be repaid. Under the Votorantim off-take agreement, Votorantim will provide MBN with an additional US$50m in prepayment financing, which will be subordinated to the Bank facilities. A second off-take agreement is expected to include a further US$50m subordinated debt facility. Disseminated nickel sulphide peers Santa Rita compares well with Although Santa Rita is a low grade disseminated nickel sulphide deposit it has size on other large scale disseminated its side. Large deposits enable large production rates and low unit costs. Santa Rita nickel sulphide deposits compares well with other large scale disseminated nickel sulphide deposits. Table 3: Disseminated nickel sulphide mines compared Project Santa Rita Tati Aguablanca Mt Keith Company Mirabela Norilsk Lundin Mining BHP Location Brazil Botswana Spain Australia Head grade (%Ni) 0.61% 0.55% 0.66% 0.53% Strip Ratio 8.0 3.0 5.6 2.0 Production Rate (mtpa) 6.0 3.6 1.8 11.5 Ni Recovery (%) 68% 76% 75% 67% Ni Concentrate (%) 12% 5% 7% 21% Cash Cost US$/lb $2.77 $2.53 $5.81 N/A Source: Argonaut Metallurgical recoveries Disseminated nickel projects There are four different types of mineralization at Santa Rita, with varying olivine come under pressure if full scale content. Olivine contains non-sulphide nickel that is not recoverable (silicate nickel) and recoveries underperform instead is lost to the tailings. Test work suggests an overall recovery of 70% nickel is expectation achievable. However disseminated nickel projects come under pressure if full scale recoveries underperform expectation. 70% of 0.61% Ni doesn’t leave room for downside surprises. Summary Corporate appeal is significant With construction 60% complete, equity financing in place, a US$280m senior debt given the unique asset and only package secured and the first of two off-take agreements negotiated Santa Rita is partially secured off-take rapidly being de-risked. Corporate appeal is significant. BUY Argonaut Securities Research 80 Road to Recovery Mirabela Nickel Equities Research Analyst: Troy Irvin Recommendation BUY Sector Materials Current Price $4.39 Issued Capital (m) 129.8 DCF Valuation $8.48 Market Cap(m) $569.7 All Ords (XAO) 5,030 Updated 04-September-2008 Profit & Loss (A$m) 30 June 2009E 2010E 2011E Financial Summary 2009E 2010E 2011E Sales Revenue 0.4 297.0 410.6 Reported Earnings Other Income -0.7 -0.7 0.0 Net Profit ($m) (23.6) 88.8 192.0 Operating Costs 0.2 115.3 86.5 EPS (cents) (17.5) 65.7 142.1 Depn & Amort 0.1 35.0 57.5 PER (x) (25.1) 6.7 3.1 Exploration Expenditure 4.9 5.0 5.1 Normalised Earnings Corporate/Admin 8.1 8.2 8.4 Net Profit ($m) (23.6) 88.8 192.0 Other 0.0 0.0 0.0 EPS (cents) 30.7 (17.5) 65.7 142.1 EBIT -13.5 132.7 253.1 EPS Growth (%) 116.2 Interest Paid 10.1 27.0 24.5 PER (x) (25.1) 6.7 3.1 Operating Profit -23.6 105.7 228.6 Cashflow Tax Expense 0.0 16.9 36.6 Operating Cashflow ($m) (32.7) 114.8 240.7 NPAT -23.6 88.8 192.0 GCFPS (cents) (24.2) 85.0 178.1 Normalised NPAT -23.6 88.8 192.0 PCF (x) (18.2) 5.2 2.5 Dividend Dividend (cents) 0.0 0.0 0.0 Yield (%) 0.0 0.0 0.0 Franking % 100% 100% 100% Cash Flow (A$m) 2009E 2010E 2011E Financial Ratios 2009E 2010E 2011E Operating Cashflow (32.7) 114.8 240.7 Balance Sheet Ratios - Capex 301.5 103.3 12.6 Total Debt / Equity (%) 116 82 44 - Exploration & Evaluation 14.1 14.4 14.7 Interest Cover (x) -1.3 4.9 10.3 - Asset purchases (+ asset sales) 0.0 0.0 0.0 Acid test ratio (x) -0.8 -0.4 1.9 Free Cashflow (348.3) (2.8) 213.4 - Dividends 0.0 0.0 0.0 Profitability Ratios + Equity Raised 0.0 0.0 0.0 Net Profit Margin (%) 29.9 46.8 + Debt Drawdown (Repaid) 280.0 0.0 (70.0) Return on Assets (%) -2.5 19.6 38.6 Net Change in Cash (68.3) (2.8) 143.4 Return on Equity (%) -9.8 26.1 36.8 Cash at End Period (22.4) (25.2) 118.2 Valuation Summary A$m A$/sh Balance Sheet (A$m) 2009E 2010E 2011E Santa Rita Open Pit 1,070.1 7.92 Total Assets 523.1 650.8 773.2 Forward Sales 0.0 0.00 Total Debt 280.0 280.0 227.5 Corporate -45.4 -0.34 Total Liabilities 280.7 310.4 251.7 Exploration 52.6 0.39 Shareholders Funds 242.4 340.5 521.4 Unpaid Capital 22.2 0.16 Investments 0.0 0.00 Cash (30 June 2008) 45.9 0.34 Debt 0.0 0.00 Production Summary 2009E 2010E 2011E 2012E Total @ 10% discount rate 1,145 8.48 Santa Rita (kt) 0.0 14.5 23.9 26.5 23.9 Ni Cash Cost - net of credits (US$/lb) 4.00 4.34 4.65 Directors Ni Total Cost (US$/lb) 5.61 5.94 26.5 Name Position Ni Price Realised (US$/lb) 10.00 8.00 Bill Clough Non-Executive Chairman Nick Poll Managing Director 4.65 Craig Burton Executive Director Joe Hamilton Non-Executive Director Nick Sheard Non-Executive Director Reserves & Resources Mt Ni (%) Cu (%) Ni (kt) Cu (kt) Reserves Santa Rita (January 2008) 84.0 0.61 0.14 508.0 117.6 Substantial Shareholders % Dundee 19.9 Resources Directors 12.6 Santa Rita (August 2008) 203.1 0.52 0.14 1,067.0 278.2 CVRD Inco 9.2 NICKEL PRODUCTION REALISED PRICE AND CASH PROFILE 30 12.00 25 10.00 20 8.00 15 6.00 US$/lb 10 4.00 Contained Metal Contained (kt) 5 2.00 0 2009E 2010E 2011E 2012E 2010E 2011E 2012E Nickel price Cash cost Argonaut Securities Research 81 Road to Recovery Research Mount Gibson Iron 4 September 2008 BUY Current Price: $2.12 Best of the rest Valuation: $3.12 Ticker: MGX Mount Gibson Iron (MGX) is a West Australian iron ore company, producing high quality Sector: Materials direct shipping ore (DSO) at its Tallering Peak and Koolan Island operations. A third project, Extension Hill, will commence later this financial year, raising total production to Shares on Issue (m): 804.2 10Mtpa in FY10. Market Cap ($m): 1,704.8 Net Cash ($m): -109.6 Enterprise Value ($m): 1,814.4 FY08 was a watershed year for MGX, with buoyant iron ore prices and ramp up of Koolan Island setting the stage for the stellar result. With pricing arrangements now locked in and equity markets languishing, the hype surrounding the junior iron ore sector has been 52 wk High/Low: $3.78 $1.58 deflated. Investor focus has switched from the promising to the proven and the aspiring to 12m Av Daily Vol (m): 6.24 the delivering. Key Metrics In Argonaut’s opinion, MGX is the ‘Best of the Rest’ amongst the junior iron ore sector, 08A 09F 10F given that it offers: P/E (x) 15.0 5.6 3.3 EV/EBITDA (x) 5.0 2.8 1.8 × Immediate leverage to the iron ore price Financials: 08A 09F 10F × Diversified production growth from two operating mines, with a third commencing Revenue ($m) 432.7 847.5 1,232.9 later in FY09 EBITDA ($m) 364.0 648.0 985.2 NPAT ($m) 113.3 304.5 516.6 × A quality (high grade, low contaminants), low capital intensity DSO product Net Assets ($m) 596.5 875.1 1,358.0 × A proven management team with operational expertise Op CF ($m) 45.8 325.4 412.0 Per Share Data: A number of organic growth opportunities exist, particularly at Koolan Island, where the 08A 09F 10F potential to delineate a significant expansion to current reserve life is tangible. MGX has EPS (cps) 14.1 37.9 64.2 already committed an initial $4m in exploration at Koolan for FY09, targeting an additional DPS (cps) 0.0 0.0 0.0 100Mt of resources over the next 18 months. With capacity and infrastructure in place to Div Yield 0.0% 0.0% 0.0% produce up to 6Mtpa at Koolan, exploration will be a key focus going forward. Additional CFPS (cps) 5.7 40.5 51.2 ore sources could be realised from: Share Price Graph × Depth extensions to Main Pit, where mineralisation is known to extend at least $4.00 300.0 300m below the ultimate designed pit depth 270.0 $3.50 240.0 × Down dip extensions to Acacia, Barramundi and Mullet $3.00 210.0 $2.50 180.0 × Outcropping hematite at the western end of the island $2.00 150.0 120.0 Key share price catalysts in the coming months include: $1.50 90.0 $1.00 × Further results from the Koolan Island extensional drilling program 60.0 $0.50 30.0 × Successful ramp up of the Company’s third mine, Extension Hill, commencing in $0.00 0.0 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 the second half of FY09 × An upgrade to the rail unloader at Geraldton Port (completion expected during June 09 quarter) could allow MGX to a ship a portion of its 1.9Mt of stockpiled ore MGX is an uncomplicated story. It is one of very few cashing in on the current pricing environment, with real earnings and cash flow to fund future production growth. Analysts: BUY Tim Serjeant Troy Irvin Argonaut Securities Research 82 Road to Recovery Overview A quality DSO producer… Mount Gibson Iron (MGX) is a $1.7 billion iron ore company with operations located in WA’s Midwest and Kimberley regions, producing a high quality hematite Direct Shipping Ore (DSO) product with low contaminants. … with two producing mines and The Company currently has two producing mines, Tallering Peak (Midwest) and Koolan a third to come online in late Island (Kimberley) with a third project, Extension Hill (Midwest) slated to come online FY09… in late FY09. … taking production to 10Mtpa in The organic growth pipeline is focused on the ramp up of Koolan Island to 4Mtpa as FY10 well as 3Mtpa from Extension Hill, taking the global production profile to 10Mtpa in FY10. Proven operational team The senior management team, headed by Managing Director Luke Tonkin are highly competent and proven operators. Luke has an extensive Mining Engineering background in which he has held general and executive management roles with WMC and Normandy. A low capital intensity DSO producer Focusing on quality DSO projects The MGX management team has successfully implemented a disciplined asset strategy, where minimal infrastructure is deliberately focusing on developing low tonnage, high grade DSO projects with minimal required infrastructure requirements. Argonaut considers those projects with low capital intensity will be the ones most likely to flourish in the current rising cost environment. Figure 1: A low capital intensity producer Source: MGX Koolan Island the focus Koolan Island presents a unique Koolan Island is unique in that it provides an opportunity to mine, crush and ship direct opportunity from site. Ramping up to 4Mtpa MGX acquired the project from Aztec Resources in December 2006 when it was on the cusp of re-commencing production. First ore was shipped in June 2007, with production ramping up to 4Mtpa by FY10. $45m to be spent on Significant capital has already been sunk, with Argonaut estimating a further $45m to rehabilitation to Main Pit be spent this financial year, primarily on de-watering, seawall construction and footwall rehabilitation to Main Pit. Argonaut Securities Research 83 Road to Recovery High grade ore body Koolan Island deposits are typically high grade with low contaminants and a LOM lump to fines ratio of 30:70. Production is currently focused on the Mullet, Acacia, Eastern and Barramundi satellite ore bodies, prior to reaching the high grade (+65%Fe) Main Pit from FY11 onwards. 6Mtpa potential With the ship loader, crusher and power on site capable of handling a 6Mtpa operation, there is potential to increase production in later years. Exploration the key Targeting 100Mt resource Once ramp up is completed, MGX will turn its focus to exploration at Koolan. MGX is upgrade over the next 18 months targeting an additional 100Mt of resources over the next 18 months. Additional ore sources could be realised from: × Depth extensions to Main Pit, where mineralisation is known to extend at least 300m below the ultimate designed pit depth × Down dip extensions to Acacia, Barramundi and Mullet Western end remains under explored × Outcropping hematite at the western end of the island (3.5km strike, widths of ~40m) Figure 2: Main Pit extensional drilling Source: MGX Summary MGX is an uncomplicated story MGX is an uncomplicated story. It is one of very few cashing in on the current pricing environment, with real earnings and cash flow to fund future production growth. A number of catalysts to drive Key share price catalysts in the coming months include: the stock higher × Further results from the Koolan Island extensional drilling program × Successful ramp up of Extension Hill, commencing in the second half of FY09 × An upgrade to the rail unloader at Geraldton Port (completion expected during June 09 quarter) could allow MGX to a ship a portion of its 1.9Mt of stockpiled ore BUY Argonaut Securities Research 84 Road to Recovery Mount Gibson Iron Equities Research Analyst: Tim Serjeant Recommendation BUY Sector Materials Current Price $2.12 Issued Capital (m) 804.2 DCF Valuation $3.12 Market Cap (m) $1,704.8 All Ords (XAO) 5,030 Updated 04-September-2008 Profit & Loss (A$m) 30 June 2007A 2008A 2009E 2010E Financial Summary 2007A 2008A 2009E 2010E Sales Revenue 156.0 432.7 847.5 1,232.9 Reported Earnings Other Revenue 9.0 2.5 10.8 25.4 Net Profit ($m) 47.8 113.3 304.5 516.6 Operating Costs 104.9 60.0 195.9 259.4 EPS ($) 0.05 0.14 0.38 0.64 Exploration Exp 0.0 0.0 1.2 0.6 PER (x) 46.9 15.0 5.6 3.3 Corporate/Admin 13.0 15.0 13.2 13.2 Normalised Earnings Other Income 0.0 3.9 0.0 0.0 Net Profit ($m) 29.0 113.3 304.5 516.6 EBITDA 47.1 364.0 648.0 985.2 EPS ($) 0.1 0.05 0.14 0.38 0.64 Depn & Amort 4.7 190.4 212.2 261.0 EPS Growth (%) -25.9 211.8 168.6 69.7 EBIT 42.3 179.4 435.8 724.2 PER (x) 46.9 15.0 5.6 3.3 Net Interest Paid 0.1 -15.5 0.8 -13.9 Cashflow Operating Profit 42.3 163.9 435.0 738.0 Operating Cashflow ($m) 78.6 45.8 325.4 412.0 Tax expense -13.2 50.5 130.5 221.4 GCFPS ($) 0.01 0.06 0.40 0.51 Minorities 0.0 0.0 0.0 0.0 PCF (x) n/a 37.3 5.2 4.1 NPAT 47.8 113.3 304.5 516.6 Dividend Normalised NPAT 29.0 113.3 304.5 516.6 Dividend ($) 0.0 0.0 0.0 0.0 Yield (%) 0% 0% 0% 0% Franking % 0% 0% 0% 0% Cash Flow (A$m) 2007A 2008A 2009E 2010E Operating Cashflow 78.6 45.8 325.4 412.0 - Capex (+asset sales) -74.4 -52.0 -127.5 -62.5 -Exploration Expenditure 0.0 -14.9 -12.2 -6.2 Financial Ratios 2007E 2008A 2009E 2010E Free Cashflow (15.2) (18.3) 185.8 343.3 Balance Sheet Ratios - Dividends 0.0 0.0 0.0 0.0 Total Debt / Equity(%) 34% 27% 21% 13% + Equity raised 2.0 6.2 0.0 0.0 + Debt drawdown (- repaid) 66.6 0.0 0.0 0.0 Profitability Ratios Net Change in Cash 53.4 (12.1) 185.8 343.3 Net Profit Margin (%) 19% 26% 36% 42% Cash at End Period 60.8 48.7 234.4 577.7 Return on Assets (%) 6% 20% 36% 43% Return on Equity (%) 11% 19% 35% 38% Balance Sheet (A$m) 2007A 2008A 2009E 2010E Total Assets 692.5 894.0 1,197.6 1,680.6 Total Debt 154.2 158.3 183.3 183.3 Valuation Summary A$m A$/sh Total Liabilities 238.2 297.5 322.5 322.5 Tallering Peak 801.9 1.00 Shareholders Funds 454.3 596.5 875.1 1,358.0 Koolan Island 1,324.1 1.65 Extension Hill 407.0 0.51 Unpaid Capital 9.2 0.01 Corporate -26.5 -0.03 Production Summary 2007A 2008A 2009E 2010E Exploration 101.0 0.13 Iron Ore Shipped (Mt) Cash (estimate) 48.7 0.06 Tallering Peak 2.3 2.6 3.4 3.0 Debt (estimate) -158.3 -0.20 Koolan Island 0.2 2.9 3.4 4.0 Extension Hill 0.0 0.0 0.4 3.0 Total @ 10% Discount Rate 2,507 3.12 Group Production (Mt) 2.5 5.5 7.2 10.0 Directors Reserves & Resources Name Position Neil Hamilton Non-Executive Chairman Reserves Mt % Fe Luke Tonkin Managing Director Tallering Peak 18.3 61.7% Craig Readhead Non-Executive Director Koolan Island 29.9 64.8% Ian Macliver Non-Executive Director Extension Hill 12.8 60.3% Alan Jones Non-Executive Director Total 61.0 62.9% Alan Rule Alternate Director Resources Mt % Fe Tallering Peak 21.0 61.6% Koolan Island 62.8 63.2% Extension Hill 19.5 59.9% Substantial Shareholders % Total 103.3 62.3% APAC Resources Ltd 19.9% GROUP PRODUCTION PROFILE REALISED PRICE & COST PROFILE 125 10.0 100 8.0 75 6.0 US$/t 4.0 50 2.0 25 Iron Ore (Mt)Shipped 0.0 0 FY07A FY08A FY09E FY10E FY08A FY09E FY10E FY11E Tallering Peak Koolan Island Extension Hill Ave Total Cost Ave Price Realised Argonaut Securities Research 85 Road to Recovery Research Panoramic 4 September 2008 BUY Current Price: $1.86 Oil painting Valuation: $4.71 Ticker: PAN Panoramic (PAN) is an established Western Australian nickel sulphide producer with two Sector: Materials profitable underground mines - Savannah (100% owned) 120km north of Halls Creek in the East Kimberley and Lanfranchi (75% owned) 42km south of Kambalda. Shares on Issue (m): 191.9 Market Cap ($m): 356.9 Net Cash ($m): 100.8 PAN has increased output for four straight years and is ramping up to 20ktpa (100% basis) Enterprise Value ($m): 256.1 in FY09. 52 wk High/Low: $6.21 $1.83 12m Av Daily Vol (m): 1.33 PAN recently announced a 44% increase in the Savannah resource to 70kt contained nickel. The new resource includes 20kt below the 500 fault (Savannah Deeps) plus the Key Metrics Northern Ore Zone (NOZ) mineralisation. The upgrade confirms Argonaut’s model of eight 08A 09F 10F years mine life producing approximately 9ktpa contained nickel. P/E (x) 6.7 5.5 3.5 EV/EBITDA (x) 2.3 1.7 1.5 Extensional drilling continues with the Deeps resource expected to grow. PAN has a target Financials: resource of 60kt. Anglo American made a historical estimate of 80kt. Drilling is scheduled 08A 09F 10F to resume at the NOZ in late 2008. Revenue ($m) 232.4 323.3 353.1 EBIT ($m) 72.8 95.0 146.3 NPAT ($m) 53.4 66.0 101.8 The Deacon ventilation project is on schedule to enable a ramp-up to greater than 10ktpa at Lanfranchi in FY09. Net Assets ($m) 231.7 278.6 361.2 Development work includes an exploration drive in the hanging wall to provide a drill Op CF ($m) 89.8 114.3 124.6 platform from September. Goals are to drill the Deacon and Helmut South channels down Per Share Data: plunge, and to upgrade 12kt of inferrred resources. 08A 09F 10F EPS (cps) 27.6 34.1 52.6 Cash cost pressure at both operations must be arrested. Although the sites (and peer DPS (cps) 12.0 10.0 10.0 sites) are under general pressure from rising wages, charter flights, diesel, steel and other Div Yield 6.5% 5.4% 5.4% CFPS (cps) 46.4 59.0 64.3 consumables, PAN’s June quarter was impacted by one-off ‘abnormals’: Share Price Graph × Savannah - Increased use of contractors to expedite the decline and ground support $7.00 15.0 $6.00 × Lanfranchi - Lower production and development rates due to mobile equipment 12.0 availability issues $5.00 9.0 Argonaut notes that FY08A cash costs were $5.55/lb payable for Savannah, and $6.34/lb $4.00 payable for Lanfranchi, resulting in attractive margins even at today’s lower nickel prices. The addition of Copernicus mill feed from October is expected to reduce fixed costs at $3.00 6.0 Savannah by around 15%. $2.00 3.0 Despite offering a tangible production growth profile to 20ktpa PAN has a modest EV of $1.00 less than $260m. At current pricing PAN is an oil painting compared to most nickel peers. The market is awarding PAN: $0.00 0.0 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 × $80m less than Albidon (ALB) - lower grade, still ramping-up, with Zambian risk × Around one-sixth the value of Western Areas (WSA) – high grade but unproven delivery of production promises × Around half Minara (MRE) – nickel laterite, under pressure from soaring sulphur prices (leapt from US$50/t to US$850/t over a 12 month period) and gas prices PAN is Argonaut’s number one nickel selection, by a whisker over another class act - Mincor (MCR). Analyst: Troy Irvin BUY Argonaut Securities Research 86 Road to Recovery Overview Established Western Australian Panoramic (PAN) is an established Western Australian nickel sulphide producer with two nickel sulphide producer with profitable underground mines - Savannah (100% owned) 120km north of Halls Creek in two underground mines - the Kimberley and Lanfranchi (75% owned) 42km south of Kambalda. Savannah and Lanfranchi Managing Director Peter Harold is a Process Engineer with over 20 years corporate experience in the minerals industry specialising in financing, marketing, and business development. Peter has extensive experience with the development and operation of both sulphide and laterite nickel projects including Silver Swan, Mt Keith and Cawse. Ramping up to 20ktpa Production has increased for four PAN has increased output for four straight years and is ramping up to 20ktpa. straight years and is ramping up to 20ktpa in FY09 Figure 1: Group production (100% basis) All figures and tables are sourced from PAN unless stated otherwise Savannah 8 year mine life and growing Resource upgrade confirms eight PAN recently announced a 44% increase in the Savannah resource to 70kt contained years mine life producing ~9ktpa nickel. The new resource includes 20kt below the 500 fault (Savannah Deeps) plus the Northern Ore Zone mineralisation. The upgrade confirms Argonaut’s model of eight years mine life producing approximately 9ktpa contained nickel. Figure 2: Savannah lower zone extension Deeps resource expected to grow Extensional drilling continues with the Deeps resource expected to grow. PAN has a towards a target of 60kt target resource of 60kt. Anglo American made a historical estimate of 80kt. Drilling is scheduled to resume at the NOZ in late 2008. Argonaut Securities Research 87 Road to Recovery Drill testing Deacon down plunge imminent The Deacon ventilation project is The Deacon ventilation project is on schedule to enable a ramp-up to greater than on schedule 10ktpa at Lanfranchi in FY09. Drill testing of Deacon down Development work includes an exploration drive in the hanging wall to provide a drill plunge will commence from from platform from September. Goals are to drill the Deacon and Helmut South channels September down plunge, and to upgrade 12kt of inferred resources. Figure 3: Lanfranchi – Deacon extensions Cost pressure Significant jump in cash costs Cash cost pressures at both operations must be arrested. Although the sites (and peer must be arrested sites) are under general pressure from rising wages, charter flights, diesel, steel and other consumables, PAN’s June quarter was impacted by one-off ‘abnormals’: × Savannah - Increased use of contractors to expedite the decline and ground support × Lanfranchi - Lower production and development rates due to mobile equipment availability issues Attractive margins even at Argonaut notes that FY08A cash costs were $5.55/lb payable for Savannah, and today’s lower nickel prices $6.34/lb payable for Lanfranchi, resulting in attractive margins even at today’s lower nickel prices. The addition of Copernicus mill feed from October is expected to reduce fixed costs at Savannah by around 15%. Value opportunity EV low compared to peers Despite offering a tangible production growth profile to 20ktpa the Company has a modest EV of less than $260m. At current pricing PAN is an oil painting compared to most nickel peers. The market is awarding PAN: × $80m less than Albidon (ALB) - lower grade, still ramping-up, with Zambian risk × Around one-sixth the value of Western Areas (WSA) – high grade but unproven in terms of delivering production promises × Around half the value of Minara (MRE) – nickel laterite, under pressure from soaring sulphur prices (leapt from US$50/t to US$850/t over a 12 month period) and gas prices BUY Argonaut Securities Research 88 Road to Recovery Panoramic Equities Research Analyst: Troy Irvin Recommendation BUY Sector Materials Current Price $1.86 Issued Capital (m) 191.9 Valuation $4.71 Market Cap (m) $356.9 All Ords (XAO) 5,030 Updated 04-September-2008 Profit & Loss ($m) 30 June 2008A 2009E 2010E Financial Summary 2008A 2009E 2010E Sales Revenue 232.4 323.3 353.1 Reported Earnings Other Income 6.1 12.1 16.0 Net Profit ($m) 53.4 66.0 101.8 Operating Costs 109.5 169.9 177.4 EPS (cents) 27.6 34.1 52.6 Depn & Amort 40.4 53.4 27.9 PER (x) 6.7 5.5 3.5 Exploration Exp. 2.2 5.0 5.1 Normalised Earnings Corporate/Admin 10.0 12.1 12.3 Net Profit ($m) 53.4 66.0 101.8 Derivatives Loss 3.5 0.0 0.0 EPS (cents) 9.2 45.3 27.6 34.1 52.6 EBIT 72.8 95.0 146.3 EPS Growth (%) (39.2) 23.7 54.3 Interest Paid 1.3 0.7 0.9 PER (x) 6.7 5.5 3.5 Operating Profit 71.5 94.3 145.5 Cashflow Tax expense 18.1 28.3 43.6 Operating Cashflow ($m) 89.8 114.3 124.6 Minorities 0.0 0.0 0.0 GCFPS (cents) 46.4 59.0 64.3 NPAT 53.4 66.0 101.8 PCF (x) 4.0 3.2 2.9 Normalised NPAT 53.4 66.0 101.8 Dividend Dividend (cents) 12.0 10.0 10.0 Yield (%) 6.5 5.4 5.4 Franking (%) 100 100 100 Cash Flow ($m) 2008A 2009E 2010E Operating Cashflow 89.8 114.3 124.6 - Capital Expenditure 55.6 28.9 15.1 Financial Ratios 2008A 2009E 2010E - Exploration & Evaluation 6.2 10.1 10.3 Balance Sheet Ratios - Asset Purchases (+ Asset Sales) (2.4) 0.0 0.0 Total Debt / Equity (%) 3.6 4.8 3.7 Free Cashflow 30.4 75.3 99.2 Interest Cover (x) 54.3 137.4 172.1 - Dividends (ords & pref) 36.1 19.1 19.2 Acid test ratio (x) 2.2 2.3 2.9 + Equity Raised 3.6 0.0 0.0 + Debt Drawdown (Repaid) (6.6) 5.0 0.0 Profitability Ratios - Other 0.0 0.0 0.0 Net Profit Margin (%) 23.0 20.4 28.8 Net Change in Cash (8.6) 61.2 80.0 Return on Assets (%) 32.9 40.3 58.4 Cash at end period 110.9 172.1 252.2 Return on Equity (%) 23.0 23.7 28.2 Balance Sheet ($m) 2008A 2009E 2010E Cash 110.9 172.1 252.2 Valuation Summary A$m A$/sh Total Assets 332.1 407.9 502.7 Savannah (including Copernicus) 307.0 1.59 Total Debt 8.4 13.4 13.4 Lanfranchi 480.9 2.48 Total Liabilities 100.4 129.3 141.4 Forwards 25.8 0.13 Shareholders Funds 231.7 278.6 361.2 Corporate -46.5 -0.24 Cash Estimate 109.2 0.56 Debt -8.4 -0.04 Exploration 40.0 0.21 Unpaid capital 4.3 0.02 10.6 Listed Investments 0.5 0.00 Production Summary 2008A 2009E 2010E 2011E Savannah (kt) 7.6 9.7 10.6 10.6 Lanfranchi (kt) 5.5 7.2 7.0 7.0 Total Nickel Production 13.1 16.8 17.6 17.6 Total @ 10% discount rate 912 4.71 By-product Copper Production 4.5 5.5 5.8 By-product Cobalt Production 0.4 0.5 0.5 5.02 Ni Cash Cost - net of credits (US$/lb) 5.30 5.52 5.30 5.02 Ni Price Realised (US$/lb) 11.88 10.57 10.39 Directors C J G de Guingand Non-Executive Chairman Peter Harold Managing Director Christopher Langdon Non-Executive Director Reserves & Resources Attributable to PAN John Rowe Non-Executive Director Nickel Reserves Mt Grade Ni (kt) Brian Phillips Non-Executive Director Sally Malay Project 2.79 1.32 36.8 Lanfranchi - Deacon 1.27 2.54 32.3 Lanfranchi - Winner 0.11 4.26 4.6 Lanfranchi - Other 0.40 2.30 9.1 Copernicus 0.78 1.10 8.5 Total Reserves 5.35 1.71 91.3 Substantial Shareholders % HSBC Custody Nominees 23.6 ANZ Nominees 17.0 Nickel Resources Mt Grade Ni (kt) Barclays 10.5 Sally Malay Project 4.74 1.48 70.3 J P Morgan Nominees 9.2 Lanfranchi - Deacon 1.43 3.04 43.5 National Nominees 8.5 Lanfranchi - Winner 0.08 6.16 5.2 Lanfranchi - Other 2.10 1.78 37.3 Copernicus 0.51 1.24 6.3 Total Resources 8.86 1.84 162.7 NICKEL PRODUCTION REALISED PRICE AND COST PROFILE 14.00 20.0 12.00 18.0 16.0 10.00 14.0 12.0 8.00 10.0 kt 6.00 8.0 US$/lb 6.0 4.00 4.0 2.0 2.00 0.0 0.00 2008A 2009E 2010E 2011E 2008A 2009E 2010E 2011E Savannah Lanfranchi Nickel Price Cash Costs Argonaut Securities Research 89 Road to Recovery Research Perilya 4 September 2008 HOLD Current Price: $0.43 Valuation: $0.57 Tenuous hold on the Hill Ticker: PEM Perilya (PEM) is focused on three projects: Sector: Materials Shares on Issue (m): 196.9 × Broken Hill, NSW (zinc/lead and silver) – Historic underground operations Market Cap ($m): 84.7 Net Cash ($m): 56.0 × Flinders, South Australia (zinc silicate) - Open pit operations Enterprise Value ($m): 28.7 52 wk High/Low: $4.54 $0.40 × Mount Oxide, Queensland (copper) – Development project 12m Av Daily Vol (m): 1.88 Key Metrics The Broken Hill mine achieved annual production of 91.3kt contained zinc and 52.4kt 08A 09F 10F contained lead (versus guidance of 90kt and 55kt). June quarter results were P/E (x) -10.1 -7.8 -3.0 disappointing in that despite strong production (more ore, more grade and more metal) EV/EBITDA (x) -0.3 1.8 -6.3 the cash operating margin was just US$0.03/lb. PEM’s ability to reduce cash costs is critical given the recent fall in the zinc price. Cash costs for the last four quarters have Financials: been above the current spot zinc price of US$0.80/lb. 08A 09F 10F Revenue ($m) 273.1 145.4 127.4 EBIT ($m) -155.3 -9.9 -27.7 In a bid to keep Broken Hill profitable PEM has initiated an operational resizing plan. Staff NPAT ($m) -140.3 -11.0 -28.6 numbers will be cut from 760 to 320, ore production reduced from 1.8mtpa to 950,000tpa and grades will increase from 5.8% Zn and 3.5% Pb to 6.5% Zn and 6.0% Pb. The North Net Assets ($m) 147.6 139.9 119.9 Mine and Potosi exploration decline will be placed on care and maintenance. Op CF ($m) -10.0 11.9 -9.6 The new operational plan is focused on conserving cash. However Argonaut is about as Per Share Data: enthused as an underground miner working a double shift. Margin pressure will remain 08A 09F 10F given the high fixed cost nature of the large Broken Hill plant. High grading the mine EPS (cps) -4.2 -5.5 -14.4 DPS (cps) 1.0 0.0 0.0 involves the increased extraction of remnant pillars that were originally planned to be Div Yield 2.3% 0.0% 0.0% mined later in the mine schedule, probably due to geotechnical reasons. Unless the zinc CFPS (cps) -5.0 6.0 -4.8 price stages a rapid recovery the operational resizing could turn into a staged shutdown. Share Price Graph Argonaut has written Broken Hill down to zero and assumed another $40m or $0.20 in closure costs. Argonaut’s expectations have not been met: $5.00 30.0 $4.50 × The zinc price has underperformed Argonaut’s forecasts $4.00 24.0 $3.50 × Broken Hill ore production has not ramped up as expected $3.00 18.0 $2.50 × Cash operating costs have been stubbornly high $2.00 12.0 $1.50 Margins are also tight at Flinders. FY08 sales totalled 26.8kt contained zinc. Average FY08 $1.00 6.0 cash costs were US$0.72/lb. An updated resource of 308,000t @ 28% Zn was recently estimated for Reliance, together with preliminary economic work on the project. $0.50 $0.00 0.0 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Mount Oxide is achieving high grade drill results outside the current 203kt copper resource including 22m @ 6.3% Cu from 258m, and 23m @ 8.9% Cu from 395m. At current copper prices above US$3/lb the 1.3% resource is potentially commercial provided adequate scale can be achieved. Development opportunities are being advanced, with a number of parties expressing interest in participating either with PEM by way of JV, or through outright purchase of the project. PEM had $26m cash at 30 June. The operational restructure is expected to result in a $60m inflow from the closure of the hedge book, a $20m outflow from the workforce reduction and a $10m outflow for debt repayment. Argonaut rates PEM a HOLD given the tenuous nature of Broken Hill. Analyst: HOLD Troy Irvin Argonaut Securities Research 90 Road to Recovery Overview Focused on base metals Perilya (PEM) is focused on zinc, lead, silver production at the Broken Hill mine in NSW, production at Broken Hill, and and on developing the Mount Oxide copper project in Mt Isa, Queensland and the developing the Mount Oxide Flinders zinc silicate project in South Australia. copper and the Flinders zinc silicate projects Executive Chairman Patrick O’Connor is an experienced management consultant and is currently an executive of St George Capital Pty Ltd, a boutique investment manager. From 1989 to 1998, Patrick was founder and Managing Director of Macraes Mining. Tight margins at Broken Hill The Broken Hill mine achieved annual production of 91.3kt contained zinc and 52.4kt contained lead (versus guidance of 90kt and 55kt). Despite strong production the June quarter results were disappointing in that despite strong production (more ore, cash operating margin in the more grade and more metal) the cash operating margin was just US$0.03/lb. PEM’s June quarter was just ability to reduce cash costs is critical given the recent fall in the zinc price. Cash costs US$0.03/lb for the last four quarters have been above the current spot zinc price of US$0.80/lb. Figure 1: Broken Hill cash costs over last 10 quarters Cash cost US$/lb 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 MARQ JUNQ SEPQ DECQ MARQ JUNQ SEPQ DECQ MARQ JUNQ 06 06 06 06 07 07 07 07 08 08 Source: Argonaut Operational resizing Operational resizing plan In a bid to keep Broken Hill profitable PEM has initiated an operational resizing plan. underway Staff numbers will be cut from 760 to 320, ore production reduced from 1.8mtpa to 950,000tpa and grades will increase from 5.8% Zn and 3.5% Pb to 6.5% Zn and 6.0% Pb. The North Mine and Potosi exploration decline will be placed on care and maintenance. Tight margins at Flinders zinc Margins will remain tight at FY08 sales totalled 26.8kt contained zinc. The first sale of lower grade DSO to Broken Hill and Flinders unless customers was completed in the June quarter. At the current spot zinc price margins the zinc price rebounds are tight. Average FY08 cash costs were US$0.72/lb. Mount Oxide copper generating interest High grade drill results outside PEM is achieving high grade drill results outside the current 203kt resource including the Mount Oxide resource 22m @ 6.3% Cu from 258m, and 23m @ 8.9% Cu from 395m. The Mount Oxide resource grade is 1.3% Cu. At the nearby Mount Gordon mine Aditya Birla (ABY) mined 2.2% ore in FY08 at a cash cost of US$2.27/lb using an underground Argonaut Securities Research 91 Road to Recovery Development opportunities are mining method. PEM is targeting mineralisation to the north, south and below a historic being advanced, with a number open pit. At current copper prices above US$3/lb a 1.3% resource in Australia is of parties expressing interest in potentially commercial provided adequate scale can be achieved. Development participating opportunities are being advanced, with a number of parties expressing interest in participating either with PEM by way of JV, or through outright purchase of the project. Figure 2: Mount Oxide drill section Source: PEM $60m hedge book closed out Hedge book closed out resulting PEM has closed all hedging contracts with a maturity date beyond 1 September 2008 in a $60m cash inflow resulting in a net cash inflow of $60m. Proceeds from the hedge book closure will be used to fund the resizing of the Broken Hill Operation and to repay $10m in borrowings. Termination of CBH merger The termination of the CBH The June termination of a proposed merger with CBH Resources (CBH) was a good merger was a good outcome for outcome for PEM shareholders. PEM shareholders There are a number of risks inherent in the CBH assets. Endeavour presents geotechnical challenges and high cash costs, Sulphur Springs presents low grades and a high strip ratio and Rasp is unviable without PEM’s under utilised Broken Hill mill. CBH would contribute 90% of the pro forma debt (including $187m in convertible notes). Conserving cash Unless the zinc price stages a The new operational plan is focused on conserving cash. However Argonaut is about as rapid recovery the operational enthused as an underground miner working a double shift. Margin pressure will remain resizing could turn into a staged given the high fixed cost nature of the large Broken Hill plant. High grading the mine shutdown involves the increased extraction of remnant pillars that were originally planned to be mined later in the mine schedule, probably due to geotechnical reasons. Unless the zinc price stages a rapid recovery the operational resizing could turn into a staged shutdown. PEM is rated a HOLD given the PEM had $26m cash at 30 June. Argonaut rates PEM a HOLD given the tenuous nature tenuous nature of Broken Hill of Broken Hill. HOLD Argonaut Securities Research 92 Road to Recovery Perilya Equities Research Analyst: Troy Irvin Recommendation HOLD Sector Materials Current Price $0.43 Issued Capital (m) 196.9 Target Price $0.57 Market Cap (m) $84.7 All Ords (XAO) 5,030 Updated 04-September-2008 Profit & Loss ($m) 30 June 2008A 2009E 2010E Financial Summary 2008A 2009E 2010E Sales Revenue 273.1 145.4 127.4 Reported Earnings Other Income 25.5 0.8 (1.0) Net Profit ($m) (140.3) (11.0) (28.6) Operating Costs 203.8 124.2 125.8 EPS (cents) (69.8) (5.5) (14.4) Depn & Amort 48.3 26.0 23.1 PER (x) (0.6) (7.8) (3.0) Exploration Written Off 0.0 2.0 1.0 Normalised Earnings Corporate/Admin 10.0 4.0 4.1 Net Profit ($m) (8.5) (11.0) (28.6) Foreign exchange loss 3.5 0.0 0.0 EPS (cents) 35.6 40.5 (4.2) (5.5) (14.4) Impairment losses 188.2 0.0 0.0 EPS Growth (%) (110.5) 30.3 160.1 EBIT (155.3) (9.9) (27.7) PER (x) (10.1) (7.8) (3.0) Interest Paid 12.8 1.1 0.9 Cashflow Operating Profit (168.1) (11.0) (28.6) Gross Op. Cashflow ($m) (10.0) 11.9 (9.6) Tax Expense / (Benefit) (25.8) 0.0 0.0 GCFPS (cents) (5.0) 6.0 (4.8) Profit from discontinued operations 2.0 0.0 0.0 PCF (x) (8.7) 7.2 (8.9) NPAT (140.3) (11.0) (28.6) Dividend Normalised NPAT (8.5) (11.0) (28.6) Dividend (cents) 1.0 0.0 0.0 Yield (%) 2.3% 0.0% 0.0% Franking % 100 100 100 Cash Flow ($m) 2008A 2009E 2010E Operating Cashflow (10.0) 11.9 (9.6) - Capex 77.8 25.2 15.4 Financial Ratios 2008A 2009E 2010E - Exploration & Evaluation 22.3 5.0 5.1 Balance Sheet Ratios - Asset Purchases (+ asset sales) (39.7) 0.0 0.0 Total Debt / Equity(%) 17.6 11.4 13.4 Free Cashflow (70.4) (18.3) (30.2) Interest Cover (x) (12.1) (9.1) (29.5) - Dividends 3.4 0.0 0.0 Acid test ratio (x) 1.7 1.3 0.4 + Equity Raised (2.7) 0.0 0.0 + Debt Drawdown (Repaid) (4.3) (10.0) 0.0 Profitability Ratios Net Change in Cash (80.8) (28.3) (30.2) Net Profit Margin (%) (3.1) (7.6) (22.5) Cash at End Period 26.5 (1.8) (32.0) Return on Assets (%) (56.9) (9.1) (25.6) Return on Equity(%) (95.0) (7.9) (23.9) Balance Sheet ($m) 2008A 2009E 2010E Cash 26.5 -1.8 -32.0 Valuation Summary A$m A$/sh Total Assets 299.5 107.8 76.0 Broken Hill (40.0) (0.20) Total Debt 26.0 16.0 16.0 Flinders 15.7 0.08 Total Liabilities 151.8 -32.1 -43.9 Mount Oxide 60.0 0.29 Shareholders Funds 147.6 139.9 119.9 Unpaid Capital 5.6 0.03 Forwards 0.0 0.00 Corporate (7.2) (0.04) Listed Investments 5.1 0.03 Exploration 20.0 0.10 Cash Estimate 56.0 0.28 Broken Hill Production Summary 2008A 2009E 2010E Debt 0.0 0.00 Contained Zinc (kt) 91.3 49.6 49.6 Contained Lead (kt) 52.4 48.5 48.5 Total @ 10% discount rate 115 0.57 Contained Silver (moz) 1.5 0.9 0.9 Zinc Cash Cost (US$/lb) 1.03 0.70 0.84 2011E Zinc Total Cost (US$/lb) 1.00 0.88 1.00 Zinc Price Realised (US$/lb) 1.19 0.85 0.85 Directors 114.0 Name Position Patrick O'Connor Executive Chairman 0.97 Phil Lockyer Non-Executive Director Peter Harley Non-Executive Director Evert van den Brand Non-Executive Director Reserves & Resources Karen Field Non-Executive Director Mt Zn (%) Pb (%) Zn (kt) Reserves Broken Hill 11.2 7.2 4.9 813 Flinders 0.2 38.1 2.8 61 Total 11.4 7.7 4.9 874 Pb (kt) Resources Broken Hill 20.7 9.7 7.6 2,011 551 Substantial Shareholders % Flinders 0.8 30.4 2.5 243 AXA Group 10.6 Total 21.5 10.5 7.4 2,254 UBS Nominees 8.0 #REF! Barclays 5.3 Mt Cu % Cu (kt) #REF! Mt Oxide (Copper) 15.5 1.3 202 537 ZINC & LEAD PRODUCTION REALISED PRICE AND COST PROFILE 100 1.40 90 80 1.20 70 1.00 60 50 0.80 40 US$/lb 30 0.60 Contained Metal (kt) Metal Contained 20 0.40 10 0 0.20 2008A 2009E 2010E 2008A 2009E 2010E Zinc Lead Zinc Lead Zinc cash cost Argonaut Securities Research 93 Road to Recovery Research Troy Resources 4 September 2008 BUY Current Price: $1.83 Confident of Andorinhas extensions Valuation: $2.69 Troy Resources (TRY) is a proven gold producer with operations at the Andorinhas Gold Ticker: TRY project in Para State, Brazil and Sandstone in Western Australia. Sector: Materials Shares on Issue (m): 69.8 The 100% owned Andorinhas operation continues to ramp up to name plate throughput. Market Cap ($m): 127.8 Underground development is on schedule to access high grade ore before the end of CY08. Net Cash ($m): 62.0 Gold production will build to 50kozpa with expected cash costs of $350/oz. Enterprise Value ($m): 65.8 52 wk High/Low: $3.99 $1.38 Resource upside is significant with existing deposits open down-plunge and along strike. 12m Av Daily Vol (m): 0.05 Current work is focused on extensions to Mamão and Lagoa Seca, and evaluation of the Babacu Prospect (1.7km north east of Mamão). TRY is confident it can extend the mine life Key Metrics past the initial five year plan with four drill rigs currently on site. 08F 09F 10F P/E (x) -6.4 8.3 2.7 EV/EBITDA (x) -3.5 2.6 1.0 A colluvial iron ore opportunity at Andorinhas is under evaluation. The experience of a local Brazilian company at the neighbouring Big Mac mine demonstrates that a simple operation Financials: is possible (free dig, screen, truck ~300km to smelters). Argonaut estimates potential 08F 09F 10F annual operating cash flow approaching $20m assuming 750ktpa of high grade ore (>57% Revenue ($m) 10.4 90.3 158.9 Fe) and an operating margin of $25/t. This would place the stock on a PCF multiple of EBIT ($m) -19.9 18.2 53.1 around 5x ignoring any contribution from the core gold business. Resource estimation and NPAT ($m) -19.9 15.4 46.8 a Pre-Feasibility Study are on track for completion during the September quarter. Net Assets ($m) 81.1 96.5 143.3 The treatment of low grade stockpiles continues at Sandstone. Ongoing problems in Op CF ($m) -20.4 16.3 50.1 securing drill rigs and escalating contract drill rates has prompted a review of future exploration at Sandstone with a decision expected in the current quarter. Per Share Data: 08F 09F 10F Argonaut’s BUY recommendation is based on: EPS (cps) -27.4 21.2 64.4 DPS (cps) 0.0 0.0 0.0 Div Yield 0.0%0.0%0.0% × Unhedged exposure to the gold price CFPS (cps) -28.0 22.5 68.9 × Proven management Share Price Graph $4.50 0.5 × Exploration upside $4.00 0.4 × ~$60m cash $3.50 $3.00 × No debt 0.3 $2.50 × A near-term iron ore opportunity $2.00 0.2 $1.50 M&A capability is also attractive, especially in Brazil where TRY has earned its stripes. $1.00 0.1 $0.50 TRY has retreated to near four year lows and is trading at a significant discount to Argonaut’s valuation of $2.69. $0.00 0.0 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 BUY Analyst: Troy Irvin Argonaut Securities Research 94 Road to Recovery Overview Proven gold producer with Troy Resources (TRY) is a proven gold producer with operations at the Andorinhas Gold operations at the Andorinhas project in Para State, Brazil and Sandstone in Western Australia. Gold project in Para State, Brazil and at Sandstone in Western Chief Executive Officer Paul Benson has 20 years experience in the mining sector with Australia tertiary qualifications in geology, engineering and management. Paul spent the last 7 years as Chief Development Officer at BHP Billiton and has been based in South America since 2004. Andorinhas Gold production is ramping up to The 100% owned Andorinhas operation continues to ramp up to name plate 50kozpa with expected cash throughput. Underground development is on schedule to access high grade ore before costs of $350/oz the end of CY08. Gold production will build to 50kozpa with expected cash costs of $350/oz. Figure 1: Location of Andorinhas All figures and tables are sourced from TRY unless stated otherwise Andorinhas has initial reserves of 256koz grading 6.5g/t Au (current mine life five years) in two shallow deposits - Mamao (underground) and Lagoa Seca (open pit). Initial resources comprise 435koz grading 3.4g/t Au. Resource upside Resource upside is significant Resource upside is significant with existing deposits open down-plunge and along with existing deposits open strike. Current work is focused on extensions to Mamão and Lagoa Seca, and down-plunge and along strike evaluation of the Babacu Prospect (1.7km north east of Mamão). Figure 2: Andorinhas geology and targets Argonaut Securities Research 95 Road to Recovery Iron ore opportunity An iron ore opportunity is under A colluvial iron ore opportunity at Andorinhas is under evaluation. The two areas of evaluation at Andorinhas… focus are the Abacaxi Target (2.2km long by 800m wide) and the Estrela Target (3.0km long by 600m wide). The experience of a local Brazilian company at the neighbouring Big Mac mine … potential to generate demonstrates that a simple operation is possible (free dig, screen, truck ~300km to operating cash flow approaching smelters). Argonaut estimates potential annual operating cash flow approaching $20m $20m p.a. … assuming 750ktpa of high grade ore (>57% Fe) and an operating margin of $25/t. This would place the stock on a PCF multiple of around 5x ignoring any contribution from the core gold business. Figure 3: Colluvial iron ore target location plan … resource estimation and a PFS Resource estimation and a Pre-Feasibility Study are on track for completion during the expected in the September September quarter. quarter Sandstone The treatment of low grade The treatment of low grade stockpiles continues. Gold production for FY08 was 33.8koz stockpiles at Sandstone at a cash cost of $706/oz. Ongoing problems in securing drill rigs and escalating continues contract drill rates has prompted a review of future exploration at Sandstone with a decision expected in the current quarter. Mongolian gold exploration Grab sampling in Mongolia TRY is earning 80% at the Gutain Davaa project, where recent work identified two new recently returned high gold gold bearing vein zones. Grab sampling returned gold grades ranging from 141g/t Au grades to 542 g/t Au. Summary BUY recommendation based on Argonaut’s BUY recommendation is based on an unhedged exposure to the gold price, proven management armed with proven management, exploration upside, ~$60m cash, no debt, and a near-term iron $60m cash ore opportunity. M&A capability is also attractive, especially in Brazil where TRY has earned its stripes. TRY has retreated to near four year lows and is trading at a significant discount to Argonaut’s valuation of $2.69. BUY Argonaut Securities Research 96 Road to Recovery Troy Resources NL Equities Research Analyst: Troy Irvin Recommendation BUY Sector Materials Current Price $1.83 Issued Capital (m) 69.8 Valuation $2.69 Market Cap(m) $127.8 All Ords (XAO) 5,030 Updated 04-September-2008 Profit & Loss ($m) 30 June 2008E 2009E 2010E Financial Summary 2008E 2009E 2010E Sales Revenue 10.4 90.3 158.9 Reported Earnings Other Income 1.2 4.4 5.7 Net Profit ($m) (19.9) 15.4 46.8 Operating Costs 26.0 61.4 93.8 EPS (cents) (27.4) 21.2 64.4 Depn & Amort 1.1 7.4 9.9 PER (x) (6.4) 8.3 2.7 Exploration Written Off 0.4 1.6 1.6 Normalised Earnings Corporate/Admin 4.0 6.0 6.2 Net Profit ($m) (19.9) 15.4 46.8 Other 0.0 0.0 0.0 EPS (cents) 5.9 (27.4) 21.2 64.4 EBIT -19.9 18.2 53.1 EPS Growth (%) 204.3 Interest Paid 0.0 0.0 0.0 PER (x) (6.4) 8.3 2.7 Operating Profit -19.9 18.2 53.1 Cashflow Tax expense 0.0 2.8 6.2 Operating Cashflow ($m) (20.4) 16.3 50.1 Minorities 0.0 0.0 0.0 GCFPS (cents) (28.0) 22.5 68.9 NPAT -19.9 15.4 46.8 PCF (x) (6.5) 8.1 2.7 Normalised NPAT -19.9 15.4 46.8 Dividend Dividend (cents) 0.0 0.0 0.0 Yield (%) 0.0 0.0 0.0 Franking % 100 100 100 Cash Flow ($m) 2008E 2009E 2010E Operating Cashflow -20.4 16.3 50.1 - Capex 15.5 14.0 4.6 - Exploration & Evaluation 2.0 8.1 8.2 - Asset purchases (+ asset sales) 0.0 -47.9 0.0 Financial Ratios 2008E 2009E 2010E Free Cashflow (37.9) 42.2 37.3 Balance Sheet Ratios - Dividends 0.0 0.0 0.0 Total Debt / Equity(%) 000 + Equity raised 0.0 0.0 0.0 Interest Cover (x) 000 + Debt drawdown (- repaid) 0.0 0.0 0.0 Acid test ratio (x) 5.8 3.6 3.2 Net Change in Cash (37.9) 42.2 37.3 Cash at End Period 62.0 104.2 141.5 Profitability Ratios Net Profit Margin (%) -192.1 17.1 29.5 Return on Assets (%) -20.8 14.5 37.8 Return on Equity(%) -24.6 16.0 32.7 Balance Sheet ($m) 2008E 2009E 2010E Total Assets 157.7 229.3 281.8 Total Debt 0.0 0.0 0.0 Total Liabilities 76.6 132.8 138.4 Shareholders Funds 81.1 96.5 143.3 Valuation Summary A$m A$/sh Sandstone 4.2 0.06 Andorinhas 61.6 0.88 Iron Ore 42.1 0.60 Production Summary 2008E 2009E 2010E Cobar Plant 5.0 0.07 Sandstone Gold (koz) 34 24 18 Exploration 20.0 0.29 Andorinhas Gold (koz) 5 37 45 Investments 2.6 0.04 Corporate -9.9 -0.14 Total Gold 38 61 63 Unpaid Capital 0.0 0.00 2012E Cash 62.0 0.89 Brazil Iron Ore (kt) 0 250 750 0 45 Gold Cash Cost (US$/oz) 605 624 439 Gold Total Cost (US$/oz) 628 723 539 45 Gold Price Realised (US$/oz) 896 900 850 Total @ 10% discount rate 126 2.69 500 Iron Ore Cash Cost (US$/t) 71 68 Iron Ore Total Cost (US$/t) 74 70 Directors Iron Ore Price Realised (US$/t) 105 104 John Jones Non-Executive Chairman Paul Benson Chief Executive Officer Tommy McKeith Non-Executive Director Ken Nilsson Director - Operations Reserves & Resources Alan Naylor Non-Executive Director Reserves Mt g/t Au (koz) Dr Denis Clarke Non-Executive Director Mamao 0.7 8.7 209 John Dow Non-Executive Director Lagoa Seca 0.5 3.1 48 Gordon Chambers Non-Executive Director Sandstone (March 2007) 1.0 2.7 84 2.2 4.8 341.1 Resources Mt g/t Au (koz) Mamao 0.9 9.5 275 Substantial Shareholders % Lagoa Seca 0.7 2.8 63 Warrigal Pty Ltd 16.0% Lagoa Seca West 2.4 1.2 95 Sandstone (March 2007) 3.0 1.9 182 Total 7.0 2.7 615.1 GOLD PRODUCTION REALISED PRICE AND COST PROFILE 70 1000 60 50 800 40 600 koz 30 400 20 US$/oz 10 200 0 0 2008E 2009E 2010E 2008E 2009E 2010E Sandstone Andorinhas Gold price Cash cost Argonaut Securities Research 97 Road to Recovery Research Western Areas 4 September 2008 SELL Current Price: $8.69 Valuation: $6.66 Ambitious production target Ticker: WSA Sector: Materials Western Areas (WSA) has built an impressive nickel sulphide asset base at the Forrestania project in Western Australia. Total current resources are 328kt contained Ni Shares on Issue (m): 167.7 at an average grade of 2.0% Ni. Market Cap ($m): 1,457.3 Net Cash ($m): -95.2 WSA reported a net loss after tax for FY08 of $54.9m. The loss included several ‘large one Enterprise Value ($m): 1,552.6 off expenses’ totalling $63.1m ($34.2m hedging losses, $22.9m non cash A-IFRS 52 wk High/Low: $12.00 $3.80 revaluation of the convertible bond, and $6.0m impairment of non-current assets). 12m Av Daily Vol (m): 0.84 The current focus is on ramping up production at the high grade Flying Fox mine to a Key Metrics target of 14ktpa contained Ni, or 20ktpa (assuming shaft haulage). The mine has made a 08A 09F 10F slow start. Despite being in production for seven straight quarters (mostly during a nickel P/E (x) 0.0 37.9 10.6 boom) Flying Fox is yet to generate anywhere close to the cash generated by peers. Financials: 08A 09F 10F Historical production reports and technical papers indicate that Outokumpu battled Revenue ($m) 60.8 152.8 352.1 difficult ground conditions when mining at Forrestania in the 1990’s, including at Flying EBIT ($m) -43.0 75.9 218.1 Fox and Cosmic Boy. Unplanned dilution, water ingress and demanding ground support NPAT ($m) -54.9 38.5 138.0 requirements resulted in missed production targets. Mining will become more difficult as the depth increases. Net Assets ($m) 125.8 164.3 293.9 Op CF ($m) -24.6 53.5 207.2 WSA has set an ambitious production target of 35ktpa contained Ni by 2011. To achieve this management has to significantly ramp-up the current Flying Fox mine, and build four Per Share Data: new mines (Spotted Quoll, Diggers South, Cosmic Boy and New Morning) almost 08A 09F 10F simultaneously. EPS (cps) -31.1 21.7 77.8 DPS (cps) 0.0 0.0 10.0 Div Yield 0.0% 0.0% 11.5% The Cosmic Boy concentrator is expected to be commissioned in February 2009. Ore is CFPS (cps) -13.9 30.2 116.8 currently treated at Norilsk’s Lake Johnston concentrator, 90km east of Flying Fox. Share Price Graph Production has been unhedged since April 2008. $14.00 30.0 $12.00 The Company has total borrowings on the balance sheet of $240m, and cash at June 30 24.0 of $144m. $10.00 18.0 $8.00 WSA’s asset base has resulted from a first class exploration effort. Spotted Quoll is one of the best discoveries made in recent times – high grade, amenable to low cost open pit $6.00 12.0 mining, and still open. The mineral resource now totals 1.05Mt at 7.2% for 75kt contained Ni. $4.00 6.0 $2.00 The stock is trading at a lofty EV compared to proven nickel sulphide mining peers reflecting the market’s high expectation that WSA can turn a quality resource base and $0.00 0.0 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 significant exploration potential into Australia’s second largest nickel producer by 2011. However exploration highlights are still overshadowing hard production data. Argonaut rates the stock a SELL until WSA proves it can 'get the nickel out of the ground' in line with the production promises made to the market. SELL Analyst: Troy Irvin Argonaut Securities Research 98 Road to Recovery Overview Focused on developing the Western Areas (WSA) has a 100% interest in the Forrestania Nickel Project, 400km Forrestania nickel project east of Perth. The current focus is on ramping up production at the Flying Fox mine to a target of 14ktpa contained Ni, or 20ktpa (assuming shaft haulage). Ore is currently treated at Norilsk’s Lake Johnston concentrator, 90km east of Flying Fox. The Managing Director is Julian Hanna. Julian is a Geologist with over 30 years experience, including senior exploration management positions with Forrest Gold Pty Ltd (CRA Gold division) and North Ltd. Reported a net loss after tax for WSA reported a net loss after tax for FY08 of $54.9m. The loss included several ‘large FY08 of $54.9m one off expenses’ totalling $63.1m ($34.2m hedging losses, $22.9m non cash A-IFRS revaluation of the convertible bond, and $6.0m impairment of non-current assets). Large, high grade resource base Large resource base of 328kt Forrestania offers three separate nickel systems, one operating mine, four proposed contained Ni at an average grade mines, and multiple drilling targets. of 2.0% Ni Figure 1: Forrestania 50km central zone, looking west All figures and tables are sourced from WSA unless stated otherwise Total current resources are 328kt contained Ni at an average grade of 2.0% Ni. Flying Fox production performance Despite being in production for The Flying Fox mine returned a gross profit of $21m for FY08 with almost half of this seven straight quarters Flying coming in the final June quarter. Fox is yet to generate significant cash Despite being in production for seven straight quarters (mostly during a nickel boom) Flying Fox is yet to generate anywhere close to the cash generated by peers. During this period the other junior nickel stocks such as IGO, PAN and MCR have built up >$100m bank balances. History of demanding ground conditions Production rates at Forrestania Historical production reports indicate that Outokumpu battled difficult ground conditions in the 1990’s were hampered by when mining at Forrestania in the 1990’s, including at Flying Fox and Cosmic Boy. difficult ground conditions Mining occurred in a high ground stress environment (variable, complex and affected by structure). Hanging wall rock strengths varied from very high to very low with generally blocky conditions. Unplanned dilution, water ingress and demanding ground support requirements resulted in missed production targets. Strain bursting of rocks (called ‘spitting’ by the miners) became an issue below 400m at Cosmic Boy, further slowing mining rates. Argonaut Securities Research 99 Road to Recovery Ambitious production target of 35ktpa by 2011 Set a challenging production WSA has set a production target of 35ktpa contained Ni by 2011. This will be target of 35ktpa by 2011… challenging given the requirement to significantly ramp-up the current Flying Fox mine, and build four new mines almost simultaneously. At Flying Fox the production promise/target does not appear to match the orebody. The 14ktpa implies bulk mining production rates from a high grade narrow orebody. However this type of deposit is usually mined with selective, low productivity, high unit cost mining methods. Figure 2: Forrestania 6 year production target …to achieve the target WSA must successfully deliver a pipeline of seven development projects Development projects To achieve total production of 35ktpa WSA must successfully deliver a pipeline of seven development projects. Spotted Quoll is one of the best Spotted Quoll (mine number two) is one of the best discoveries made in recent times – discoveries made in recent high grade, amenable to low cost open pit mining, and still open. Diggers South (mine times – high grade, amenable to number three) is a 1.5% Ni reserve located 40km south of Flying Fox. Cosmic Boy low cost open pit mining, and (mine number four) was partially mined from 1993-1999 (production 1.9mt @ 2.0% still open Ni). A contract has been awarded to re-excavate the old boxcut. New Morning (mine number five) requires drilling to test for extensions below a granite dyke. The Cosmic Boy concentrator is expected to be commissioned in February 2009. Exploration Proven team of explorationists WSA has a successful team of explorationists equipped with a $3m/month budget. In equipped with a $3m/month addition to the promising Forrestania nickel belt, attractive projects include new nickel / budget copper discoveries at the Mt Alexander JV (with BHP) and Lynn Lake in Canada. Hard to see value The stock is expensive Although WSA has an attractive nickel resource base with impressive exploration upside compared to proven nickel the stock is expensive and remains unproven in terms of delivering production sulphide mining peers promises. Given the high capital expenditure commitment (building 4 mines, a haulage shaft and a concentrator), $30m exploration budget and annual financing costs in excess of $20m WSA’s balance sheet is expected to tighten. SELL Argonaut Securities Research 100 Road to Recovery Western Areas Equities Research Analyst: Troy Irvin Recommendation SELL Sector Materials Current Price $8.69 Issued Capital (m) 167.7 Argonaut NAV $6.66 Market Cap(m) $1,457.3 All Ords (XAO) 5,030 Updated 04-September-2008 Profit & Loss ($m) 30 June 2008A 2009E 2010E Financial Summary 2008A 2009E 2010E Sales Revenue 60.8 152.8 352.1 Reported Earnings Other Income 13.7 4.9 0.7 Net Profit ($m) (54.9) 38.5 138.0 Operating Costs 26.4 45.2 86.5 EPS (cents) (31.1) 21.7 77.8 Depn & Amort 16.0 21.0 32.3 PER (x) 37.9 10.6 Exploration Exp. / Written Off 5.9 7.6 7.7 Normalised Earnings Corporate/Admin 6.0 8.1 8.2 Net Profit ($m) (54.9) 38.5 138.0 Derivatives Loss 34.2 0.0 0.0 EPS (cents) 15.1 (31.1) 21.7 77.8 Mark-to-market Revaluation of Convertible Bond 22.9 0.0 0.0 EPS Growth (%) 258.8 Impairment of non-current assets 6.0 0.0 0.0 PER (x) 37.9 10.6 EBIT -43.0 75.9 218.1 Cashflow Interest Paid 24.6 20.9 20.9 Gross (Op.) Cashflow ($m) (24.6) 53.5 207.2 Operating Profit -67.6 55.0 197.2 GCFPS (cents) (13.9) 30.2 116.8 Tax expense -12.7 16.5 59.2 PCF (x) 28.8 7.4 Minorities 0.0 0.0 0.0 Dividend NPAT -54.9 38.5 138.0 Dividend (cents) 0.0 0.0 10.0 Normalised NPAT -54.9 38.5 138.0 Yield (%) 0.0 0.0 11.5 Franking % 100 100 100 Cash Flow ($m) 2008A 2009E 2010E Operating Cashflow (24.6) 53.5 207.2 Financial Ratios 2008A 2009E 2010E - Capex 34.8 172.9 35.4 Balance Sheet Ratios - Exploration & Evaluation 21.1 30.2 30.8 Total Debt / Equity(%) 191 146 82 - Asset Purchases (+ Asset Sales) 12.7 0.0 0.0 Interest Cover (x) -1.7 3.6 10.4 Free Cashflow (93.1) (149.6) 141.0 Acid test ratio (x) 2.6 0.4 1.4 - Dividends 0.0 0.0 8.4 + Equity Raised 4.3 0.0 0.0 Profitability Ratios + Debt Drawdown (Repaid) (3.5) 0.0 0.0 Net Profit Margin (%) -90.4 25.2 39.2 Net Change in Cash (92.2) (149.6) 132.6 Return on Assets (%) -15.9 16.5 41.2 Cash at End Period 144.7 (4.9) 127.7 Return on Equity(%) -43.7 23.4 47.0 Balance Sheet ($m) 2008A 2009E 2010E Valuation Summary A$m A$/sh Total Assets 415.2 454.0 656.9 Flying Fox 466.0 2.63 Total Debt 240.0 240.0 240.0 Diggers South 113.4 0.64 Total Liabilities 289.4 289.7 362.9 New Morning / Daybreak 96.5 0.54 Shareholders Funds 125.8 164.3 293.9 Cosmic Boy 16.0 0.09 Spotted Quoll 321.5 1.81 Forward Sales 0.0 0.00 Corporate -18.4 -0.10 Nickel Production Summary 2008A 2009E 2010E 2011E Exploration / Canada 256.0 1.44 Flying Fox (kt) 3.9 8.9 8.9 9.3 Investments 6.0 0.03 Spotted Quoll (kt) 0.0 0.0 6.5 13.0 Unpaid Capital 19.7 0.11 Diggers South (kt) 0.0 0.0 3.2 10.4 Cash Estimate 144.7 0.82 New Morning / Daybreak (kt) 0.0 0.0 0.1 0.0 Debt -240.0 -1.35 Cosmic Boy(kt) 0.0 0.0 0.0 0.0 Total Nickel Production (kt) 3.9 8.9 18.7 Total @ 10% discount rate 1,182 6.66 Ni Cash Cost - net of credits (US$/lb) 4.01 2.76 2.34 2.65 Ni Total Cost (US$/lb) 6.80 4.45 3.55 3.93 Ni Price Realised (US$/lb) 8.95 10.00 10.00 8.00 Directors Terry Streeter Chairman Reserves & Resources 32.7 Julian Hanna Managing Director David Cooper Non-Executive Director Reserves Mt % Ni Ni (kt) 2.65 Robin Dunbar Non-Executive Director Flying Fox 1.2 5.3 63.4 Craig Oliver Finance Director Diggers 2.1 1.5 30.8 Total 3.3 2.8 94.2 Resources Mt % Ni Ni (kt) Substantial Shareholders % Flying Fox 2.3 4.7 107.3 Jungle Creek (Terry Streeter) 20.5 Spotted Quoll 1.0 7.2 75.1 G SantaLucia Investment 11.5 Diggers 10.0 1.0 99.6 Commonwealth Bank 8.2 New Morning / Daybreak 2.1 1.4 30.7 JP Morgan Nominees 6.6 Cosmic Boy 0.4 2.4 9.0 Northmead Holdings 6.5 Beautiful Sunday 0.5 1.4 6.7 Merrill Lynch 6.1 Total 16.4 2.0 328.4 NICKEL PRODUCTION REALISED PRICE AND COST PROFILE 14.00 35.0 12.00 30.0 10.00 25.0 8.00 20.0 US$/lb 6.00 15.0 4.00 10.0 Contained metal (kt) metal Contained 5.0 2.00 0.0 0.00 2008A 2009E 2010E 2011E 2008A 2009E 2010E 2011E Flying Fox (kt) Diggers South (kt) New Morning / Daybreak (kt) Spotted Quoll (kt) Nickel Cash costs Argonaut Securities Research 101 Road to Recovery Contact Details Important Disclosures Research: Argonaut acts as corporate advisor for Mirabela and receives fees commensurate with this service. Ian Christie Director Research +61 8 9224 6872 Argonaut owns/controls 600,000 Jabiru shares. Troy Irvin General Disclosure and Disclaimer Associate Director, Resources +61 8 9224 6871 This research has been prepared by Argonaut Securities Pty Limited (ABN 72 108 330 650) Tim Serjeant (“ASPL”) for the use of the clients of ASPL and its related bodies corporate (the “Argonaut Analyst Group”) and must not be copied, either in whole or in part, or distributed to any other +61 8 9224 6806 person. If you are not the intended recipient you must not use or disclose the information in this report in any way. ASPL is a holder of an Australian Financial Services Licence No. Institutional Sales: 274099 and is a Market Participant of the Australian Stock Exchange Limited. Paul Carter Nothing in this report should be construed as personal financial product advice for the Executive Director purposes of Section 766B of the Corporations Act. This report does not consider any of +61 8 9224 6864 your objectives, financial situation or needs. The report may contain general financial Chris Wippl product advice and you should therefore consider the appropriateness of the advice having Senior Institutional Dealer regard to your situation. We recommend you obtain financial, legal and taxation advice +61 8 9224 6875 before making any financial investment decision. Ben Willoughby This research is based on information obtained from sources believed to be reliable and Institutional Dealer ASPL has made every effort to ensure the information in this report is accurate, but we do +61 8 9224 6876 not make any representation or warranty that it is accurate, reliable, complete or up to date. The Argonaut Group accepts no obligation to correct or update the information or the Corporate and Retail Sales: opinions in it. Opinions expressed are subject to change without notice and accurately reflect the analyst(s)’ personal views at the time of writing. No member of the Argonaut Kevin Johnson Group or its respective employees, agents or consultants accepts any liability whatsoever Executive Director for any direct, indirect, consequential or other loss arising from any use of this research +61 8 9224 6880 and/or further communication in relation to this research. Glen Colgan Executive Director Nothing in this research shall be construed as a solicitation to buy or sell any financial +61 8 9224 6874 product, or to engage in or refrain from engaging in any transaction. The Argonaut Group and/or its associates, including ASPL, officers or employees may have interests in the Geoff Barnesby-Johnson financial products or a relationship with the issuer of the financial products referred to in Senior Dealer this report by acting in various roles including as investment banker, underwriter or dealer, +61 8 9224 6854 holder of principal positions, broker, director or adviser. Further, they may buy or sell James McGlew those securities as principal or agent, and as such may effect transactions which are not Senior Dealer consistent with the recommendations (if any) in this research. The Argonaut Group and/or +61 8 9224 6866 its associates, including ASPL, may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. Andrew Venn Dealer There are risks involved in securities trading. The price of securities can and does +61 8 9224 6865 fluctuate, and an individual security may even become valueless. International investors Ben Kay are reminded of the additional risks inherent in international investments, such as currency Dealer fluctuations and international stock market or economic conditions, which may adversely +61 8 9224 6859 affect the value of the investment. Rob Hamilton The analyst(s) principally responsible for the preparation of this research may receive Dealer compensation based on ASPL’s overall revenues. +61 8 9224 6830 © 2008. All rights reserved. No part of this document may be reproduced or distributed in any manner without the written permission of Argonaut Securities Pty Limited. Argonaut Securities Pty Limited specifically prohibits the re-distribution of this document, via the internet or otherwise, and accepts no liability whatsoever for the actions of third parties in this respect. Argonaut Securities Research 102 Road to Recovery Contact Details Important Disclosures Research: Argonaut acts as corporate advisor for Mirabela and receives fees commensurate with this service. Ian Christie Director Research +61 8 9224 6872 Argonaut owns/controls 600,000 Jabiru shares. Troy Irvin The Analyst has an immaterial interest in Jabiru, Mincor and Perilya shares. Associate Director, Resources +61 8 9224 6871 General Disclosure and Disclaimer Tim Serjeant Analyst This research has been prepared by Argonaut Securities Pty Limited (ABN 72 108 330 650) +61 8 9224 6806 (“ASPL”) for the use of the clients of ASPL and its related bodies corporate (the “Argonaut Group”) and must not be copied, either in whole or in part, or distributed to any other Institutional Sales: person. If you are not the intended recipient you must not use or disclose the information in this report in any way. ASPL is a holder of an Australian Financial Services Licence No. Paul Carter 274099 and is a Market Participant of the Australian Stock Exchange Limited. Executive Director +61 8 9224 6864 Nothing in this report should be construed as personal financial product advice for the Chris Wippl purposes of Section 766B of the Corporations Act. This report does not consider any of Senior Institutional Dealer your objectives, financial situation or needs. The report may contain general financial +61 8 9224 6875 product advice and you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice Ben Willoughby before making any financial investment decision. Institutional Dealer +61 8 9224 6876 This research is based on information obtained from sources believed to be reliable and ASPL has made every effort to ensure the information in this report is accurate, but we do Corporate and Retail Sales: not make any representation or warranty that it is accurate, reliable, complete or up to Kevin Johnson date. The Argonaut Group accepts no obligation to correct or update the information or the Executive Director opinions in it. Opinions expressed are subject to change without notice and accurately +61 8 9224 6880 reflect the analyst(s)’ personal views at the time of writing. No member of the Argonaut Group or its respective employees, agents or consultants accepts any liability whatsoever Glen Colgan for any direct, indirect, consequential or other loss arising from any use of this research Executive Director and/or further communication in relation to this research. +61 8 9224 6874 Geoff Barnesby-Johnson Nothing in this research shall be construed as a solicitation to buy or sell any financial Senior Dealer product, or to engage in or refrain from engaging in any transaction. The Argonaut Group +61 8 9224 6854 and/or its associates, including ASPL, officers or employees may have interests in the financial products or a relationship with the issuer of the financial products referred to in James McGlew this report by acting in various roles including as investment banker, underwriter or dealer, Senior Dealer holder of principal positions, broker, director or adviser. Further, they may buy or sell +61 8 9224 6866 those securities as principal or agent, and as such may effect transactions which are not consistent with the recommendations (if any) in this research. The Argonaut Group and/or Andrew Venn its associates, including ASPL, may receive fees, brokerage or commissions for acting in Dealer those capacities and the reader should assume that this is the case. +61 8 9224 6865 Ben Kay There are risks involved in securities trading. The price of securities can and does Dealer fluctuate, and an individual security may even become valueless. International investors +61 8 9224 6859 are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely Rob Hamilton affect the value of the investment. Dealer +61 8 9224 6830 The analyst(s) principally responsible for the preparation of this research may receive compensation based on ASPL’s overall revenues. © 2008. All rights reserved. No part of this document may be reproduced or distributed in any manner without the written permission of Argonaut Securities Pty Limited. Argonaut Securities Pty Limited specifically prohibits the re-distribution of this document, via the internet or otherwise, and accepts no liability whatsoever for the actions of third parties in this respect. Argonaut Securities Research 102 Road to Recovery