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High Costs Keep Minara Out Of Favour

Australia | Jul 13 2009

By Chris Shaw

In terms of production, nickel miner Minara ((MRE)) largely met market expectations, its quarterly output of 7,800 tonnes either in-line or only slightly below broker expectations on the nickel side and a little better than UBS had factored in on the cobalt side.

As well, there were no changes to guidance for full year output of 30,000 to 34,000 tonnes of nickel given the June quarter was the sixth consecutive quarter of above 7,000 tonnes of output. This seems to suggest that actual production doesn’t appear to be an issue of concern for the market.

What is of concern though are Minara’s operational costs, as they remain stubbornly high. In the view of GSJB Were operational costs for the company are high enough to prefer other, lower cost plays in the nickel sector, especially given GSJBW is not particularly bullish on the outlook for the metal.

With respect to the nickel price, UBS points out Europe remains a major market for the metal but its demand, along with that of the US, has been relatively soft in recent months. At the same time, nickel stocks remain high at around 110,000 tonnes or about four weeks of supply, leading UBS to suggest there is little at present to push up the metal’s price given the market is entering the northern summer period where traditionally demand slows down.

Bank of America Merrill Lynch agrees costs are a major issue for Minara as while BA-ML expects costs for the first half of this year of around US$5.75 per pound to fall by around 50c in the second half -as legacy contracts roll off- BA-ML sees costs rising again in 2010 as the lower cost orebodies currently being mined will be exhausted by then.

Looking forward the broker expects the company will need to receive around US$5.50 per pound to cover its cash outgoings, meaning Minara may do little more than break-even in the absence of any further gains in nickel prices. BA-ML’s earnings per share (EPS) forecasts reflect this view as on its numbers the company should deliver outcomes of minus 0.6c in 2009, zero in 2010 and minus 0.4c in 2011. This means the company will not be profitable in any of the three coming years, including the present one.

Most other estimates in the market are for similarly flat earnings outcomes with GSJB Were expecting an EPS of minus 3.8c this year, minus 2.9c in 2010 and minus 0.9c in 2011, while UBS is at minus 2c, 2c and 4c respectively. The FNArena database shows consensus forecasts of minus 2.4c this year and a positive 0.5c in 2010.

Macquarie notes the Australian dollar is also important for group earnings given the company’s leverage to the currency. UBS highlights this factor by estimating a 5c move in the Australian dollar would change the company’s year end cash position by as much as $10 million dollars. Fortunately, the cash position at present is relatively robust in Macquarie’s view as post the recent equity raising there is about $127 million in cash on the company’s balance sheet.

Bank of America Merrill Lynch has re-run its numbers post the company’s quarterly production report and estimates a value for Minara of around 60c per share at current spot prices, while it estimates a US50c per pound increase in nickel prices would add 19c to its valuation. Given the stock is trading at a premium to its current valuation the broker retains its Underperform recommendation, while overall the FNArena database shows a total of Five Sells and just one Hold rating.

This makes Minara one of the least recommended stocks in the FNArena universe (see also FNArena Sentiment Indicator on the website).

The average price target according to the database is around $0.56, with a wide range given Macquarie and Deutsche Bank have targets of 44c and 45c respectively and GSJB Were is most bulllish with a $0.70 price target. Shares in Minara today are slightly weaker and as at 2.10pm the stock was down 3c at $0.73, which compares to a trading range over the past year of $0.245 to $2.45.

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