macquarie research report

Event

We initiate research coverage on Intec Ltd (INL) with a neutral recommendation and a 12-month price target of $0.15.

Impact

Zinc production platform … INL derives its present revenues and profitability through a tailings retreatment operation in north-western Tasmania known as the Hellyer Zinc Concentrate Project (HZCP). INL sensibly uses this project and high zinc prices to build cash as it determines how to best monetise its proprietary processing technology.

… for technology growth. Specifically, INL's technology, the 'Intec Process' is patented hydrometallurgical processing technology for the base and precious metals industries. If proven commercially, it has the potential to offer a lower capital expenditure and operating cost alternative to conventional ore processing flowsheets.
Key assets. INL owns a 50% interest in the HZCP, a 23.5% shareholding in Bass Metals (BSM), and 100% of the Hellyer Mill and associated infrastructure in Tasmania. It also owns Intec Process patents, and is party to a number of potentially value-adding strategic alliances and agreements.

Valuation. Our valuation is based on a sum-of-the-parts analysis, including our estimated discounted cashflow value of the HZCP ($26m), the market value of BSM ($7m), plant and equipment ($20m), cash plus options ($25m) and the Intec Process ($20m) for a total ~$98m ($0.15 per share, fully diluted). By far, the most subjective component of our valuation is, inevitably, the last one, INL's technology.

Earnings revision

We forecast one year of strong earnings per share in 2008, at 3 cents. Our 2009 earnings per share estimate falls off to 0.7 cents on steeply declining zinc prices.

Price catalyst

12-month price target: A$0.15.

Catalyst: Favourable zinc price movements; exploration success; negotiation of value-adding agreements and alliances; successful commercialisation of 'the Intec Process'.

Action and recommendation

We initiate coverage with a neutral recommendation and a $0.15 price target.

We view the next two years as critical to INL in realising its vision. The currently favourable metals environment provides a unique opportunity for INL to generate cash and trial its technology in conjunction with conventional operations. However, INL's not inconsiderable challenge is to transform its revenue and earnings base from one that is highly leveraged to the metals cycle to one that is more insulated from metal price downturns by increased demand for its low capex and low operating cost processing technology.
Investment Fundamentals

code: INL AU

year end 2006a 2007e 2008e 2009e
reported e $m (4.51) 0.23 18.63 3.98
adjusted e $m (4.51) 0.23 18.63 3.98
gross cashflow $m (3.83) 2.46 20.80 6.00

cfps c (0.91) 0.26 3.30 0.98
pgcfps x - 60.32 4.40 14.80

eps adj c (1.06) (0.13) 2.96 0.66
pe x - - 4.90 21.90

dps c - - - -
yield % - - - -
franking % - - - -
ev/ebitda x (8.00) 102.65 3.11 12.16

Regards

SP