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Compass Resources Limited (CMR)

Positives? Give us More Please
Recommendation: Speculative Buy

24/09/2008
Marker = $0.58
Note: Marker indicates price of $0.58 at publication date.

Investment Rating
CMR is developing the Browns project near Batchelor NT. First ore from the base metal Oxides project is set for 3Q08. At 13.4Mt and growing, Oxide resources are 16% of the 80Mt total excluding uranium. A pre-feasibility study for a follow-up Sulphide development of up to 4Mtpa capacity is underway. CMR is an opportunity to participate in realisation of value at advanced projects and exploration properties. It has no earnings history, is subject to development risk, low liquidity and high share price volatility. Delayed Oxide production, growing debt and potentially high operating costs equate to extreme risk. Net debt is $54m. Management is struggling with credibility and needs to build a track record. Sulphide development is funded via the landmark Hunan (HNC) deal. Exploration upside appeals but CMR is highly Speculative and only for those acutely aware of the risks.


Result Description

* CMR has begun copper electro-winning at the Browns Oxide project. First copper has been plated onto stainless steel cathodes and stripped - effectively first production. Unexpectedly this has occurred before first nickel/cobalt output due to extra work required on meeting new safety standards - now complete. First nickel/cobalt precipitate output is to come in early October.


* Is this the start of a run of good news after an excruciatingly long period of negatives? It's certainly welcome news but way too early to call. More major issues including debt/dilution remain unresolved. Also positive overall is the slide in the A$ and the sharp fall in sulphuric acid prices from recent unprecedented peaks. CMR's acid prices are locked-in for a year at lower levels making it irrelevant for now, but if sustained, the declines would be appreciated when the next year's contract comes up.


Impact

* For now we'll retain the wait and see approach, assuming dilutionary debt repayments as equity. We stick with our A$1.40/share valuation and Speculative Buy recommendation. CMR's 80Mt base metal orebody is a draw-card and base metal exploration upside genuine. That said the company remains only for the extreme risk aware, its very survival still hangs in the balance. Demonstrated sustainable profitable Oxide production and/or an effective quarantining of dilution from debt is required to radically alter the nature of CMR as an investment. Potential for this, in conjunction with the solid resource base, underpins our positive call. We stress the Speculative investment attributes and the high business and investment risk. The stock remains entrenched in the make-or-break zone.


Recommendation Impact (Last Updated: 24/09/2008)
Unchanged.

Price data based on previous close.
Previous Close Market Cap
$0.44 $58 (million)
52 Week High/Low
$4.35 - $0.41
Sector
Materials

Intrinsic Valuation
$1.40
Note
NPV at 15% discount

Moat Rating None
Risk Speculative
Company Beta 0.79
Sector Beta 0.90

Year 12/06A 12/07A 12/08E 12/09E
NPAT ($m) -2.80 -22.40 -7.60 -8.10
EPS (c) -2.66 -17.73 -5.30 -4.50
% Change 59.28 566.54 -70.11 -15.09
DPS (c) -- -- 0.00 0.00
Franking (%) -- -- 0.00 0.00
Dividend Yield (%) 0.00 0.00 0.00 0.00
PER -16.54 -2.48 -8.30 -9.78
Source: Aspect Huntley analyst estimates

2 Year Price Chart