nickel price stats, page-4

Respected stockbroker Huntleys provided a detailed update yesterday......placing a sell on the stock and a valuation of $2.65 on MRE.

Here is a copy of this report for your info:

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Recommendation 16/10/2006: Sell
Investment Rating
MRE is a major Australian producer of nickel and cobalt via its 60% owned Murrin Murrin operation. The long life mine, located near Leonora in Western Australia, produces approximately 30,000tpa of nickel and 2,000tpa of cobalt from laterite ore. MRE is focused on plant improvement to achieve its 40,000tpa nameplate capacity. Expansions are possible. Prices should support strong earnings for the foreseeable future. MRE is a leveraged nickel exposure suitable for trading, but operational and commodity price risk tolerance is required. The balance sheet is sound with net cash approaching $200m. A lack of production reliability makes MRE sub investment grade.


Event

Murrin Murrin's 3Q06 nickel output rose 36% compared to 2Q06 to 9,202t. Cobalt production fell 6.3% to 475t. For the first time since start-up, output was steady through the quarter with no significant interruptions.

Construction of the 200,000tpa heap leach demonstration plant remains on schedule to finish in December 2006. Output of 2,000tpa of nickel and 150tpa of cobalt is expected by the end of 2007.

Cash at end 3Q06 stood at $177m after payment of the final dividend.

Full Event Analysis

Impact

Our valuation rises marginally to $2.65 a share. Assumptions of US$5.00/lb long term nickel, an A$/US$ exchange rate of 0.76 and a 10% discount rate are unchanged.

Recent price strength provides an attractive profitable exit for this trading stock. Given a number of Accumulate and Buy recommendations around $2.00 from late 2004 until as recently as mid 2006, we are happy to take profits. Red blooded speculators may wish to retain some exposure given our valuation rises to $11 a share based on the spot nickel price of US$14.40/lb.


Recommendation Impact
(Last Updated: 16/10/2006)
Downgrade to Sell due to share price movement.


Event Analysis
The market was apathetic towards MRE a year ago. With nickel prices at all time highs and a quarterly production record just set, bullishness has taken over. Throw in a bit of takeover speculation from Glencore/Xstrata and you have a top performing share. The price has doubled in a few short months. Another example of market short termism! We didn't believe the sky was falling a year ago, nor are we convinced the future will be plain sailing. Solid production provides encouragement that the maintenance focus is starting to pay off but more than three good months are needed to banish MRE's chequered operational performances to history.

Our valuation rises marginally to $2.65 a share. Assumptions of US$5.00/lb long term nickel, an A$/US$ exchange rate of 0.76 and a 10% discount rate are unchanged. As a result of the sharp share price increase, we downgrade our recommendation to Sell. Recent price strength provides an attractive profitable exit for this trading stock. Given a number of Accumulate and Buy recommendations around $2.00 from late 2004 until as recently as mid 2006, we are happy to take profits. Red blooded speculators may wish to retain some exposure given our valuation rises to $11 a share based on the spot nickel price of US$14.40/lb.

MRE has much momentum and our sell recommendation could look silly in the short term. The serious cashflow and solid balance sheet may be used for growth but we believe nickel prices aren't sustainable at these levels. The company is highly leveraged to nickel prices as per the sensitivity table. Near term forward multiples are still attractive at around 10 times. There is always a chance bullish sentiment will reflect reality but a few more problems are likely before Murrin Murrin becomes a steady performer. While the company is a perennial takeover target, we certainly wouldn't invest at record levels on that basis. The potential for a Glencore or Xstrata buy out has always been there, the market is just more attuned given current frenetic corporate action. We generally see buying rumoured takeover targets as high risk/low return speculation.

Murrin Murrin's 3Q06 nickel output rose 36% compared to 2Q06 to 9,202t, 15% better than expected. Cobalt production fell 6.3% to 475t. For the first time since start-up, output was steady through the quarter with no significant interruptions. Solid production is encouraging after years of unreliability. Construction of the 200,000tpa heap leach demonstration plant remains on schedule to finish in December 2006. Output of 2,000tpa of nickel and 150tpa of cobalt is expected by the end of 2007. We value the heap leach at $100m or 22c a share. Cash at end 3Q06 stood at $177m after payment of the final dividend.

We raise our FY06 NPAT forecast 4.3% to $256.7m due to the result. FY07 is little changed at $167.0m. Average nickel price assumptions are US$10.30/lb in FY06 and US$9.50/lb in FY07. Production is expected to be flat in 2007 due to the bi-annual shutdown scheduled for late in the year. FY07 NPAT will be lower with higher tax as carried forward losses are exhausted.