mre outlook report

In addition to $70m spent already, about $300m will be invested to expand the world¡¦s first nickel heap leach from 2,000t to 8,000-10,000t a year from end 2009. It¡¦s the first capital investment in growth since Murrin Murrin was built nearly a decade ago. Heap leach is a low cost method of recovering nickel. The total capital cost of has risen to $400m, partly reflecting overheated conditions in WA.

Business Impact: Provided the technical risk can be managed, it should still be a good investment. Only an approximate A$2.50/lb margin is needed to generate a 10% return on investment. The extra volumes through Murrin Murrin should improve overall unit costs. Detail on expected cash costs is limited but we expect the project to exceed the $2.50/lb margin needed to generate value. We maintain our nominal $200m or 43c a share heap leach valuation. This implies a long term margin of A$4.00/lb which is achievable given potential for volume cost savings. Our overall valuation remains $6.20 a share. Long term assumptions remain US$10.00/lb nickel, an A$/US$ exchange rate of 0.80 and a 10% discount rate. While the heap leach will improve MRE¡¦s industry cost position, production is likely to remain in the high cost half of the curve. Investment success will continue to be leveraged to nickel prices. The outlook is solid, underpinned by new high cost production from New Caledonia, Indonesia and Philippines. Our earnings forecasts are little changed with 1Q08 production basically as expected. We continue to forecast FY08 production at the bottom of the 34-38,000 range.