Hi Guys. Huntley has just come out really pissed off with CMR today.
Result Description CMR management has again disappointed. Significant room for improvement in the budgeting process exists. We struggle giving benefit of the doubt with respect to latest guidance - taking a harsher line on schedule and budget. It's somewhat academic with the market's displeasure apparently already more than priced in for several weeks. Recent monthly Oxide project development updates were pointing in the right direction with positive trends in remaining man hours and reasonably re-assuring rumblings with respect to cost. But the company has inexplicably come out with yet another budget blow out and schedule push-back. The expected capital cost including contingency has risen by $35m to $175m and first fills, pre-production and owners costs by $8m to $40m. Again the news is reported at 5 to midnight with little further in the way of explanation!
In response to the original budget blow out, we increased our discount rate from 10% to 15% and added a Speculative qualification to our headline Buy recommendation. Recent form unfortunately further entrenches these riders. As with past blow-outs, the quantum in itself is not overlying damaging to valuation, but the delay to positive cash flow is.
Impact Risk in CMR has again risen - deferred production and blow-outs have created a squeeze. The need for US$24m in new debt at a not unreasonable interest rate from a company related to Chairman Gordon Toll highlights the urgency for successful first production. Survival is dependent on it, confirming CMR is a stock for the non risk averse only. The price discount means we retain our Speculative Buy recommendation but reduce our valuation by 15% from $6.00ps to $5.10ps - still giving ample room for error at current share prices. Oxide project cost blow-outs, delays and dilution due to cheap equity repayments to Cornell are the cause.
