Summary:Upgraded and undervaluedIncreases to our forecast nickel...

Summary:

Upgraded and undervalued

Increases to our forecast nickel prices, partly offset by a pending equity raising, has resulted in a healthy target price upgrade to A$0.89. AGM remains significantly undervalued and is primed to re-rate approaching nickel production from October. Buy.

Nickel pricing and valuation upgrade
Significant uplifts to our forecast nickel prices (Table 1) have driven an upgrade to our DCF-based target price to A$0.88, after adjusting for a pending equity issue. Spot LME nickel has pushed to fresh highs beyond US$20/lb in recent weeks, however, the AGM share price has remained flat (Chart 1), possibly in light of an upcoming capital raising. We note an inevitable pull-back in the nickel price (and sentiment) would generate price weakness across the nickel space in the short term, but believe this would provide an attractive entry point as the longer-term (+12 month) fundamentals for nickel and AGM remain very strong, in our view. We view our long-term nickel forecasts as conservative at US$5/lb.

Upcoming capital requirements
AGM held A$51.5m in cash at the end of the December quarter and raised a further A$3.975m via an equity placement to offtake partner Jinchaun in mid January. Comparing the original capital requirement vs current project status, we (conservatively) anticipate AGM will require a further A$40m to see Avebury through to production. Management anticipates an upcoming equity raising, possibly via a combined placement and SPP. Pending further details, we have modelled a equity issue of 73m shares at A$0.55c per share to raise A$40m, which would cause around 10% dilution.

Construction progress and exploration update
AGM retains its October 2007 target for first concentrate production. Delivery of the ball mill is on schedule for late June, for plant construction in July and commissioning in August-September. Management remains highly focussed and well aware of the benefits of timely commissioning. A resource estimate for a portion of the East Avebury and Saxon deposits, 1.2km East of the Avebury mill was released this week. We expect AGM to continue increasing reserves to be accessed from the Viking decline, leading to an expansion in throughput at the Avebury mill, with potential for annual production above 22mlb of nickel in concentrate. Current reserve life is six years and we are becoming more comfortable with AGM's goal of doubling this.