Recommendation 20080222: Buy Investment Rating CBH owns the Endeavor zinc/lead mine near Cobar in NSW with annual capacity of 65kt of zinc and 35kt of lead in concentrates. Reserves support over 15 years, with potential for life extensions. The Panorama opencut in WA is set to start in FY10 with 20ktpa of copper and 50ktpa of zinc for at least seven years. Output of 30ktpa of zinc and 25ktpa of lead is expected from the Rasp mine in Broken Hill from mid 2008. Management aims to mould CBH into a mid tier miner via acquisitions and organic growth. The balance sheet is sound with about $160m net cash - excluding $200m of convertible notes, likely to convert. CBH is a relatively high cost, single mine producer. An understanding of commodity price and mining risk is needed.
Event
Adjusted 1H08 NPAT fell significantly from $21.1m in 1H07 to $4.4m primarily due to lower realised zinc prices. The headline result of $8.5m included $4.1m of unrealised foreign exchange and hedge gains. The pcp had no such one off items.
Sales revenue slumped 36% to $91.0m mainly due to reduced zinc prices. Zinc and lead output was slightly below the pcp.
EBITDA was sliced 68% to $11.8m with the margin halving to a less than impressive 12.9%.
EBIT similarly fell 81% to $6.1m on a thin margin of 6.7%.
Net operating cashflow was fair, up 59% to $18.5m but thanks only to beneficial working capital movements of $11.8m.
The balance sheet is sound with modest net debt of $39.6m. Of the debt, $199m is a convertible note likely to be exercised.
CBH expects improvement in 2H08 with the majority of Endeavor ore to come from the higher grade middle of the mine. Ore in 1H08 was primarily sourced from the lower grade bottom of the mine, which is also more expensive per tonne.
CBH is in talks with Perilya regarding a potential merger.
Full Event Analysis
Impact
The result missed our $9.6m forecast with 2Q08 production poorer than expected. With margins thin, profit is highly sensitive to small moves in prices, costs and sales volumes. Encouragingly, costs were as expected. CBH is placed to benefit from higher volumes and possible stronger prices.
We lower our FY08 NPAT forecast 26% to $21.1m due to the disappointing 1H08. Our FY09 NPAT forecast is little changed at $57.1m based on US$1.30/lb zinc and A$/US$ FX of 0.93.
Our valuation remains 74c a share. Long term assumptions of 0.90/lb zinc, US$0.70/lb lead, US$2.00/lb copper, A$/US$ FX of 0.80 and a 10% discount rate are unchanged.
Recommendation Impact (Last Updated: 20080222) While disappointing, the profit result should prove the nadir for CBH, provided commodity prices don’t fall out of bed, a scenario we’re not predicting. A Perilya merger would unlock significant value for both PEM and CBH. It’s potentially a strongly positive development.
CBH Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
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