huntley report

Rate : HOLD
up to $0.60 BUY
$0.60-$0.75 ACCUMULATE
$0.75-$1.25 HOLD
$1.25-$1.60 REDUCE
over $1.60 SELL
Marker = $1.06
Note: Marker indicates price of $1.06 at publication date.


Investment Rating
The Mt Garnet plant in Qld sources ore from a number of small, high grade deposits to produce zinc, copper, lead, silver and gold. Thalanga´s late 2006 start-up sees copper dominate. The Mungana base metals mill at Chillagoe, similar to Mt Garnet, was postponed in 2008. It was to start April 2009. Red Dome and Mungana may support a combined low grade gold/copper development. KZL´s Lounge Lizard is a promising exploration project adjoining Western Areas´ (WSA) Flying Fox nickel mine in WA. Admiral Bay is a large but low grade and deep zinc, lead, silver deposit with significant option value. Speculative and only for those seeking upside from exploration and development with a tolerance for mining and commodity price risk. KZL has no moat with cash costs near the industry average for zinc but in the highest quartile for copper.


Result Description

* FY09 was a horror year for KZL, high cash costs and a weak balance sheet placing the company under considerable strain.


* The headline FY09 net loss of $94.0m compared to a net profit of $65.0m in the pcp. FY09 included $57.4m of pre-tax asset writedowns. There were no one off items in FY08. The $53.8m adjusted loss was driven by sharp copper and zinc price falls.


* Revenue near halved to $166m due to commodity prices. KZL made an EBITDA loss of $21.4m compared to $129.2m profit in FY08.


* The balance sheet has largely been restored post June 30 with the injection of approximately $130m from new shares.


* The dividend was rightly cut.


* Guidance is for 46kt of zinc and 23kt of copper production in FY10 compared to 26kt of zinc and 37kt of copper in FY09.


Impact

* The result was worse than our $33.5m forecast due to lower than expected revenue partly due to provisional pricing.


* We raise our FY10 NPAT forecast slightly to $23.9m, higher commodity price forecasts offset by lower output. Assumptions are A$3.17/lb copper and A$0.97/lb zinc. Our FY11 NPAT forecast of $22.7m assumes A$2.66/lb copper and A$0.97/lb zinc.


* Our valuation rises marginally to $0.88. Long term assumptions remain US$2.00/lb copper, US$0.80/lb zinc, an A$/US$ exchange rate of 0.80 and a 10% discount rate.


Recommendation Impact (Last Updated: 22/09/2009)
We maintain our Hold recommendation. KZL offers strong leverage to both the copper and zinc price but production costs, particularly for copper, are high. Balance sheet risk is much reduced following recent equity raisings.