MRE owns 60% of the Murrin Murrin operation near Leonora in WA. The long life mine produces over 30,000tpa of nickel and 2,000tpa of cobalt from laterite ore. Appeal is nickel leverage via the huge resource containing 3.4Mt of nickel and 226,000t of cobalt. MRE is focused on incremental improvement to achieve plant capacity of 40,000t a year after which expansions are possible. MRE is a leveraged nickel exposure suitable for trading. Operational and commodity price risk tolerance is required. The balance sheet is sound with net cash. Low reliability and high costs make MRE speculative.
Event27-Jun-2008 Our half yearly review of commodity price forecasts in ‘Commodities Update’ is complete. The full report is available on the homepage. Key changes include increasing the A$/US$ exchange rate from 0.80 to 0.95. Long term nickel is unchanged at US$10.00/lb. MRE has also suffered some production disruptions due to restricted gas supply following the Varanus Island explosion. Guidance is lowered from 34-38,000t to 31-35,000t of nickel in FY08. MRE is entitled to 60%.
Business Impact: The higher foreign exchange rate assumptions reduce A$ nickel prices. As a result, our valuation declines from $6.20 a share to $4.85, such is MRE’s leverage as a high cost producer. That cuts both ways in rising and falling markets, though long term, low cost producers are preferred. We lower our FY08 NPAT forecast from $207.4m to $123.8m after incorporating reduced production guidance and higher exchange rates. Our FY09 forecast falls less, from $207.8m to $189.5m.
Forecast Impact: --
Recommendation Impact: We upgrade from Accumulate to Speculative Buy looking for a bounce in the nickel price and sustained long term prices. The speculative tag reflects MRE’s high cost position, though the sound balance sheet provides a modicum of support.
Cheers NJ
MRE Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
