huntleys update

Some positive momentum appears to have returned to CMR following two months of disinterest in which the price fell 20% from $6.25ps highs. The driver is news of an intended double spin-off of uranium assets in addition to NSW exploration interests. We have commented on the lethargy that can plague share prices like CMR in pre-production mode. Niggling negatives have also heightened the poor mood. These include delays to signing of the Hunan JV documents, albeit now complete, a three month slip in Oxide project commissioning due to a slow NT Power and Water Authority (PWA), an $11m capex blow-out of which CMR will wear 100%, a review of operating cost estimates, some director selling and less than hoped for wet season exploration drilling.


Impact

* We retain the Buy recommendation. Our valuation stays $7.25ps still crediting only 50% of our calculated Sulphide project value. The negatives of delayed first production and cost increases are offset by a lift in our exploration valuation ex uranium to $100m and near term commodity price increases. Long term assumptions remain US$1.75/lb copper, US$15/lb cobalt, US$5.00/lb nickel, an A$/US$ exchange rate of 0.76 and a 10% discount rate. Using spot prices markedly increases the valuation to over $12ps, again including only half the sulphides. At 7% of the total valuation, exploration is still modest. Resource upgrades intended to incorporate 2006 drilling won't now happen until completion of the 2007 campaign. We have previously hinted at potential for a doubling in base metals. Our FY07 earnings forecast declines sharply from 27cps to 5cps thanks to delayed first oxide production. Our FY08 forecast increases marginally from 39cps to 42cps on prices.


Recommendation Impact (Last Updated: 11/05/2007)
Unchanged.

Intrinsic Valuation
$7.25
Note
NPV at 10% discount


Event Analysis

The PWA delay disappoints as it was only recently we commented on the excellent progress of project construction. CMR previously said it could diesel generate on site if need be. The capital cost rise and operating cost review, double speak for `prepare for increases`, while similarly disappointing are not unexpected given the frenetic state of the resource industry generally. The good news is the dollars from Hunan are arriving, initially in the form of a $40m loan until stamp duty settles. Hunan will also provide an additional $32m and repay $11m of past exploration expenditure. Exploration is restarting with a $4m program this year in the NT.

While light on detail, the spin-out announcement points to the listing of a focused uranium company and a separate NSW base and precious metals explorer. CMR will retain all the cash. It will distribute scrip in the two new companies to shareholders and retain minority stakes of its own. New equity will be raised for the de-merged vehicles as part of the listing process. The newly focused, slimmed down CMR will progress its base metal projects and seek new advanced stage assets. Given available cash, forecast cash flow generation from oxides and zero debt, CMR should have the capacity to make a substantial acquisition.

While relatively grass-roots, the NSW explorer could appeal given the promising early stage drill results of last year. It is in elephant country with cash and single minded purpose. Airborne magnetics have just been completed. But it's the uranium listing that's likely to create the most interest. Ignoring the high flyers, aka Paladin Resources, the current market weighted capitalisation per pound of U3O8 resource is around A$12. On that basis, CMR's 14.5Mlb resource is worth about $175m, slightly below our $187.5m valuation. That $187.5m valuation assumes 25Mlb of resources, half CMR's stated target, at a $7.50/lb multiple.

The $64m question is just how much uranium value is presently credited in the share price versus base metals and other assets. This may not be known until the de-mergers complete. We believe that 25Mlb is readily achievable and on average market multiples would be worth $300m, 60% above our current uranium valuation. Over 30 drill holes have been completed since the last uranium resource calculation. In addition with uranium now at US$120/lb and rising, market multiples could be more favourable by the time of listing. At the very least, a pure uranium play looks likely to attract a premium. Uranium King (UKL) listed on a JORC compliant inferred resource of 6.1Mlbs, raised capital at 25cps and hit the ASX at 48cps. It is now trading at $1.29, capped at ~$113m or $18/lb of U3O8. Direct comparisons shouldn't be made, but the case is worthy of consideration albeit in a highly speculative market.