Dear all,News From THE WALL STREET JOURNAL ASIA By Patrick Barta...

Dear all,
News From THE WALL STREET JOURNAL ASIA
By Patrick Barta


Investors Warm Up To Minara
26/03/2007 7:30AM

A FEW YEARS ago, it would have been hard to find a better example of a failed mining project than Murrin Murrin, a huge, star-crossed nickel operation deep in the Western Australia desert.

Now, Murrin Murrin is an investor favorite. Shares of the company that runs it -- Perth-based Minara Resources -- have more than tripled in the past year, and some analysts see room for more gains.

The surprising turnaround highlights a central fact of the current commodity boom: With prices this high -- especially for nickel -- even technically difficult or chronically troubled projects look good. Nickel is most widely used as an ingredient in stainless steel.

That encouraging development is all the more important now that the world is filled with other high-risk new mining ventures, particularly ones involving nickel.

On the South Pacific island of New Caledonia, Companhia Vale do Rio Doce of Brazil is contemplating whether to continue with a US$3 billion nickel mine under construction that faces fierce local opposition and cost overruns. Anglo-Australian mining giant BHP Billiton is dealing with cost blowouts of its own at its US$2.2 billion Ravensthorpe operation in Australia.

But analysts say those two and other costly operations could still make piles of money if they get up and running in the next couple of years, while prices are still strong by historical standards. And they could do even better if they learn from Minara's mistakes.

Minara was conceived in the 1990s by maverick Australian mining entrepreneur Andrew Forrest. Its strategy was to make low-grade nickel into something useful through processing techniques used in Cuba. A massive facility was put in the middle of nowhere to process minerals under extreme temperatures and pressures. Mr. Forrest raised more than US$1 billion for the venture, including US$420 million in junk bonds in the U.S.

But the plan unraveled when the project (then called Anaconda) ran into big technical snags, which analysts now attribute to design and construction flaws. Repeated shutdowns sent costs soaring and the project never came close to operating at full capacity.

An acrimonious restructuring exercise involved persuading bondholders to sell at a loss. Eventually, the project re-emerged under the Minara name, with Swiss commodity firm Glencore International as a key shareholder.

Many analysts still doubted the mine could operate profitably. But under new management, Minara spent tens of millions of dollars to refit the operation and instituted more rigorous maintenance procedures.

Last year, those efforts started to pay off as nickel prices more than doubled and Minara continued to get production issues under control. Last month, Minara said 2006 net profit rocketed to A$339 million (US$273.1 million) from A$43 million a year earlier, and the company paid a hefty dividend. Meanwhile, the company produced a record 17,500 metric tons of nickel in the six months ending Dec. 31. Production could hit 35,000 metric tons this year.

"The second half [of 2006] demonstrates what the company can achieve with steady production and record nickel prices," wrote Citigroup analysts Jonathan Battershill and Brian Warner. Citigroup rates Minara a "buy" with a 12-month price target of A$8.32 a share. (On Friday, the stock rose 4%, or 18 Australian cents, to A$7.08 in Sydney.)

Indeed, analysts see reasons to be bullish. While most industry experts doubt nickel prices will stay as high as they are, a widely held view is that prices will remain well above the long-term averages the industry predicted a few years ago -- in part because so many new projects are having trouble starting.

This should keep Minara profitable, at least for the foreseeable future. Minara's costs are running at about US$4 per pound, or 0.45 kilogram, of nickel, analysts say, and could be even lower in the years ahead. Nickel has recently been trading at about US$20 a pound.

Another reason for optimism is that Minara is exploring options to expand. The company is working on an experimental "heap leach" facility that involves percolating acid through large piles of scrap material to recover more nickel. If it works, this could let Minara significantly increase production.

The company also plans to make plant upgrades later this year that could further boost production.

In a research note last month, UBS analysts reckoned Minara could crank up capacity to as much as 80,000 metric tons within three or four years. Citigroup said it, too, sees "plenty of upside." But Citigroup warned investors it was more realistic to expect more modest gains, though even a few thousand additional tons of production could significantly raise profit.

Murrin Murrin still faces plenty of challenges. There is always the risk nickel prices will come down harder than analysts expect, especially if stainless-steel companies begin hunting more aggressively for lower-cost alternatives or global growth slows dramatically.

Also, Minara has continued to report maintenance or other problems, and it is always possible there will be more adverse surprises. Any work stoppage could be costly: Minara has no other major productive assets to provide cash flow in the event of a problem.

Although the company has said it intends to resolve some remaining maintenance issues this year, "I'd be a little more cautious," says RBC Capital Markets analyst Geoff Breen. He maintains a "sector perform" rating on the stock rather than a buy, with a target of A$7 a share. Mr. Breen says he likes what Minara achieved in recent years. But given its big share-price rise, he says he now sees more upside in smaller nickel producers.

Goldman Sachs JBWere calls Minara a "buy" with a 12-month target of A$7.70, citing continuing strong nickel prices and the potential for expansion.



(END) Dow Jones Newswires