kzl - macquarie research

KZL followers, you are going to like this.

Macquarie Research has just upgraded their recommendation for KZL from Neutral to Outperform. I have just received a report that goes out to the instos.

For your eyes only......., they say:

"Macquarie has reviewed the KZL suite of assets and their considerable greenfield and brownfield development potential in a report released yesterday.

Impact:

• Mungana tiger potential. Recent drilling supports the potential for a large, low to moderate grade, gold-copper porphyry deposit at depth, below the narrower upper porphyry dyke systems. Should KZL be able to
delineate sufficient ore tonnage (10mt+), there is clear scope to establish a smaller Ridgeway-style 2mtpa gold-copper operation in the Chillagoe region. Indicative value would be $140–180m (73–93cps).

• Walsh River zinc project. Independent of the Mungana gold-copper deposits, a smaller operation in the Chillagoe region is increasingly appearing viable through the development of the Walsh River zinc deposits (King Vol, Montevideo, etc) and the Mungana zinc-copper
resource. Indicative value is around $50m (26cps).

• Balcooma stacked lodes = mine life. Macquarie’s expectation that mine life at the Mt Garnet project will be substantially extended (current resource mine life ten years) should be realised in the current year with the progressive delineation of the stacked zinc-copper lode system at Balcooma.

Earnings revision:

• We have incorporated the planned Mt Garnet copper circuit in our forecasts from 1Q06. The impact of the additional 8kt per annum copper has lifted FY06 earnings 39% to $35m (18¢ EPS). Including the impact of the 1H05 plant debottlenecking has reduced forecast 1H earnings 35% to $5m (3¢ EPS).

Valuation, target, catalyst:

• Valuation: $0.90 DCF (WACC 9.0%, ERP 5.0%).
• 12-month price target: $1.30 based on a DCF methodology.
• Catalyst: Sustained low cost production at Mt Garnet combined with Chillagoe exploration and development potential.

Action and recommendation:

• KZL’s exploration success last year has delivered unrealised development potential sufficiently attractive for us to upgrade our recommendation to outperform. The attraction of KZL is its coupling of existing low cost
production with an array of highly impressive gold and base metal development projects."