Aquarius PlatinumEverest commences productionEvent * Aquarius...

Aquarius Platinum

Everest commences production

Event

* Aquarius Platinum (Aquarius) has announced that it has shipped first PGM concentrate from its Everest operation.

Impact

* First output is three months ahead of schedule: Following the commissioning of the concentrator plant and recommencement of milling operations at Aquarius' Everest operation, Everest shipped first PGM concentrate last Friday, approximately three months ahead of schedule. Importantly, Aquarius has advised that the rebuild of Everest, which was closed in December 2008 due to a subsidence event, is also well within budget, with R170m out of a total capital budget of R259m having been spent to date.

* A rapid ramp-up is being forecast: Aquarius has indicated that it expects Everest to process approximately 120kt of ore during May and June, resulting in the contribution of approximately 8koz (4E) to Aquarius' attributable PGM production for FY10. Although Everest' FY10 output contribution is largely immaterial to our FY10 attributable PGM output forecast of approximately 425koz for the Aquarius group, the contribution in subsequent years is significant. This is particularly true following the revised Everest ramp-up guidance which Aquarius has provided. Aquarius has guided towards Everest PGM production of approximately 120koz and 180koz in FY11 and FY12 respectively, followed by steady-state output levels of 200koz thereafter.

* Our Everest forecasts are far too conservative: Given that we were conservatively forecasting first PGM production from Everest in 1H11, followed by a gradual ramp-up in PGM output to a steady-state production level of 120koz in FY12, the above mentioned Everest revisions are significant and we have adjusted our Aquarius production profile accordingly.

Earnings and target price revision

* We have made marginal revisions to our Aquarius earnings forecasts on the back of this renewed production guidance. In addition, we have also upgraded our DCF derived 12-month target price to A$9.00, from A$8.10 previously.

Price catalyst

* 12-month price target: A$9.00 based on a DCF methodology.

* Catalyst: Release of FY10 results in August; potential merger and acquisition activity in the SA PGM industry

Action and recommendation

* We retain our Outperform recommendation for Aquarius, and the counter remains one of our preferred picks in the PGM sector given its favourable position on the PGM industry cash cost curve and its resulting profitability and free cash flow generation ability. We contend that this production update supports our Aquarius investment thesis, which is largely biased towards the company's operational ability.