Funding Reflects Timing Not Crisis Recommendation: Buy 05/12/2007
Note: Marker indicates price of $3.35 at publication date.
Investment Rating CMR is focused on development of its Browns project near Batchelor NT. First production from the base metal Oxides project is set for 1Q08. At 9.4Mt and growing, Oxide resources are just over 10% of the 84Mt total. A feasibility study for a follow-up Sulphide development of up to 4Mtpa capacity is underway. A preliminary study on the adjacent Mt Fitch uranium resource determined favourable economics. CMR is an opportunity to participate in realisation of considerable value at advanced projects and exploration properties. It has no earnings history, is subject to development risk and low liquidity. The balance sheet is strong with exploration and development well funded following the landmark Hunan (HNC) deal.
Result Description CMR has drawn down US$25m on its A$100m stand-by facility with New York based investment fund, Cornell Capital. The facility comprises two components including a convertible note than can be drawn to a maximum of A$50m and the balance as shares to be issued at the prevailing market price. CMR has initiated the first draw down as convertible notes. This leaves the approximate available balance on the notes at just over A$20m in addition to the full A$50m compliment of equity.
Subscribers may ask why the facility is accessed now when we have previously stated that the Oxide project could be fully funded from internal reserves, even after the recent cost blow-outs. The answer is slower than expected Hunan payments. While Hunan has agreed to fund its full $72m share of project expenditure, timing is slower, upset by issues including stamp duty assessment delays. CMR had received $30m from Hunan by end June and another $10m in the September quarter. The $32m balance will be paid this quarter, but apparently not in time to avert a potential funding gap. The draw-down is a sign of prudence not critical cash shortage. In addition to the impending $32m, CMR will also receive a further $11m from Hunan for past exploration expenditure. We anticipate this payment in 1Q08 upon finalisation of stamp duty.
Impact CMR has strengthened its management team, re-affirmed its forecast for Oxide plant commissioning in 1Q08 and is sitting on a huge backlog of drill assays due to lab congestion. Five rigs will drill a further 12,000m this quarter. Expect strong news flow in the new year. We retain our Buy recommendation.
Recommendation Impact (Last Updated: 05/12/2007) Unchanged Price data based on previous close. Previous Close Market Cap $3.35 $427 (million) 52 Week High/Low $6.25 - $3.12 Sector Materials
Intrinsic Valuation $6.50 Note NPV at 10% discount
Moat Rating None Risk High Company Beta 1.06 Sector Beta 1.22
The convertible notes attract a set rate of interest and are repayable in cash. Any election by Cornell to convert to equity is subject to a maximum number of shares, putting a ceiling on the dilutionary impact. Conversion now would have negligible impact on our $6.50ps valuation. Should it desire, we expect CMR to be in a position to comfortably close out the notes in early 2008.
CMR Price at posting:
0.0¢ Sentiment: None Disclosure: Held
