http://business.smh.com.au/business/high-hopes-for-compass-dashed...

http://business.smh.com.au/business/high-hopes-for-compass-dashed-20080824-41er.html?page=2

Read the fine print

Compass's projections show the importance investors need to place on looking at the fine print when companies forecast profitability based on particular commodity price and exchange rate assumptions.

Right now, copper is trading at $US3.52 a pound and nickel at $US9.39 a pound. Cobalt is at $US26 a pound and falling. It assumed an exchange rate of US87c this year but just US80c every following year. And the cost of one of the main inputs, sulfuric acid, could rise when Compass renegotiates a contract at the end of the year.

An analyst with Aspect Huntley said Compass's delayed oxide production, growing debt and potentially high operating costs equated to "extreme risk" and margins of "negligible if not negative levels". The analyst owns shares in the company.

Compass's managing director, Richard Swann, said the oxide project was profitable "depending on the day you do the spot prices". But he added Compass was most focused on the sulfide project, which could produce 150,000 tonnes of lead, 40,000 tonnes of copper, 6000 tonnes of cobalt and 4000 tonnes of nickel a year by 2012.

The question for investors is whether the oxide plant will produce enough cash for Compass to pay off its debts and stave off administration while HNC completes the feasibility study. Swann said there was an option for the debt to be repaid by issuing more shares, which would dilute existing holders but remove repayment pressure.