reccomendation change, page-5

Eureka

Minara

In this context we believe Minara (MRE) clearly reflects both scale and leverage. However, in addition the significant cash flow generation is supporting a very attractive dividend yield.

Minara resources is a leveraged laterite nickel producer through its 60% interest in the Murrin Murrin JV.As a partner, Glencore (40%) has shown strong support for the project and the MRE management, which clearly reflects their very positive view on the long term fundamentals for the laterite nickel industry, and the Murrin Murrin technology. We believe Glencore’s continued support should not be underestimated despite a healthy dose of domestic market scepticism for the future success of the project. We are very happy to back both Glencore and MRE management; I think Peter Johnston has done an outstanding job, in their positive view of the fundamentals.

MRE reminds me very much of the current doubts surrounding the future success of Fortescue (FMG) and Paladin (PDN). All three companies continue to be subjected to intense project scrutiny with limited institutional support. I think the blame lies squarely on the rear vision views of domestic analysts. However there is no doubt that the MRE success story continues to confound the sceptics.

Not bad so far.

Our senior resource analyst David Radclyffe first recommended MRE in March 2006 as a “buy” when the share price was $2.09.Subsequently the total return including capital appreciation and dividends is 260%. Not bad for a company with no significant institutional shareholder base. However it is not too late, we believe Minara is a long-term production growth story, 100% leveraged to the nickel price. In addition, we believe the long-term mine life will support a very attractive dividend yield. Our firm belief is that MRE is on the cusp of a significant PE rerating.

Long mine life.

The Murrin Murrin laterite nickel resource stands at 342mt @ 0.99% nickel with current reserves of 144mt @ 1.09%. This is expected to support a mine life of over 40 years at the nameplate plant capacity of 40kt pa. In addition there is Mt Margaret (100%) supplemented by the Marshall Pool (321mt @ 0.69%) and Weld Range (75%) (329mt @ 0.75%) target deposits. There is little doubt that MRE has very, very long life supplies of laterite nickel.

Pressure acid leach.

The high-pressure acid leach (HPAL) process used at Murrin Murrin for nickel extraction has provided the major source of market scepticism. There is no doubt that the plant and the technology have experienced a significant amount of early operational issues. However the current management has fined tuned the plant operations, spent considerable cap-ex on plant upgrades, and implemented a planned maintenance regime. The end result has been very successful with more consistent and sustainable production.

We believe last year was an inflection point for Minara.After a disappointing 1H 06 with production of 14kt, the company achieved record 2H production of 17,464t. Management was able to address some legacy operational issues after bringing forward a planned maintenance shutdown. As a result the company achieved a significant improvement in operating performance across the plant. Consequently Minara produced a record 31,500t of nickel in 2006, despite a 12-day shutdown, compared to 28,240kt in 2005.

This year the 1H 07 production of 14,889k was impacted by 2 power failures (no fault of Minara) and a scale build up at the back of plant, (which the company believes has been resolved). Consequently management recently downgraded the FY forecast to the 31-33kt range from 32-35kt previously. As a result MRE has experienced a 27% correction from the recent high of $9.67 in May, exacerbated by a 33% fall in the nickel price from over $US24lb over a similar period.

Despite the slight production downgrade, we believe the key issue overlooked by many analysts is the strong plant performance at the front end. There has been a significant improvement in the performance of the overall plant due to a substantial increase in the integrity of the acid plant operational performance. The management has achieved four consecutive quarters of consistent nickel production from the improved front end performance which clearly reflects a new production sustainability. As a result the risk profile has improved considerably which we believe will be the catalyst for a further PE rerating.

The heap leach.

Despite the record nickel production in 2006 from the existing HPAL plant, we believe the big upside for Minara is the current trial for the heap leach extraction process. This will provide a second processing stream independent of the HPAL circuit with the potential to double current production. The construction of the heap leach 2kt demonstration plant was completed earlier this year at a cost of $25m, and the current trials are already producing nickel at the expected recovery rates. This is a very positive development.


I have always believed that keeping it simple is a good recipe for generating out performance.
In this context I think the market is completely underestimating the significant potential for this project. Even I can understand the concept of the heap leach process so it must be very simple. As the picture shows it is merely a massive pad of low-grade ore laid out and drenched in sulphuric acid. The result is the eventual leaching out of nickel and cobalt over the course of a year. I finally feel some satisfaction after failing chemistry.