significant ni results, page-3

Everyone should remember the huge upside for manganese going forward, even conservative Huntleys have started in their latest report - CSM as accumulate.
They also state that $200 million profit in manganese for FY08, exactly as Vote NO TEAM MEMBERS have been saying. There is so much upside in CSM now why sell
CONSOLIdATEd MINERALS (CSM)$3.07
RECOMMENdATION: ACCuMuLATE
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HiHiF/
6/(a)
6/(a)
6/(a)
6/(e)
6/(e)
emerging DiverSiFieD miner
market Cap:
laSt review:
Yr HigH/low:
ex-DiviDenD:
paYaBle:
BuSineSS riSk:
priCe riSk:
$706.7m
14/6/07 (YMW22$3.23/$1.63
11/7/07
31/8/07
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y npat eps %chg Dps Fr.% ylD per0425.1 14.8 +104.6 8.0 100.0 2.6 20.7
0552.6 26.8 +81.1 18.0 100.0 5.9 11.5
0616.0 7.3 -72.8 3.0 100.0 1.0 42.1
0735.5 15.6 +113.7 6.3 100.0 2.0 19.7
08193.9 84.2 +439.7 35.0 100.0 11.4 3.6
csM mines manganese and chromite, raw materials
for steel and stainless steel making. Diversification into
nickel provides a growth avenue. new management
is restoring credibility after falling manganese prices
severely damaged fY06 profits. suitable for growth oriented
investors seeking exposure to steel and stainless
steel making materials. potential for a partial takeover
by Brian Gilbertson led pallinghurst could boost growth
ambitions. ex-MD Michael kiernan upped bidding tension
after flagging interest. Acquisition, exploration and
operational risk tolerance is required. special consideration
is needed as manganese and chromium markets
lack transparency. nickel is a more attractive market, but
costs are high. csM is a price taker and has no moat.
kiernan on pallinghurst’s territory
Ex-MD Michael Kiernan has entered the fray and sparked
bidding tension. His new ASX listed vehicle, Territory
Resources (TTY), backed by key shareholders the Noble
Group and DCM DECOmetal, proposes to bid for CSM
subject to due diligence. CSM has granted TTY limited data
access until July 13. The potential bid is $2 cash and one
TTY share for every CSM, or three TTY shares for every
CSM. At TTY’s share price of $1.16, the offer values CSM
at between $3.16 and $3.48 a share and could be superior
to Pallinghurst’s bid. CSM’s advisers will also perform due
diligence on TTY to estimate its value.
If shareholders accept TTY’s cash and scrip alternative,
they will end up with just under 40% of the combined
group, a similar outcome to Pallinghurst. There would be
debt involved however with TTY looking to take on $250m.
Pallinghurst’s offer will see no new debt. TTY brings to
the table a group of early stage iron ore assets in NT plus
a recently started 1.5Mt a year iron ore mine at Frances
Creek. Exports are through the Port of Darwin 190km to
the north via the Darwin-Alice Springs rail line. TTY is also
evaluating the high grade Tambao manganese deposit in
Burkina Faso with AIM listed Weatherly International (WTI).
TTY and WTI can earn up to 72% of the deposit.
It’s now a case of the devil you know – Kiernan – versus the
devil you don’t – Gilbertson. Early CSM shareholders will admire
the way Kiernan built the company. It was disappointing
that relationship soured towards the end. New management
has improved disclosure significantly. There appears no
love lost between Kiernan and CSM’s current board. Pallin-
ghurst’s offer will be put to a vote on July 19. A $5m break
fee is payable to Pallinghurst if the CSM board withdraws
support, recommends another bid or if a competing offer
achieves more than 50% ownership within six months.
In our last report, we said Pallinghurst’s offer of $2.30
cash for 60% of current holdings would need to be raised.
Pallinghurst responded last week by increasing its bid
to $2.80 cash for 60% of holdings, with the remainder to
be taken in new CSM shares. The offer equates to $8.40
cash and two new CSM shares for every five current CSM
shares, worth $2.91 at the current CSM share price of
$3.07. In addition, the final dividend will be 4.5c fully franked
and will accrue to existing shareholders, not Pallinghurst.
Ignoring capital gains tax implications but including the final
dividend, the new CSM shares will need to trade at $3.36
to represent superior value to selling on market at $3.07.
That’s only a 10% premium to the current price and seems
achievable given much publicised acquisition targets.
While we were satisfied with the revised bid, fundamentals
have changed. The manganese price has shot up. The
average for FY07 of US$2.35/dmtu was above guidance
and the 2H07 average of US$2.65/dmtu beat guidance by
6%. Negotiations are underway for August-October 2007
with an increase of up to 140% over 2H07 prices expected.
This would be equivalent to about US$6.35/dmtu or A$385/
t of manganese ore. We estimate the company achieved
an average price of A$150/t in FY07. If CSM achieves
those September quarter prices for the whole of FY08, the
manganese division will add over $200m in revenue.
While manganese prices are notoriously volatile, we now
look for US$5.50/dmtu in FY08 and US$3.50/dmtu in FY09,
up from our previous US$2.50/dmtu forecast. This more
than doubles our FY08 NPAT forecast to $193.9m. We
may have more confidence in our FY08 forecast following
the FY07 result and full guidance. Expected improvement
in near term profitability drives a 21% increase in our
valuation to $3.20 a share. We also raise our long term
nickel price assumption by 40% to US$7.00/lb. CSM gains
little benefit though due to short mine life. We upgrade
our recommendation from Hold to Accumulate due to the
improved valuation, significantly enhanced near term profit
outlook and increased bidding competition from TTY.