ABN-AMRO: WMR Result Preview6/08/04 By: Ben SmokerResult – Due...

ABN-AMRO: WMR Result Preview
6/08/04 By: Ben Smoker

Result – Due 11th August

What is the Street Saying?

THE NUMBER:
Market is going for a range of A$356m – A$451m (Av. A$434m) 1H04 NPAT with a dividend of 6-15 cents per share unfranked. ABN AMRO is at the lower end of this with GS JB Were at the top end of consensus.

THE TIME:
The result is expected to come out pre-market Thursday 11th August with an analyst briefing at 1.00pm.

WHAT TO LOOK FOR:
Should be significant impact from higher copper and nickel prices during the half.
Production is still likely to be below capacity due to maintenance at Olympic Dam and Mt Keith.
The Olympic Dam smelter had a great quarter, the solvent extraction plants ran well but indications were that the mine is getting worse. Production is on target to reach the now broader guidance of 220-230ktpa of copper for 2004 but it will now be more reliant on surface stocks. Commentary here will be important.
The company has stated its operating cost guidance of a bit higher than A$600m. The key point here will be to determine whether the costs associated with bringing the mine up to budget rates are treated as capital expenditure rather than operating expenditure.
The nickel smelter shut for 13 days during the quarter and furnace roof rebricking was carried out. However, the utilisation of matter stocks allowed the Kwinana refinery to increase production. Impact on numbers as a result will be a focus. Guidance has been that WMR averted any major threat to 2004 earnings and in the process provided potential upside for 2005 (an extra 28 days of production from the smelter). Confirmation of this will be viewed as a positive.
The booking of tax credits is the other positive catalyst to keep an eye on. The recognition of A$1bn in tax losses will lead to WMR changing from providing for tax to showing a tax credit and an estimated 41% increase in NPAT.
Action Point?

Why we like WMR:

We recently lifted our target price from A$5.00 to A$5.65 on the basis that the market may be willing to ascribe a higher multiple to WMR now that there is greater surety that nickel production can be maintained. Our NPV has increased by A$0.20 to A$4.34/share following a modification to the effective tax rate for after tax cash flows in 2006 and 2007.

Secondly, we’re bullish nickel. Inventories on the LME are tracking lower. See these charts below:



Upside Surprise Catalysts:

ð The Olympic Dam smelter operated at record levels during the quarter, with copper and uranium SX plants performing within the company’s expectations. There is upside to Olympic Dam's full-year EBIT contribution.

ð The successful completion of smelter maintenance and the potential upside to production in 2005 and an ability to run the refinery at the 70ktpa rate.

ð Positive earnings surprise in 2004 with tax credit adding to profits and improvement in copper and nickel in 2H04 is also beneficial to the prospective multiples the market is willing to ascribe to WMR ahead of any NPV re-rating.

Where to BUY:

Technically, $5.00 looks like a good entry point with a trading range that gives an upside to $5.40 initially, then towards $5.80.

For The Long WMR:

WMRIZK 20-Jan-05 550 Hot Instalment DELTA: 44
WMRIZO 15-Jun-05 250 Instalment DELTA: 98
WMRIZQ 2-Dec-05 300 Rolling Instalment DELTA: 93
WMRWZB 22-Dec-04 525 Call DELTA: 25



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