full review - still a buy * CMR dropped a bombshell admitting...

full review - still a buy


* CMR dropped a bombshell admitting commissioning of its Browns Oxide project is delayed from 4Q07 to 1Q08 and process plant cost will increase by 20-30% or $20-30m. CMR will wear most of this increase. It is hard to believe this could come one month from commissioning when shareholders had been told that everything was tracking to plan! It implies a breakdown in communications between the Board and what was happening on site. Our confidence has been shaken. The company's ASX release reveals little in the way of what happened or why, and how it could go unnoticed. This needs to be clarified for trust to begin to be restored.


* The plant was over 85% complete prior to the announcement. The issues are to do with construction and configuration, there is nothing wrong metallurgically. Richard Dossor (experience includes Northparkes underground development, Kanowna Belle Gold Project and several iron ore expansion projects) has been appointed General Manager New Projects. He will focus attention on Browns Oxide until it is fixed.


Impact

* The implied maximum cost increase of $30m or 23cps, is equivalent to 3% of our prior $7.40ps valuation. There is also the implicit cost of lost profits from delay, worth a further 27cps. We also institute a harsher 15% discount rate to reflect uncertainty at the management level. That sees our valuation decline to $5.50ps. A degree of safety is retained by use of conservative long term metal price forecasts, only crediting CMR with 50% of its share of the Browns Sulphide project valuation and assuming the upper end 30% Oxide project cost increase.


* Conclusive evidence that management and Browns Oxide are safely back on track could result in reinstatement of our normal 10% discount rate and a valuation closer to the $7ps mark.


Recommendation Impact (Last Updated: 10/09/2007)
Unchanged.

Price data based on previous close.
Previous Close Market Cap
$3.76 $478 (million)
52 Week High/Low
$6.25 - $3.34
Sector
Materials

Intrinsic Valuation
$5.50
Note
NPV at 10% discount


Event Analysis

Project delays nevertheless mean our FY07 and FY08 earnings forecasts decline to negative 0.3cps and positive 31.6cps, falls of 106% and 22% respectively. Despite this stumble, we retain our Buy recommendation. Our interest remains chiefly in the quality of the Browns base metal orebody and the near mine prospectivity, including uranium. An orebody of Browns' calibre should financially withstand hiccups such as these. Management has disappointed and we look forward to clarification for the path forward. Further informing the market is reportedly a priority for the Board, hopefully in a week. We believe the share price weakness provides an opportunity to buy at a substantial discount to intrinsic value. At these prices, CMR is a takeover candidate. Its Batchelor orebodies have "super pit" potential and the economies that scale affords. We stress that until commercial production is achieved, the company remains at the higher risk end of resource exposures. Recent issues only heighten that tag.

CMR has no debt, retains more than sufficient cash to see itself through to oxide project commissioning, and is to be free carried on Sulphide project development including feasibility assuming Hunan does not renege. Exploration is a key attraction with this year's substantial 35,000m drilling program already having thrown up some interesting results including 10m @ 6.6% copper, 0.46% cobalt, 0.33% nickel, 165g/t silver and 3.8lb/tonne U3O8 at Browns East. We look forward to more of these although the market will understandably likely be more focused on first metal output. Achieving producer status could see the company on attractive earnings multiples from which to leverage the Sulphide and uranium projects.