trading on a pe of 4, page-2

Big Production Downgrades At Perilya
FN Arena News - December 21 2007

By Greg Peel


Prior to this morning, Broken Hill miner Perilya (PEM) boasted a healthy 4/1/0 B/H/S ratio from the five brokers in the FNArena database covering the stock. Only UBS had decided upon Neutral based on the analyst's short term forecast of a continuing pullback in zinc and lead prices. But UBS still agreed, as the other brokers did, that the Perilya share price represented good value against the sheer potential of the company's large resource areas.


Perilya operates, among other projects, the now iconic zinc-lead-silver mine in Broken Hill - the mine that gave rise to a company by the name of the Broken Hill Proprietary, now BHP Billiton ((BHP)). As this is a mature operation it presents the company with various challenges, and 2007 has proved disappointing as many of the challenges have already led to production downgrades. But this time the downgrade has been rather devastating.


The Southern Cross area of the company's operation has been disrupted by localised seismic events. Underground rumblings are the great fear of any miner, and as we learnt from the Beaconsfield experience they can be disastrous. What has never been truly established from Beaconsfield is whether Mother Nature was at work when the mine collapsed, or whether it was the mining operations themselves that set off seismic movements.


Suffice to say, Perilya has been forced to alter its sequence of mining operations, despite no actual damage being done to date. This has meant a switch back to the safety of mining lower grade material. It has also meant big production cuts. First half zinc production is now forecast to be 26kt instead of 30kt and zinc production 42kt instead of 50kt. The cuts will likely also extend into the second half.


A very disappointed Macquarie Bank - long-time champion of the stock - has cut its FY08 earnings forecast by 63% and FY09 by 39%. The analysts now expect a $4m loss in the first half.


Macquarie also points out that there is a risk its current zinc price forecast is too high. The analysts are working off a second half average price of US$1.55t when spot is currently US$1.05t. Adjusting to spot would shave another 14cps off the second half EPS forecast. Adjusted full-year EPS currently is forecast at 21.1cps.


Macquarie has taken its target down from $4.90 to $3.60. The analysts have, nevertheless, maintained an Outperform rating, based on Perilya's "sheer size and margin leverage". They are looking ahead to development of the company's other promising zinc projects at Potosi and Flinders. At the current price level ($3.00 close yesterday, fallen to $2.66 this morning) there is still value on offer, says Macquarie.


Macquarie was the only broker to report on Perilya this morning, so the ratio stands at 4/1/0. The average target is $4.27, ranging between UBS at $3.35 and Credit Suisse at $5.00. CS last reported on November 28.

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