Top Gainer: Kagara Zinc (KZL)
Zinc, copper and nickel miner Kagara had been sliding for 18 months before the gains it has seen in recent weeks. At last there has been some good news for investors with the stock has jumping 27% since June 28th on the back of a 121% jump in zinc production for the June quarter on a reduced cash cost of 74 US cents per pound. Perhaps the change in strategy from new MD Geoff Day is starting to bear fruit. The share price continued northwards today, with it grabbing the title of the day’s biggest gainer, jumping 7.9%.
Back in the mining boom days of 2006, Kagara was a favourite with speculative investors as the miner soared from $1.20 in July 2005 to an all-time high of $7.72 in November 2006, a 700% gain in just 16 months. Fast forward two years to 2008 and the stock had nosedived to just 50 cents, and has never recovered.
Despite its recent woes, KZL is known as one of Australia’s lower cost producers of zinc, copper, lead and nickel. Based in Queensland, it has three underground mines, one open pit mine and three processing facilities with copper production of 23,000 tonnes in FY2011. It is targeting zinc production of 100,000 tonnes in FY2012. Production has commenced at its Lounge Lizard Nickel Project in Western Australia where it has a targeted nickel ore production rate of 50,000 tonnes per annum.
It is looking to expand via acquisition as well. Having been unsuccessful with its $14.3 million takeover bid for Copper Strike (CSE) earlier this year, it has now offered to buy CSE’s Einasleigh Copper Project in Queensland for $19 million. According to KZL, the project contains 15 million tonnes of 0.84% copper at Kaiser Bill and 1.1 million tonnes of 2.9% copper at Einsasleigh. Kagara said the planned acquisition would provide ore feed to complement production from its Balcooma operations to the south of Einasleigh.
KZL itself could be a takover target. According to Peter O’Connor resources analyst with Merrill Lynch, mid-tier and third-tier miners with strategically important assets – particularly those whose share prices have recently declined alongside commodity prices – are likely to attract big-end mining stocks that have exceptionally deep pockets. KZL is one such company, with a high internal rate of return.
However with the recent run in the share price, KZL is starting to hit broker’s price targets. Bell Potter had a buy on the stock only just last week when the stock was sitting at 61 cents with a price target of 71 cents. At 68 cents it is just about there. Bell Potter’s report also paints a far from rosy picture. “KZL has reported zinc production of 40.1kt and copper production of 22.5kt for FY11…both were below their targets of 42kt and 23kt respectively which was disappointing,” it says. “However we are starting to see signs that the business improvement activities initiated by new MD Geoff Day are starting to work, with costs decreasing to US$0.74/lb for zinc (from US$0.81/lb) and to US$1.79/lb for copper (from US$1.85/lb).
Southern Cross Equities also had a buy on KZL on May 17th when it was trading at 57 cents with a price target of 68 cents – which was the closing price on Wednesday. Southern Cross refers to MD Geoff Dayemphasising that he wants to grow copper production from 23kt in 2011 to 30kt in 2015 and extend mine life to at least 10 years. “Our valuation for Mt Garnet Copper already includes life of 7 years which assumes further resource growth at Balcooma,” it says. “Extending this to 10 years, which would require further success at Griffiths Hill and Maitland, could add another 5cps to our valuation.” Southern Cross also points to several risks that could affect KZL, from commodity price and exchange rate fluctuations to wet weather and discovery rates. “The Queensland operations have an average four year mine life,” it says. “While the targets to develop new sources are extensive, any delay puts pressure on life extension aspirations.” You can read the full research report here.
Meanwhile Maquarie has the highest 12-month price target at 88 cents, but has only a NEUTRAL rating. “KZL has flagged an increased focus on exploration, with Red Dome copper zone and further nickel upside at Lounge Lizard looking promising,” it wrote.
Based on Thomson Reuters data, two analysts have a buy on the stock, four have a hold, none have a sell.
Chart: Share price over the year to 20/07/2011 versus ASX200 (XJO)
Stock code: KZL
Charts: Kagara Zinc Limited
More news: Kagara Zinc Limited
Investor Centre: Kagara Zinc Limited
Biggest Loser: Ausdrill (ASL)
Despite grabbing the title of the day’s biggest loser with a fall of 2.7% Ausdrill (ASL) – as has been the case with many mining services stocks – has boomed over the past year, rising a whopping 100% for the past 12 months.
As reported earlier this month on TheBull PREMIUM, and in an article “Mining Services Stocks Leveraged to the Mining Boom” in February on TheBull, and in 18 Share Tips on March 21st, brokers and funds have been jumping on board – which can’t have hurt the company’s share price.
On May 17, Invesco became a 5% shareholder of Ausdrill – the Invesco Smaller Companies Fund is overweight in a diverse pool of securities, led by mining services company Ausdrill Ltd (ASL). This appears to have been a good move, as JP Morgan and RBS Australia both initiated coverage of Ausdrill in May with buy ratings. The company is heavily focused on the gold and iron ore mining industries. JP Morgan, which expects a recent equity raising to enable additional capital investment, targeted the company’s share price at $4.17. This brings the consensus target up to $3.99. RBS noted that 65% of the company’s revenues come from customers at the production stage, protecting ASL against price volatility.
“Ausdrill’s business has experienced strong growth in recent years and, assuming continued strength in the resources sector, Ausdrill anticipates a high level of tender activity in the next 12 months,” the company said in April in anticipation of the equity raising. RBS forecasts 13-16% revenue growth across FY12-FY12; JP Morgan expects earnings per share to grow 20% in FY12.
Graeme Carson, Senior Industrial Analyst for Patersons, said that Ausdrill “expected to report a solid interim earnings result later this month following renegotiation of some key contracts previously operated by Brandrill as well as an earlier recommencement of exploration drilling operations in the New Year due to high demand.” Carson added, “The company is well and truly emerging as a dominant force in Australian and African contract mining services and the growth outlook is underpinned by the gold and iron ore-dominated order book.”.
Hamza Habib, Patersons Securities also has a BUY on ASL, pointing out that this diversified mining and services company reported a 71.7 per cent increase in interim 2011 earnings on the previous corresponding period. “Management has increased earnings guidance and expects to provide the market with positive news flow regarding new contract wins moving forward,” says Bigwood. “ASL’s African business exposure has been strengthened by its strategic alliance with Barminco, which is expected to grow the company’s revenue during the next two years.”
Based on Thomson Reuters data this is a favourite with brokers – 100% of analysts have a buy on ASL with a total of eight analysts covering the stock.
Chart: Share price over the year to 20/07/2011 versus ASX200 (XJO)
Stock code: ASL
Charts: Ausdrill Limited
More news: Ausdrill Limited
Investor Centre: Ausdrill Limited
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