Stock Resource - Minara Resources

MRE
MARKET CAP
$840m

Minara Resources 14 Jul, 2010

Major Capital Return

MRE; Hold around $0.715

Minara has recorded a weak June quarter production result, with operations disrupted by a pipeline failure as noted in our most recent update. Despite this, full year production forecasts remain within the guidance range and the company is proposing a major distribution of capital due to its very strong cash generation.

At the same time the near term outlook for nickel prices has softened following the likely resolution of long term strikes at Vale’s North American nickel operations.

“Despite periodic operational challenges Murrin Murrin continues to generate strong cashflow – and Minara shareholders are being rewarded with a significant capital return.”

Recapping, Minara is a leading Australian nickel producer, and one of the top ten in the world. Its operational activities centre on the Murrin Murrin nickel joint venture project (60% Minara, 40% Glencore International AG). It essentially represents a pure nickel play, with its share price performance closely aligned to nickel price movements, as well as periodic production surprises (positive or negative).

During the June quarter Murrin Murrin achieved production of 6,680 tonnes of packaged nickel and 459 tonnes of packaged cobalt. As noted previously production was impacted by the pipeline failure in one of the four ore-leach autoclave circuits on 25 May 2010. Rectification actions have been implemented to address the cause of the failure.

The trend in quarterly production performance is illustrated below:

MREquarterly14Jul10

Despite the recent disruption and a triennial major plant shut planned for late 2010, the company’s production guidance for the full year remains unchanged – albeit at the lower end of the 30,000 – 34,000 tonnes of nickel range. The annual production trend is illustrated below:

MREannual14Jul10

During June commissioning of the $90m high density slurry (HDS) project also commenced. This project is designed to debottleneck the neutralisation circuit which in turn will enable an increase in ore-leach autoclave throughput.

Nickel Market
Nickel prices have softened during the past few months, despite falling stock levels on the LME, in keeping with broader commodity and equity markets – driven by lingering concerns over the potential for disruption to the global economic recovery.

MREnickel14Jul10 Source: LME, RBA, SR

While the nickel market has been in significant deficit during the first half of 2010, this appears likely to change during the second half. While there are risks that near term nickel demand is softening, a far bigger issue is an expansion of nickel supply.

Most notably, a vote will be taken in the next few days that should end a year long strike at Vale’s Sudbury and Port Colborne nickel operations – with the unions and Vale having already signed a tentative deal. In turn, this could pave the way for resolution of a similar strike at Voisey’s Bay.

Collectively, these operations can produce in excess of 100,000tpa of nickel supply, equivalent to around 8% of world supply, and the disruption has been a major supportive factor for nickel prices during the past year.

Proposed Capital Return
Murrin Murrin continues to generate strong free cashflow, with Minara having cash of $363m at 30 June and no debt.

This has prompted the company to announce that they will propose to shareholders a return of capital of 9.5 cents per share, which will result in a total of $111m being returned to shareholders.

The company notes that “The Australian Taxation Office has issued a Class Ruling in favour of Minara shareholders that no part of the 9.5 cents per share returned to shareholders will be deemed a taxable dividend. As previously announced, the return of capital will reduce the capital gains tax cost base of the shares held in Minara. However, shareholders should obtain independent tax advice to obtain certainty in relation to the tax effect of the return of capital.”

An extraordinary general meeting of shareholders of Minara will be held on Tuesday, 17 August 2010, at which a resolution will be put to shareholders to approve the return of capital.

The record date for determining the Minara shareholders entitled to participate in the return of capital will be Wednesday, 25 August 2010. If approved, the return of capital is expected to be paid to shareholders on Monday, 6 September 2010.

Discussion & Recommendation
Minara remains on track to achieve production within the full year guidance range, despite the impact of the recent operational disruption. It has also been a winner in the revision to the proposed mining tax changes, incurring no additional tax impost under the latest revisions (which now only impact iron ore and coal producers, plus the energy sector).

Equally importantly, Murrin Murrin continues to generate very strong cash flow around current nickel prices. This is enabling Minara to reward shareholders with a significant capital return.

Offsetting this positive news is the risk that the nickel market will move into surplus in the coming months, at least temporarily, creating downside risk on pricing.

Minara is trading around ‘fair value’ based on current earnings expectations and hence, Stock Resource recommends Minara Resources as a Hold around 71.5 cents.

The Chartist’s Perspective

History repeating

mre14Jul10

The share price history form the early 1990s resembles a roller coaster ride with the drop to 18c in late 2008 the turning point for the current ride higher. Reaching resistance at $1.39 in mid 2009, the price paused in a similar fashion to the 2004-5 experience, when it oscillated back to support before resuming its upswing.

The phase is still influencing the price which may continue to churn around 65-75c area with broader parameters lying at 60c and 90c – which provide important trigger points going forward. When the upswing resumes on a break above 90c the stock would gain the potential to head towards higher barriers at $1.30 and $1.50 and potentially towards $2.10.

The danger to this scenario would be a drop below 55c.

‘The Chartist’s Perspective’ has been independently derived by Regina Meani from charting and technical assessment, and has not taken into account fundamental analysis of the company.

Disclaimer

Breakaway Investment Group Pty Ltd, and its authorised representative Stock Resource, have made every effort to ensure the reliability of the views and recommendations expressed in this report. Our research is based upon information known to us or which was obtained from sources which we believed to be reliable and accurate at time of publication.

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As at the date at the top of this page, Directors and/or associates of Breakaway Investment Group Pty Ltd currently hold positions in Adelaide Brighton (ABC), Beach Energy (BPT), Commonwealth Bank (CBA), Cooper Energy (COE), Cue Energy (CUE), Energy Metals (EME), Icon Resources (III), Integra Mining (IGR), Far Limited (FAR), KUTh Energy (KEN), Namoi Cotton (NAM), National Australia Bank (NAB), Northern Iron (NFE), Otto Energy (OEL), PanAust (PNA), Pluton (PLV), Regional Express (REX), Sipa Resources (SRI), Tiger Resources (TGS), Westpac (WBC) and Zicom Group Limited (ZGL). These may change without notice and should not be taken as recommendations.

Reference within the Stock Resource Report to the “Stock Resource Portfolio” is a reference to the hypothetical portfolio on the “Past Predictions” page, which includes details on the methodology used to derive the performance figures.