Citi Gives Up On Minara

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            [1] => ((SMY))
            [2] => ((JBM))
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This story features METRICS REAL ESTATE MULTI-STRATEGY FUND.
For more info SHARE ANALYSIS: MRE

By Chris Shaw

Yesterday FNArena pointed out Minara Resources ((MRE)) had again disappointed the market (see “Minara Disappoints Again”) and Citi has wasted little time expressing just how disappointed it was with the company’s quarterly production report, downgrading the stock to Sell from Buy.

There are a number of factors contributing to the broker’s downgrade, not the least the lower production guidance for 2007 offered by management, where it sees downside risk to indicated production of 28,000-30,000 tonnes for the year.

The downside risk comes in part from a required major plant shutdown in coming weeks, which will reduce output while also presenting scope for some difficulties when the company attempts to ramp back up to full output.

The other issue is costs, the broker noting the company’s previous comments the heap leach process would produce the lowest cost nickel in Australia simply won’t be the case.

Given the combination of lower output and higher costs the broker has slashed its earnings forecasts, with its estimate this year cut 27% to $296.8 million, 2008 reduced 25% to $192.5 million and 2009 cut by 22% to $173.1 million.

The lower earnings outlook means the broker’s valuation has fallen 36% to $4.20, while its target price has been cut to $5.30 from $7.00 previously. This compares to an average price target in the FNArena database of $6.81, down from $6.97 prior to the production update.

To date Citi is the only broker to downgrade its recommendation, while Merrill Lynch analysts have retained their Buy rating given they see a positive outlook for nickel prices in coming years and find the prospective dividend yield attractive.

In contrast to Citi, UBS remains optimistic on the potential for the heap leach plant as it points out when (or is that if?) it is fully up and running the company’s production capacity will have doubled. Assuming this is achieved the broker sees scope for the shares to touch $10 at some point in the future.

Macquarie is also somewhat less critical than Citi and points out technical difficulties can always be expected as new projects are ramped up. The broker expects some shorter-term weakness in nickel prices though so it retains its neutral view on the stock.

Overall the FNArena database now shows two Buys, an Accumulate, two Holds and Citi’s Sell rating. Citi suggests those chasing nickel exposure could do better with less complex and more reliable producers such as Sally Malay ((SMY)) and Jubilee Mines ((JBM)), which it rates as Buy and Hold respectively.

Shares in Minara today have shown little reaction to the Citi rating change and at 1.15pm were down 4c at $6.06.

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