Australia | Nov 27 2007
By Chris Shaw
Whether or not you believe in the continuation of a commodities “Supercycle” it appears likely prices are going to remain at what are historically elevated levels for some time, so companies that can deliver substantial increases in production in coming years should be able to deliver strong earnings as a result.
One such stock is CBH Resources ((CBH)), which Shaw Stockbroking rates as a Buy given its expectations for output to increase from the 64,000 tonnes achieved in FY07 to around 250,000 tonnes of zinc equivalent over the next four years.
The company’s increased output will be driven by a combination of improvements at existing operations such as Endeavour and new projects such as the zinc and lead Rasp development and the zinc and copper Panorama project.
The Rasp and Panorama assets appear worth fighting over as major shareholder Toho Zinc and the board have been at odds with Toho attempting to gain access to concentrates from both projects and the board appointing two new directors to strengthen its own position in the dispute.
Following a site visit the broker notes development at the Rasp project is on track, with work continuing on establishing a decline towards the Western mineralisation resource, which will provide base feed for processing.
An advantage of the company’s project being located in the Broken Hill region in the broker’s view is mineralisation in the area is typically of high quality, which along with the expected increase in production sets the company up nicely in coming years.
On the broker’s numbers the production increases will flow through into steadily growing earnings, its forecasts calling for net profit after tax to increase from a forecast $67.7 million in FY08 to $84.8 million in FY09 and $101.1 million in FY10.
This would put the stock on a P/E of less than 7x in FY10, which in the broker’s view justifies its price target of $1.00. This is well above the average price target according to the FNArena database of $0.495, with the database showing only Macquarie and ABN Amro covering the stock. Both brokers have not updated their views on the company since the profit result of August, at which time they rated it as Underperform and Hold respectively.
Shares in CBH Resources today are slightly weaker and as at 11.20am were down 0.5c at 59c, which is about the middle of their range over the past 12 months of 38c-80.5c.