Kagara Still A Key Mid-Cap Resource Pick

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By Chris Shaw

Kagara Zinc ((KZL)) has for some time been rated very highly by those brokers who cover the stock, as evidenced by the FNArena database showing a perfect five-for-five in terms of Buy ratings.

This has not changed after a December quarter production report that showed production meeting expectations but a shortfall in earnings on the back of a lower contribution from the company’s zinc operations.

The issue for Macquarie was lower realised prices for the company’s output, meaning the earnings outlook for the group is actually lower than the market had been anticipating.

ABN Amro agrees and like Macquarie has cut its earnings forecasts for the company, the broker taking around 35% from its estimates for the current year on the back of lower grades at the zinc operations.

This leaves ABN Amro forecasting earnings per share (EPS) of 41.2c for FY08, rising to 43.3c in FY09. In contrast Macquarie is forecasting 40.3c in FY08 and 46.8c in FY09, while UBS expects 40c this year after cutting its estimates by around 8%.

The broker is far more optimistic on the FY09 outlook and expects EPS next year of 66c, reflecting its expectation of significant increases in copper and zinc production in coming years as production from projects such as Admiral Bay, Red Dome and Waterloo comes on-stream.

ABN Amro also likes the longer-term outlook and suggests the current market uncertainty has overstated negative sentiment towards base metals. While this trend may persist for some time the broker still has the stock as its preferred mid-cap metals pick, particularly as the longer-term outlook is improving as the company continues to deliver good exploration results.

The broker has cut its target price to $6.05 from $7.02 to reflect the impact of the lower metal prices being achieved on earnings, which contributes to the fall in the average price target according to the FNArena database to $5.95 from $7.13 prior to the quarterly report.

Shares in Kagara are slightly higher today and as at 12.20pm were up 8c at $3.70.

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