Pressure Building On Minara

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This story features METRICS REAL ESTATE MULTI-STRATEGY FUND.
For more info SHARE ANALYSIS: MRE

By Chris Shaw

The fact nickel producer Minara Resources ((MRE)) reported a weak first half result was no great surprise as the market had anticipated such an outome given rising sulphur and gas prices and higher labour costs, but even so the result was worse than most in the market had forecast.

Earnings of $50.9 million were well below the $126 million forecast of Merrill Lynch, while post the result Macquarie cut its full year estimate by almost 30%. The issue now is earnings going forward, as with sulphur prices at risk of making the group’s operations uneconomic Deutsche Bank sees significant downside risk in the stock.

This is in part because the increase in costs has forced the company to defer the Heap Leach Stage 2 project at Murrin Murrin, which pushes down the broker’s valuation on the stock to $2.33 from $2.71. But the broker also points out at sulphur prices of around US$800 per tonne the company’s operations don’t make money and in its view sulphur prices could stay at around these levels into 2010.

This means there is significant downside risk to earnings in the broker’s view so while it is forecasting earnings per share (EPS) of 12c this year, 11c in 2009 and 12c in 2010 it has little confidence in its forecasts, particularly as at present its numbers factor in very low earnings in the second half of this year. UBS has similarly reviewed its earnings outlook and cut forecasts to reflect the triple issues of lower production, lower prices and higher costs.

Its earnings per share estimates now stand at 12c this year and 8c in 2009, which is well below previous market consensus numbers of more than 30c in both years. The FNArena database shows forecasts in the market are in the process of being revised down as it shows consensus numbers now of 25.2c and 20.4c respectively. (Compare that with the numbers we just cited).

The other issue for UBS is even though the company has deferred the Stage 2 project it will still require additional funding for it sometime in 2009 or 2010, or even by the end of this year if nickel prices don’t recover in the shorter-term. In its view the company’s financing options are limited as a capital raising is unlikely to be well received in the current market,  so a bank facility or a convertable note are possibilities for management to consider.

Brokers have started to factor in the deferral of the Stage 2 expansion valuations and therefore price targets for the stock have come down, with UBS today halving its target to $1.85 from $3.70 and Deutsche Bank cutting its target to $1.40 from $2.50. This leaves the average price target according to the FNArena database at $2.84, against $3.33 prior to the half-yearly result. (But not everyone has updated yet).

UBS is the only one to change its rating, downgrading the stock to Neutral from Buy, but it had been the only Buy on the stock in the market. The database now shows three Holds and four Sell recommendations.

Shares in Minara today are weaker despite a strong overall market and as at 10.55am the stock was 9.5c or 6% lower at $1.55, which compares to a trading range over the past year of $1.43 to $7.26.

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