The item below is from 'The Bull' of 21 July 2011. Looking pretty good back then. So why have so many things gone so very wrong for them in just 9 months? Let's hope the fixes, (new banking arrangements, Mungana cash, suspending mining, etc), will work. The implementation of the recent strategic review has really started well hasn't it? I've been in KZL for quite a while but I'll admit to being very anxious.
Top Gainer: Kagara Zinc (KZL)
Closing price $0.68 Change +0.05 % change +7.9%
Zinc, copper and nickel miner Kagara had been sliding for 18 months before the gains it has seen in recent weeks. At last there has been some good news for investors with the stock has jumping 27% since June 28th on the back of a 121% jump in zinc production for the June quarter on a reduced cash cost of 74 US cents per pound. Perhaps the change in strategy from new MD Geoff Day is starting to bear fruit. The share price continued northwards today, with it grabbing the title of the day's biggest gainer, jumping 7.9%.
Back in the mining boom days of 2006, Kagara was a favourite with speculative investors as the miner soared from $1.20 in July 2005 to an all-time high of $7.72 in November 2006, a 700% gain in just 16 months. Fast forward two years to 2008 and the stock had nosedived to just 50 cents, and has never recovered.
Despite its recent woes, KZL is known as one of Australia’s lower cost producers of zinc, copper, lead and nickel. Based in Queensland, it has three underground mines, one open pit mine and three processing facilities with copper production of 23,000 tonnes in FY2011. It is targeting zinc production of 100,000 tonnes in FY2012. Production has commenced at its Lounge Lizard Nickel Project in Western Australia where it has a targeted nickel ore production rate of 50,000 tonnes per annum.
It is looking to expand via acquisition as well. Having been unsuccessful with its $14.3 million takeover bid for Copper Strike (CSE) earlier this year, it has now offered to buy CSE's Einasleigh Copper Project in Queensland for $19 million. According to KZL, the project contains 15 million tonnes of 0.84% copper at Kaiser Bill and 1.1 million tonnes of 2.9% copper at Einsasleigh. Kagara said the planned acquisition would provide ore feed to complement production from its Balcooma operations to the south of Einasleigh.
KZL itself could be a takover target. According to Peter O’Connor resources analyst with Merrill Lynch, mid-tier and third-tier miners with strategically important assets - particularly those whose share prices have recently declined alongside commodity prices – are likely to attract big-end mining stocks that have exceptionally deep pockets. KZL is one such company, with a high internal rate of return.
However with the recent run in the share price, KZL is starting to hit broker's price targets. Bell Potter had a buy on the stock only just last week when the stock was sitting at 61 cents with a price target of 71 cents. At 68 cents it is just about there. Bell Potter's report also paints a far from rosy picture. "KZL has reported zinc production of 40.1kt and copper production of 22.5kt for FY11...both were below their targets of 42kt and 23kt respectively which was disappointing," it says. "However we are starting to see signs that the business improvement activities initiated by new MD Geoff Day are starting to work, with costs decreasing to US$0.74/lb for zinc (from US$0.81/lb) and to US$1.79/lb for copper (from US$1.85/lb).
Southern Cross Equities also had a buy on KZL on May 17th when it was trading at 57 cents with a price target of 68 cents - which was the closing price on Wednesday. Southern Cross refers to MD Geoff Dayemphasising that he wants to grow copper production from 23kt in 2011 to 30kt in 2015 and extend mine life to at least 10 years. "Our valuation for Mt Garnet Copper already includes life of 7 years which assumes further resource growth at Balcooma," it says. "Extending this to 10 years, which would require further success at Griffiths Hill and Maitland, could add another 5cps to our valuation." Southern Cross also points to several risks that could affect KZL, from commodity price and exchange rate fluctuations to wet weather and discovery rates. "The Queensland operations have an average four year mine life," it says. "While the targets to develop new sources are extensive, any delay puts pressure on life extension aspirations." You can read the full research report here.
Meanwhile Maquarie has the highest 12-month price target at 88 cents, but has only a NEUTRAL rating. "KZL has flagged an increased focus on exploration, with Red Dome copper zone and further nickel upside at Lounge Lizard looking promising," it wrote.
You can read the full reports from Macquarie, Southern Cross and Bell Potter here.
Based on Thomson Reuters data, two analysts have a buy on the stock, four have a hold, none have a sell.
KZL Price at posting:
11.5¢ Sentiment: Hold Disclosure: Held
