Jabiru Metals Ltd (JML $0.56) Buy�� Price Target:...

Jabiru Metals Ltd (JML $0.56) Buy

�� Price Target: $0.70/sh
�� Reason For Update: Qtrly report
�� What we know:
Record copper production of 3kt and slightly lower zinc production of 5.4kt over the pcp has resulted in headline C1 operating costs of negative US$0.59/lb, down from negative US$0.12/lb in the June?Q. With an average zinc price of US$0.91/lb, JML is one of the world?s lowest cost zinc producers.
Throughput was similar of 94.1kt vs 96.3kt with the copper grade up 20% at 3.67% v 3.03%. Zinc grade was similar at 7.90% (7.98% pcp).

? During the Q JML made a number of positive announcements including;
? Increase in Bentley reserves, mine life now at 8yrs,
? Acquisition of tenements to extend VMS strike extent to 50km,
? Commitment to build a HMS plant at a capital cost of ~ $10m,
? Two stage production expansion to 560kt pa,
? Modest silver hedging to net $14m in upfront payment.
Development of Bentley is progressing on schedule and on budget. Some 533m of underground development was completed at Bentley and the decline now extends 310m from the portal. First Bentley ore is expected in 3rd Q CY?11.
An ?in principle? agreement in relation to Native Title over the Stockman project was reached and the Tribunal has subsequently given its consent to the grant of the Mining
Licence by the Victorian Department.
JML added further currency protection via put/call options and some straight A$ forwards
to protect themselves against the rising A$. It A$ call/US$ put options increased in the 1st H FY?12 from US$5m @ 0.896 to US$11.5m @ 0.907 and it added a further US$8m @ US$0.907 in the 2nd H FY?12. In addition its straight A$ forward contracts total US$11m @ 0.867 spread out over the next two years.

Cash at the end of the Q was $35.8m with some $4.1m in fi nance lease contracts.

�� What we think:
This excellent production result caps off a very strong quarter which has seen JML transformed to a medium- long life, very low cost base metal producer which offers
growth through a 50% plant expansion at Jaguar and longer term through the development of its 100% owned Stockman project.
The headline grabbing C1 cost of negative US$0.59/lb refl ects the strong copper production and price and the slightly lower zinc production as this number is the cash
cost per payable lb of zinc after copper and silver credits.


Bentley development, HMS plant construction, concentrator upgrade and exploration can all be funded from existing reserves and cash fl ow generated from Jaguar. The $14m
silver hedge was a smart move alleviating fears of a possible equity raising and keeping the company debt free. Its hedging policy is conservative, protecting the revenue line but still with enough exposure to spot that the current high prices refl ect its operating
performance.
JML is the only independent ASX listed zinc producer that is not tied up with the Chinese, either at a project or corporate level. It has deliberately done this so its concentrate is free to sell at its discretion.
The Stockman project remains the ?sleeper?. This has potential to be a similar production
size to Jaguar, however, there is little hard information on this asset as JML has spent the last 3 years re-drilling and optimisation the fl ow sheet and production parameters. We hope a scoping study should be available by year end and this will be the catalyst for us to model this as production asset, rather than the nominal $50m value we ascribe to this asset currently.

�� Investment Case:
Our valuation has increased from $0.63/sh to 0.68/sh after this better than expected result, higher Stockman valuation and a modest increase in our copper price assumptions.
JML is in the best shape of its operating life with at least 8 yrs reserves, EBITDA of $55m increasing to $80m over the next two years, cash of $36m and no debt. It is a well managed company that offers both exploration and organic growth and trades on an FY?13 EV/EBITDA of <4x which is too cheap for a company with a minimum of 6-7 yrs
mine life.
Longer term if Stockman is developed an additional $0.20-30/sh of value could be added to JML increasing our price target towards the $1.00/sh level. A catalyst for this could be the delivery of the scoping study by year end.