I have combed through the five year plan and prior reports and all I find is data that suggests that the market is presently throwing away KZL stock at heavily discounted prices due to various other factors that have little to do with the strength of the business.
Consider for a moment that KZL invested 60 million into Lounge Lizard and may reap 100-160 million for the asset sale, should they proceed. What's Lounge Lizard worth? The indicated nickel resource at Lounge Lizard = 793,000t x 2200lb = 1,744,600,000 pounds x 8.94 US$/lb = ?
This plan is a five year plan, not a one week outlook. Factors driving selling appear to be uncertainty over Greece, slower growth in China, downgrades to global growth, downgrades to European & US banks and a fall in commodity prices.
Selling an asset at this time appears at face value as an admission of the business being in trouble and facing financial distress, which couldn't be further from the truth. The sale (if it happens) will consolidate Kagara's position and enable it to move forward on other more profitable business in the future and to achieve expansionary growth (into Asia) albeit it at a faster rate.
Now down to key points of the plan:
Page 14 - Cash costs rose 10-15% on both copper and zinc as a result of FX effects over the first half of 2011 but going forward this has been negated by a 10-11% fall in FX from the July peak in 2011 to current levels. There equates to a gross margin of 28% between zinc costs and a 60% margin for copper based on current market prices as at 22-23 Sep. Hedging may also work in their benefit for the immediate future as they may have locked in slightly higher prices.
Page 16 - Zinc outlook (fine, I agree and spot on) but could have noted that presently stocks have fallen 65,000t or 6.20% from their peak a month ago down to 833,000t with 77,000t of this on backorder implying true inventory levels of 755,000t.
Page 17 - Outlook for copper (I don't understand nor like this chart, too complicated)
Page 18 - Seems to be a stated determination to push ahead with Admiral Bay but no facts as to when or how.
Page 19 - plus next five pages or so, total fluff
However it states 'beyond 2015' - complete assessment of Admiral Bay - Is Admiral Bay really going to be assessed for the next five years?
Page 24 - EBIDTA forecast 2012 = $54-72M - a 10% increase on 2011 and forecast to rise by 265% by 2016.
Page 46-47 - Presents an interesting schematic of how Kagara intends to build a pipeline of 8 mines feeding 4 processing plants.
Page 48-49 - Further details the pipeline of zinc & copper projects around North Queensland. This really completes the picture of why Kagara is selling Lounge Lizard. The opportunity to expand quickly throughout and dominate North Queensland with local infrastructure is strategically very appealing indeed. It also presents a gateway to explore future Asian projects.
Page 51 - We know that NM Rothschild was appointed to manage the process for securing a partner for Admiral Bay. It would appear that they are surprised by the level of interest in the project which looks promising.
Page 101 - 56.6 million cash on hand. CAPEX at 24.0 million but inventory on hand in July was reported at over 20,517t with an invoice value of 21 million. Kagara has also secured a host of other new financing structures such as:
- $16M HP Facility - $32M Performance Bond Facility - $40M Cash Working Capital Facility
OTHER future funding options: - Top up of Bank Facilities - Off-take project financing for new projects - Sale of Non-Core Assets - Lounge Lizard etc - Stockpile Financing, Silver Loans, etc
Page 102 - This page is interesting because had Kagara not incurred impairments charges of 48.5 million, which looked to be a little too conservative at the time, they would have recorded a NPAT of 15.5 million. I'm not sure if I calculated this correctly but that's how it looks. Basically the CEO avoided paying tax on 15 million and recorded a loss instead which has no impact on cash flow or cash at hand. It was a stroke of genius grossly undervalued by the market.
Page 106 - Production. Forecast for zinc up 32% in 2012 (conservative end) and up 200% by 2016. Forecast for copper down 10% (conservative end) but up 76% by 2016.
Page 111 - Excellent reporting timetable for 2011/12
KZL Price at posting:
41.0¢ Sentiment: Buy Disclosure: Held
