We maintain our Buy rating with a view that the transformation of KZL is now underway. With production guidance in place, the focus now turns to exploration and growing reserves to underpin the new production outlook. The sale of Lounge Lizard is a near-term catalyst and assists with development funding.
KZL has reported another strong operational performance in the September quarter with 17.8kt Zn, up 13% q-o-q and 5% higher than UBSe. Cash costs of US¢72/lb are 3% lower q-o-q, although are 7% above UBSe. Copper production of 5.74kt is 4% above our forecasts and 3% lower q-o-q. Both zinc and copper production fall at the upper end of the recently issued quarterly production guidance range. Zinc cash costs are within the annual target range of US¢72-75/lb, however copper cash costs remain above the upper end of the FY12 target range of US¢155-161/lb.
Nickel production of 516t was 8% higher than our forecasts and a 64% improvement q-o-q. Stockpiles of concentrate on site remain at elevated levels, increasing from 20.6kt at end June quarter to 31.1kt as of the end of the September quarter. Based on prices as of 30 September, the value of these stocks is A$35m. With the recent signing of a 2 year trucking contract, the Company plan on reducing concentrate stockpiles to 5-10kt by end CY11.
With the start of a positive production trend identified in Q3 FY11, KZL have now delivered two consecutive quarters of better-than-expected Zn output and reducing cash costs. Based on quarterly guidance, both Zn and Cu production are expected to decrease from current levels through the rest of FY12.
Exploration and resource definition drilling fell below budget with 26,000m drilled, 13,000m short of plan. With an ongoing focus on resource and reserve growth to justify production expansions (see below), we would like to see these lost metres made up over the coming periods.
Investment thesis
With good disclosure now provided in the 5 year strategy and improved production performance evident over the last 2-3 quarters, we are recognising the positive impact new management are having on operational performance, establishing a basis for future growth and re-engaging with the investment community. However, the Company’s current reserve base does not support growth ambitions and the focus is now on exploration to delineate and prove-up sufficient mineral inventory to underpin longer term production plans. We consider the exploration potential of KZL’s North QLD tenements to be very good and are encouraged by the large exploration budget over the next two years. Resource/reserve growth over this period will encourage us to consider increasing mine/asset life toward Company targets. The sale of Lounge Lizard could be a near-term catalyst and alleviate potential funding issues.
KZL Price at posting:
43.0¢ Sentiment: LT Buy Disclosure: Held
