Kagara Zinc (KZL) Shares

Submitted by Craig Strzelecki on 6 July, 2007 - 19:16

Kagara Zinc (KZL) suffered a 6% fall on Wednesday after downgrading FY07 profit guidance, and announcing a move to owner-operator status at its Queensland operations. Kagara Zinc (KZL) has a maintained Outperform recommendation and a $8 share price target from Australian Stock Exchange analyst Macquarie Research Equities. The company, despite a 12% fall in recent weeks, still remains the analysts' top pick in the small cap copper/zinc sector. While the stock has recovered 5% yesterday, the company shares still remain almost 25% below the analysts' target. With the outlook for copper and zinc still remaining bullish, they view this as an excellent trading opportunity. Trailing earnings downgrade: FY07 profit before tax guidance was revised down to $130m (from $175m). This was partially anticipated following Kagara Zinc recently announced wet weather issues and June quarter average metal/A$ prices. The downgrade was attributed as follows: lower than budgeted zinc ($10m) and copper ($20m) production, higher A$ ($5m) and lower copper/zinc prices ($10m). The previously undisclosed factor also driving lower production was delays in accessing high-grade ore from the Balcooma pits.

Owner-operator status: The delay in accessing high-grade Balcooma ore was caused by poor material movement rates by Kagara Zinc (KZL). Given the stated contractor underperformance, Kagara Zinc has moved to assume responsibility for open pit mining activities at both Balcooma and Mt Garnet. Employees of the local private contractor have transferred to Kagara Zinc and mining equipment leases have also been assumed (except at Balcooma where equipment is now being supplied on a dry hire basis by EMECO). The total cost of this restructuring should be around $5m, including the assumption of equipment lease liabilities. Analysts would highlight that the previous operating model sat somewhere between pure contracting and owner-operator. Strong outlook: A full contribution from Thalanga and the development of the Mungana project should deliver strong production growth over the next three years. The analysts highlight that their forecasts remain slightly behind KZL's operational guidance. The key risk to this profile remains the timing of the Mungana project, which is predominantly related to EPA approval. A requirement for a full Environmental Impact Statement (EIS) would likely push back first production around six months to mid-2009. Reinforcing the view: Recent drilling results at Red Dome affirm our longstanding belief that KZL will continue to progressively add significant value through targeted and development-oriented drilling programs. The downgrade is disappointing and highlights the need for a renewed operational focus (which does appear to be occurring). However, in the analysts' view it fails to materially dent the bigger Kagara Zinc (KZL) picture. The stock is the analysts' preferred small copper/zinc play (Oxiana is at the big end) given the quality exposure offered to polymetallic assets (operating and development). Pricey short-term multiples must be weighed against a strong organic growth pipeline, and significant further development potential and exploration prospectivity.

Kagara Zinc Limited is listed on the Australian Stock Exchange (ASX) under stock code KZL. The company was a winner of the week in April. You can view their investor website here. KZL was listed on the ASX on 22 December, 1999. Kim Robinson is the Chairman for Kagara Zinc and the Directors are John Linley and Joseph A Treacy. Kagara Zinc is involved in zinc exploration and mining; the company had acquired and developed a package of zinc sulphide deposits in the Mt Garnet-Chillagoe area in North Queensland. Find out the meaning of the recommendations in this primer. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade KZL. Browse for Australian stockbroker recommendations. Check your charts and good luck with your share trading!

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