Australian Resources Sector Update

Submitted by Jim Thesiger on 28 May, 2008 - 17:37

Here is an update on the Australian Resources Sector provided by Australian market analyst UBS.

Small Cap Resources

The resource sector has continued to outperform the market as a result of strong global demand. In today’s note, Macquarie Research Equities (MRE) reviews some the smaller cap players that have a strong outlook including Kagara Ltd (KZL) and Felix Resources Limited (FLX)

Kagara Ltd (KZL) – Outperform $5.60 Target

KZL remains a quality exposure to high-grade, expandable polymetallic assets, both operating and development. KZL’s revenue split in each of FY08 and FY09 is ~60% copper, ~30% zinc and 10% lead. The stock continues to offer a strong organic growth pipeline combined with significant further development potential and good exploration prospects. Near-term potential catalysts are initial resource statements at Admiral Bay and Lounge Lizard expected by the end of June.

Felix Resources Limited (FLX) – Outperform $17.88 Target

Felix Resources is MREs preferred Australian coal exposure. MRE believe Felix Resources is favourably positioned in the Australian coal sector given its diverse asset base, near-term organic growth and access to infrastructure at Port Waratah, NCIG and Gladstone. While fundamentally solid, MRE also believe FLX has corporate appeal. Although FLX is looking fully priced on a DCF basis, earnings multiples remain attractive combined with the M&A thematic emanating through the coal sector.