Australian Resources Sector Update

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.