|
|
|
|
|
 MARKET REPORTS |
|
Analyst report - shares
"Stock of the week": Straits Resources
November 5, 2007
Tim Morris, wise-owl.com analyst
Stock: Straits Resources
Recommendation: BUY
Code: SRL 
In July we profiled Straits Resources (SRL) as a promising yet often overlooked ASX200 growth story. At the time the stock was consolidating near all time highs around the $5 mark. For those who have followed the story, it has certainly been a roller coaster ride over the last few months, with the stock forced lower towards the $3 mark on several occasions before surging to all time highs above $6 in recent trading. Our conviction towards the stock has remained firm despite this volatility as Strait’s growth prospects through its attractive production profile and exciting exploration activities have remained unchanged.
For those unfamiliar with the story, Straits Resources listed on the ASX in 1994, and has become a rapidly expanding copper, coal and gold producer, with mines in Australia and Indonesia. Straits controls and operates the Whim Creek and Tritton Copper operations in Australia, the Mt Muro Gold Mine in Indonesia and the Sebuku Coal mine in Indonesia which is owned by Straits subsidiary Straits Asia Resources and is listed on the Singapore exchange.
The company has literally ‘weathered’ some difficult conditions in recent months, as production at its Sebuku Coal Mine, located on a small island off Indonesia, was heavily impeded by a prolonged and intense wet season where rainfall was more than double the 20 year historical average. 'Force Majeure' was declared in July for one month, whereby Straits contractual production obligations to customers were voided.
This setback was only temporary and the mine is now due to return to full production, however the disruption means that production for the year is now likely to be around 3.5m tonnes, less than the 4.1m tonnes produced last year.
Flat production figures should no longer haunt the Sebuku operations, as capacity at the mine is scheduled to increase from around 4mtpa to 5mtpa in 2008 and 6mtpa in 2009. The Sebuku mine is forecast to produce strong cash flows in the future as its low operating costs and production ramp up allow Straits to capitalise on expected increases in thermal coal prices.
Production at the Tritton Copper Mine, located in central NSW, accounting for roughly 30% of Straits earnings, suffered as the operation was forced to mine through several levels of weak mineralisation in the so called ‘gap zone’ between the upper and lower ore zones.
However mining has now moved through the ‘gap-zone’ into development of the higher grade lower ore body, and any future problems should be offset as other parts of the deposit are developed. One of these, the ‘Larsens / North East’ decline is due to begin production early next year. To make room for the ramp up, Straits is planning to expand the Tritton processing mill by 55% from 900,000tpa to 1.4 mtpa by mid 2008. The company is aiming to almost double copper production at the mine from the 23,000t of copper in concentrate seen in 2006, to 45,000 by 2009.
The Tritton copper mine has also remained under significant pressure during the first half of the year because almost all production was hedged at a copper price of around US$1.00/lb, well below current market or ‘spot’ prices, which sit around US$3.60/lb. To eliminate this burden, Straits recently conducted a $134m placement to reduce their copper hedge commitments at Tritton. Although this does create some shareholder dilution, the move is significant because it allows the company to receive more favourable prices for their product, should copper prices remain high.
In addition to growth from existing production assets, Straits earnings profile should receive a boost as its Hillgrove antimony, gold and tungsten mine in NSW commences metal production this month. When commissioned, the company’s demonstration plant is set to treat 250,000t of ore pa. Hillgrove’s current mine life has been estimated at 10 years.
Other projects in development include the Whim Creek copper mine, located in W.A. Production increase during this period, and progress on the undeveloped, yet promising parts of the land is gaining traction. The Salt Creek deposit already contains a 1.2m tonne indicated and inferred resource, grading 8.3% zinc, 2.8 % Cu and 68 g/tonne silver. A new resource estimate is due in the second half of 2007, which should coincide with the Whim and Salt Creek feasibility studies and development plans due for completion in the 4th quarter of 2007.
Each of these projects discussed are major jewels within Straits large, diversified portfolio of resource projects. Straits other projects are very promising, from the exploration and development perspective, and have the potential to provide a surprise catalyst in what is already a high growth company.
Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses. Click here for your complimentary report.
More articles from this week's CompareShares newsletter:
Fundamentals: Telltale signs to sell that stock
Stocks: Another hot mining prospect
Smart investing: ATO toughens up on SMSFs
Resident Trader: How to profit from volatility - part 3
Stocks: Stock winners and losers from bullish currency
Stock of the week: Straits Resources weathers the storm
CFDs: ASX launches CFD exchange
Expert panel (CFDs): Top Ten CFD stocks for the week
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
 Email to a friend
 Print this article
|
|
