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 MARKET REPORTS |
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Analyst report - shares
Wise-owl.com "Stock of the week": Straits Resources Ltd
July 9, 2007
Tim Morris, Wise Owl analyst
Stock: Straits Resources
Code: SRL
Recommendation: BUY
Strong performances by BHP and RIO have occupied much of the spotlight at the big end of town recently, as their stock prices have finally started to surge. However, Straits Resources (SRL), a recent entrant into the ASX 200 index that hasn’t received much attention, also has the potential to deliver strong returns.
SRL is emerging as a real force in the resources industry. Its principal activities involve the production and sale of copper and coal, and exploration. Straits controls and operates the Whim Creek and Tritton Copper operations in Australia, and the Mt Muro Gold Mine and Sebuku Coal mine in Indonesia.
Increasing production numbers combined with favourable hedging contracts commencing in the near future, will result in SRL generating significantly more cash flow. Strong earnings are forecast for 2007, 2008 and 2009.
SRL’s core project, the Sebuku Mine, has been performing well with 834,000 tonnes of coal produced in the March quarter, keeping in line with the 4m tonnes forecast for the full year. Construction is underway at the site to further improve on this number and we should see this take effect in 2008.
This year is going to be a very busy one for Straits with a number of production and exploration activities to come on line. Record production numbers are expected at Sebuku and there will be a ramping up of activities with the new installations and purchase of washplants in the UK. Mining costs are forecast to be lower, so cashflows should improve.
At Salt Creek, an infill drilling programme has commenced, while at the New Central Kalimantan Coal Tenement, field exploration is underway with results expected in the next few months.
Besides the prospect of the company not delivering on its production forecasts, one of the key risks remains its exploration activities, which have the potential to burn a lot of cash and discover nothing. However, such risks are a given throughout the industry, and we remain confident in the company.
The ingredients for a share price rise, increasing cashflow, and news flow to the market, are all present.
The strong Australian dollar may impact SRL’s overall financial performance but with hedging contracts in place, this should be mitigated. The new hedging contracts for SRL’s products are favourable compared to last year’s, and should therefore flow through to this years financial performance.
Wise-owl.com currently has a buy recommendation on Straits Resources Ltd.
For the full report and further wise-owl.com recommendations and strategies, please click here for your free wise-owl.com trial.
Wise-owl.com is one of Australia's leading independent stockmarket research houses. It empowers all levels of investors and traders with education, advice, actionable strategies and risk management techniques. Its investment philosophy is based on a combination of quantitative, fundamental and technical analysis that has been proven over the years to produce very consistent and powerful returns.
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