CBH Resources 30 Aug 06

A turn-around base metals story

It has been an extremely difficult task to find value amongst the established base metal producing companies, as most have enjoyed tremendous share price appreciation. One stock that has lagged its peers is CBH Resources, due to operational difficulties that arose during late 2005 at its Endeavour zinc mine at Cobar in NSW. These operational matters appear to have been resolved to our satisfaction, providing Members with a unique buying opportunity in our view. The company also boasts an attractive pipeline of new projects that reinforces its attraction.


"The operational issues at Broken Hill have been resolved and we expect CBH to enjoy a rapid market re-rating over the coming months."

CBH has been a strong performer over the past four years. From a low of less than 3 cents in September 2002, the stock has produced a more than 20-fold increase to reach an all-time high of 59 cents in May.

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Such strong gains in any stock are typically punctuated by temporary periods of correction. In the case of CBH, the May to June correction coincided with a wider correction in global commodities. However, as can be seen on the weekly chart, the longer term upward trend remains intact.

Firm gains during August signal a revival of upward momentum for CBH. Today's break above 42 cents further bolsters investor support for the stock, targeting 46.5 cents initially. We believe that a sustained break above here will target a retest of the 59-cent high in the months ahead.

We had a positive meeting last week with Bob Besley, the Managing Director of CBH Resources. The purpose of the meeting was to ascertain the recovery in production from the company's Endeavour zinc mine at Cobar in New South Wales. Given its relative underperformance over the past nine months, we were keen to see if CBH warranted our attention as a recovery situation. We are confident it does.

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CBH boosted production from the Endeavour mine during the June quarter by 66% compared to the previous quarter. The focus was on mine development and re-establishing reliable and consistent production. Zinc concentrate production rose by 55% to 11,900 tonnes during the quarter, while lead concentrate production rose by 104% to 6,950 tonnes. We anticipate full production by December 2006.

Although a mature mine, Endeavour still represents a tremendous growth project for the company. Our meeting with the company revealed that CBH anticipates zinc concentrate production of 125,000 tonnes during 2007, jumping to 160,000 tonnes in 2008 and a stabilized 170,000 tonnes from 2008 onwards.

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CBH and Toho Zinc have agreed on terms for a new zinc concentrate sales agreement for future output from Endeavor from January 2009 onwards. The deal will provide CBH with access to $30m of low cost development capital. Currently, 50,000 tonnes of zinc concentrate annually is committed to Zinifex until the end of 2008, with the balance going to Toho. In consideration for the new agreement, Toho will provide CBH with a $15m loan and $15m of convertible notes, as well as other payments.

Elsewhere in Broken Hill, the company is keen to develop the Rasp Mine. CBH is proceeding with an exploration decline and associated works as part of a feasibility study for an underground mine and on-site processing plant. The Rasp mine comprises a base metals orebody known as the Western Mineralisation, a previously un-mined zinc resource.

Previous work by CRA in the 1980s outlined 6.7 million tonnes grading 6% zinc, 2.3% lead and 32g/t silver that meets JORC Inferred Resource guidelines. The initial plan is to mine the upper 300 metres of the deposit from 100-400 metres vertical depth by way of an open pit.

The company has based the project feasibility study on a 750,000 tpa (tonnes per annum) operation, with most infrastructure already available on site.

Another of CBH's prime development projects is the Sulphur Springs base metals project in Western Australia. It lies within the Pilbara region, 160km south of Port Hedland. The open-pit mine design comprises a resource of 10 million tonnes grading 3.5% zinc, 1.4% copper and 17g/t silver. This would produce 75,000 tonnes of zinc concentrate and 65,000 tonnes of copper concentrate annually.

The company proposes to mine the deposit at a rate of 1.25 million tonnes a year, making it one of the larger base metal operations in Western Australia. The open pit life will be eight years, following which the company plans to mine depth extensions to the resource from underground. We believe metallurgy is good, yielding high metal recoveries.

The overwhelming theme from CBH Resources is of a company keen to not only re-establish lost production from Endeavour, but to significantly expand its production base over time. This is where the Rasp and Sulphur Springs projects come in.

Adding further growth potential was the recent takeover bid announced for Triako Resources. Triako is an existing gold producer with an aging operation at Mineral Hill in NSW, but the real upside comes from the company's emerging Hera gold-zinc-lead deposit, 150km south of CBH's Endeavour mine.

CBH could develop Hera by decline access to an underground operation, with trucking of the ore to the Endeavour mine for treatment. This would provide an additional ore source for Endeavour and low-cost development of the Hera deposit. Hera project has the potential to contribute around 200,000 tonnes per annum of ore to the Endeavor operation, with production potentially occuring as soon as the second half of 2007.

CBH Resources has a very sound balance sheet position, with cash resources of $18.3 million and bank debt of $4.7 million. It maintains no metal of currency hedging, giving it full exposure to metal price upside.

The other primary attraction is its undervalued status compared to its zinc-producing sector peers, as the chart below demonstrates. CBH's share price is clearly lagging its peers, which represents a buying opportunity in our view.

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As well as representing a strong recovery situation, CBH also offers a strong growth story. When we factor in development of both the Rasp and Sulphur Springs mines, CBH's attributable zinc production jumps from 125,000 tonnes of concentrate in 2007 to 220,000 tonnes in 2008, and up to 305,000 tonnes by 2010. This represents an internal growth profile unmatched by any of CBH's existing zinc sector peers.

We anticipate 2006/07 EPS (Earnings Per Share) of 10 cents, increasing to 18 cents in 2007/08. This puts the company on a modest P/E (Price/Earnings) multiple of 4.3x for 2006/07 and 2.4x for 2007/08. We believe this is incredibly low and underlines our value call on CBH.

We are comfortable with CBH Resources from both a short-term recovery situation, as well as a longer-term growth perspective. We recommend the stock as a Buy to all Members around 45.5 cents.

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