CBH - CBH Resources

[Miner]

Can not believe it.
How come a technical analysis between two brokers so different ?
Huntleys recommend CBH as BUY.

THe analysis is appended

Weak 1H08 the bottom?
Recommendation: Buy 22/02/2008



Note: Marker indicates price of $0.42 at publication date.

Investment Rating
CBH owns the Endeavor zinc/lead mine near Cobar in NSW with annual capacity of 65kt of zinc and 35kt of lead in concentrates. Reserves support over 15 years, with potential for life extensions. The Panorama opencut in WA is set to start in FY10 with 20ktpa of copper and 50ktpa of zinc for at least seven years. Output of 30ktpa of zinc and 25ktpa of lead is expected from the Rasp mine in Broken Hill from mid 2008. Management aims to mould CBH into a mid tier miner via acquisitions and organic growth. The balance sheet is sound with about $160m net cash - excluding $200m of convertible notes, likely to convert. CBH is a relatively high cost, single mine producer. An understanding of commodity price and mining risk is needed.


Result Description
Adjusted 1H08 NPAT fell significantly from $21.1m in 1H07 to $4.4m primarily due to lower realised zinc prices. The headline result of $8.5m included $4.1m of unrealised foreign exchange and hedge gains. The pcp had no such one off items.


Sales revenue slumped 36% to $91.0m mainly due to reduced zinc prices. Zinc and lead output was slightly below the pcp.


EBITDA was sliced 68% to $11.8m with the margin halving to a less than impressive 12.9%.


EBIT similarly fell 81% to $6.1m on a thin margin of 6.7%.

Net operating cashflow was fair, up 59% to $18.5m but thanks only to beneficial working capital movements of $11.8m.


The balance sheet is sound with modest net debt of $39.6m. Of the debt, $199m is a convertible note likely to be exercised.


CBH expects improvement in 2H08 with the majority of Endeavor ore to come from the higher grade middle of the mine. Ore in 1H08 was primarily sourced from the lower grade bottom of the mine, which is also more expensive per tonne.


CBH is in talks with Perilya regarding a potential merger.


Impact
The result missed our $9.6m forecast with 2Q08 production poorer than expected. With margins thin, profit is highly sensitive to small moves in prices, costs and sales volumes. Encouragingly, costs were as expected. CBH is placed to benefit from higher volumes and possible stronger prices.


We lower our FY08 NPAT forecast 26% to $21.1m due to the disappointing 1H08. Our FY09 NPAT forecast is little changed at $57.1m based on US$1.30/lb zinc and A$/US$ FX of 0.93.

Our valuation remains 74c a share. Long term assumptions of 0.90/lb zinc, US$0.70/lb lead, US$2.00/lb copper, A$/US$ FX of 0.80 and a 10% discount rate are unchanged.


Recommendation Impact (Last Updated: 22/02/2008)
While disappointing, the profit result should prove the nadir for CBH, provided commodity prices don’t fall out of bed, a scenario we’re not predicting. A Perilya merger would unlock significant value for both PEM and CBH. It’s potentially a strongly positive development. Price data based on previous close.
Previous Close Market Cap
$0.42 $350 (million)
52 Week High/Low
$0.68 - $0.32
Sector
Materials


Intrinsic Valuation
$0.74
Note
US$0.90/lb zinc, US$0.70/lb lead, 10% discount rate


Moat Rating None
Risk High
Company Beta 1.12
Sector Beta 1.22


Year 6/06A 6/07A 6/08E 6/09E
NPAT ($m) -15.30 38.70 21.10 57.10
EPS (c) -2.80 4.70 2.40 6.50
% Change -300.00 -- -48.90 170.80
DPS (c) 0.00 0.00 0.00 1.00
Franking (%) -- -- 0.00 0.00
Dividend Yield (%) 0.00 0.00 0.00 2.40
PER 0.00 12.00 17.30 6.40

Source: Aspect Huntley analyst estimates
2 Year Price Chart






--------------------------------------------------------------------------------
Event Analysis

1H08 Result 1H07 1H08 % Chg
Production
Zinc in Conc (kt) 27.3 24.0 -3.6
Lead in Conc (kt) 15.1 11.3 -1.7
Silver in Conc (koz) 295.1 479.0 +81.7
Financials
Sales ($m) 142.8 91.0 -36.3
EBITDA ($m) 36.9 11.8 -68.1
EBIT ($m) 32.2 6.1 -81.0
Pre-Tax Profit ($m) 31.5 4.2 -86.8
Adjusted NPAT ($m) 21.1 4.4 -79.1
Headline NPAT ($m) 21.1 8.5 -59.8
Adjusted EPS (c) 2.7 0.5 -81.2
Operating CF ($m) 11.6 18.5 +59.3
Net Debt ($m) -26.9 39.6 n/a
EBITDA Margin (%) 25.8% 12.9% -50.0
EBIT Margin (%) 22.5% 6.7% -70.2

 

[GREENS]

I was reading in the Fin Review yesterday that perilya (PEM) is looking to make a moderate sized acquisition in the next 6-12 months. I threw out the article yesterday so can not exactly quote it now. If anyone else has the article would they mind posting up a quote? In short, they mentioned a few companies including JML, CUO and CBH.

CBH is the most obvious candidate given the synergies an acquisition could create; they both have significant operations, development and exploration in West NSW, such as Broken Hill and the Cobar Basin. Furthermore CBH has long life mines in this Western NSW area, a massive low cost/high grade Cu-Zn open pit in WA scheduled to come on line in 2009 and plenty of projects around Australia currently under evaluation.

Nevertheless, you would think that CBH would have to be up the top of their shopping list. The only problem that I can see that would stop PEM choosing CBH over other candidates is the fact that Toho Zinc has a 25% stake in the company and could potentially block or make it difficult to acquire the company.

Was only about a matter of time before these two companies came to an agreement and decided to merge their operations. Both are relatively high cost producers, producing at or very close to their marginal cost of production and are thus facing very challenging times at the moment i.e. thinning margins. If the zinc price falls further then these two companies won’t be able to make a profit standing alone. PEM’s share price has been mostly in freefall for the past year (and for good reason) whilst CBH has held up only slightly better. As stated previously there are plenty of efficiencies and synergies that a combined company could achieve given the close proximity of their current operations, development and exploration holdings in the western NSW region of Cobar and Broken Hill.
The announcement:

•Trading Holt for CBH and PEM as they continue in depth talks about a tie up.
•News of the results will be released prior to market open Wed 26th March

http://www.asx.com.au/asxpdf/20080320/pdf/31853rh8rs6805.pdf


PEM recent half year results – Cash flow after operating activities was -$8.8m. Cash flows after investment activities was a whopping -$35.3m, not a very sustainable situation to be in. Luckily for the company they have a bundle of cash to live off for the moment (i.e. $110m).

CBH on the other hand needs as much cash as it can get its hand on at the moment with the current developments of Sulphur springs and broken hill as well as the expansion of the endeavour mine. CBH on the financial side came out much better than Perilya with a positive cash flow from operations of $18.52m, but because of significant expenditures back into the company’s growth projects, cash flow after investment activities was -$60m. The question here is whether this type of investment outlay which will continue into subsequent quarters will be worth it in the long run i.e. as a result of significant increases in production over the coming 6-18months.

After the initial announcement of a merger, Perilya shares went down and CBH got a healthy boost. Hopefully the same happens again, but not sure really why this happened, as it seems to be PEM that is getting a lot of the benefits, unless analysts believe that Perilya’s assets are actually quite attractive yet poorly managed at the moment.

Disclaimer: Hold an extremely small parcel of CBH.

 

[Freeballinginawetsuit]

Was only about a matter of time before these two companies came to an agreement and decided to merge their operations. Both are relatively high cost producers, producing at or very close to their marginal cost of production and are thus facing very challenging times at the moment i.e. thinning margins. If the zinc price falls further then these two companies won’t be able to make a profit standing alone. PEM’s share price has been mostly in freefall for the past year (and for good reason) whilst CBH has held up only slightly better. As stated previously there are plenty of efficiencies and synergies that a combined company could achieve given the close proximity of their current operations, development and exploration holdings in the western NSW region of Cobar and Broken Hill.
The announcement:

Disclaimer: Hold an extremely small parcel of CBH.

Hi Greens,

I think you will find the PEM/CBH script merger will be on a VWAP over a sustained period, quite a long one otherwise this one wouldn't have passed 1st base.

 

[GREENS]

Hi Greens,

I think you will find the PEM/CBH script merger will be on a VWAP over a sustained period, quite a long one otherwise this one wouldn't have passed 1st base.

Hey FBIAW

Just trying to understand where you’re coming from. You don’t view the scrip offer being based on the value at which the shares last traded (PEM -$1 And CBH $0.34) implying that 1 Perilya share would be offered for approx every 3 CBH shares held. i.e. a 1-for-3 scrip offer. Instead you believe it will be based on a WAP of both companies over a certain time frame say the last 3-6 months or even more?

I got the following figures if you based it on the closing share price of each company over a 3 and 6 month period.

3-month: 1-for-4.39
6-month: 1-for-5.35

It is quite obvious that Perilya’s share price and in turn its market capitalisation has diminished significantly over the past year. If Perilya had merged with CBH this time a year ago according to the SMH the scrip ratio would have been 7.5-for-1. So you believe that it will thus be based on a much longer time frame, otherwise talks would not have passed first base? Think I could have misunderstood what you were saying FBIAW, please fill me in if this is the case.


On a totally different note, as a CBH shareholder, I personally think Perilya shareholders are getting a pretty good deal when it comes to a 1-for-3 offer. Having looked at Perilya’s financials, operating costs/lb and growth outlook, really there isn’t much value in the company and it thoroughly deserves to be trading where it is at the moment. (Refer to the many arguments I have posted in the PEM thread).

The only short to medium term upside I can see in terms of CBH merging with Perilya is:

•Perilya’s cash to fund the development at SS and broken hill.
•Access to feed more ore from the currently producing endeavour and near producing broken hill mine through the underutilized mill of PEM at broken hill. Again whether CBH can even mine enough ore to put this underutilised capacity to good use is another question all together. CBH ore throughputs have only just begun to reach near full capacity at Cobar.
•Perilya’s Mount Oxide Copper project looks quite attractive at these early stages, but is only in its infancy and is not expected to be in production for a number of years.

The only hope I have for the merged entity is if CBH can turn production and milling at Perilya’s broken hill mine around or get there other higher grade development assets in near proximity into production ASAP, because at a cash cost of “$US0.93/lb for zinc” (from the latest half year reported), this may have to be shutdown or put on care and maintenance if zinc prices fall much further from their current levels.

Just confirming I don’t even hold CBH in high regards, so this is not just a go at Perilya shareholders, the benefits of a merger are there for both companies; however in my view they are clearly more with PEM holders. A 3-for-1 scrip offer would be an excellent outcome for Perilya, as they get exposure to some significant and relatively high quality near term producing assets. On the other hand the good news for CBH holders is that they gain a wad of cash which will come in very handy when developing the SS deposit. The rest of the upside to CBH from Perilya’s assets is highly risky. If they get their broken hill assets producing at the lower end of the cost curve it will boost the combined company. If not it will be a significant drag on earnings.

 

[Freeballinginawetsuit]

Hey FBIAW

Just trying to understand where you’re coming from. You don’t view the scrip offer being based on the value at which the shares last traded (PEM -$1 And CBH $0.34) implying that 1 Perilya share would be offered for approx every 3 CBH shares held. i.e. a 1-for-3 scrip offer. Instead you believe it will be based on a WAP of both companies over a certain time frame say the last 3-6 months or even more?

I got the following figures if you based it on the closing share price of each company over a 3 and 6 month period.

3-month: 1-for-4.39
6-month: 1-for-5.35

Hi Greens,

Not going to get into back of the envelope fundamentals.

IMO and as per previous post I'd be leaning towards a VWAP over the last few months as a minimum in any potential script merge.

We will know soon enough anyway!.


Cheers.

 

[GREENS]

Hi Greens,

Not going to get into back of the envelope fundamentals.

IMO and as per previous post I'd be leaning towards a VWAP over the last few months as a minimum in any potential script merge.

We will know soon enough anyway!.


Cheers.

Cheers for the thoughts. I’d just assumed it would have been based on the price the companies last traded before the trading holt similar to what OXR and ZFX did. But definitely see where you’re coming from and think it is a real possibility. I think if they did do a VWAP though, it would only be based on the past 3-6 months, I couldn’t see them going back further than that. I'm hoping from my view point as a CBH holder this is not the case and it is based on my first assumption. As you said, all will be revealed very shortly. Are you a PEM or CBH holder? If so any thoughts on the merged entity?

 

[UMike]

SO who is getting the best deal here?????

Extract of the meger Ann:

Under the terms of the Proposed Merger, CBH shareholders will receive:

• 1 Perilya ordinary share for every 3 CBH shares;
• 1 Perilya option for every 20 CBH shares; and
• Shares in Kimberley Metals, expected to be approximately 1 Kimberley Metals share for each 9.2 CBH shares.

 

[Freeballinginawetsuit]

Cheers for the thoughts. I’d just assumed it would have been based on the price the companies last traded before the trading holt similar to what OXR and ZFX did. But definitely see where you’re coming from and think it is a real possibility. I think if they did do a VWAP though, it would only be based on the past 3-6 months, I couldn’t see them going back further than that. I'm hoping from my view point as a CBH holder this is not the case and it is based on my first assumption. As you said, all will be revealed very shortly. Are you a PEM or CBH holder? If so any thoughts on the merged entity?

Hi Greens,

Soz for the late reply but went to Fiji over easter.................and stayed a bit longer. Its a beaut place to go if you ever get the chance.


Well it seems like you were on the money for a 1:3 script.

Yep I hold some PEM from a carry over trade in Feb, and quite a wack more from a few entries in the days before the trading halt.

 

[GREENS]

Hi Greens,

Soz for the late reply but went to Fiji over easter.................and stayed a bit longer. Its a beaut place to go if you ever get the chance.


Well it seems like you were on the money for a 1:3 script.

Yep I hold some PEM from a carry over trade in Feb, and quite a wack more from a few entries in the days before the trading halt.

I am quite relieved that the offer wasn’t based on VWAP for the past few months. I wouldn’t have been happy with the proposed merger otherwise. After having a look over the merger report it looks like there are some real synergies to be had in the broken hill region. My view of the combined company has softened a bit, looks like both companies can gain considerably. Just a few off the top of my head.

• Perilya should regain full capacity at its mill in Broken Hill from additional feed from CML-7 and maybe Endeavor, meaning that their costs of production will fall significantly and profit margins will become more attractive.
• Should see cash costs at broken hill move back down towards the $0.60/lb level from their current levels of >$0.90/lb
• CBH will not have to spend significant amounts of capital on infrastructure (eg. new mill at CML-7) and access to Perilya’s supply terms.
• Rationalisation of mine management and workforce
• Strong Balance sheet to move the Panorama projects (Sulpher Springs and Kangaroo Caves) and Mount Oxide into production as quick as possible.

Also being a Perilya shareholder you may be able to answer this question regarding the flinders project. Is this just a mining operation of high grade ore from relatively small deposits? Therefore they have only very short mine life, for example Beltana was an open pit mine where mining was conducted over a 12 month time frame and concluded in Feb 2008.

By the way Fiji sounds nice! Your shout

 

[Fed23]

I got a question. If I buy shares in CBH now will I get the options outlined in todays announcement?

-One perilya ordinary share for every three CBD ordinary shares

 

[GREENS]

I got a question. If I buy shares in CBH now will I get the options outlined in todays announcement?

-One perilya ordinary share for every three CBD ordinary shares

Yes. I couldn’t see why not. The merger and the conditions attached is yet be approved on by CBH shareholders and the acquisition of CBH shares has yet to take place. Have a look at the company report or presentation regarding the merger and dates accompany the transformation of CBH shares into Perilya stock, should give you an idea of how long you have to purchase stock in CBH if you want to receive the attached option. To be 100% sure ring up the CBH hotline for enquires regarding the merger, you find the number in the recent company announcements.

Insert: Also just so you know, you receive 1 perilya share for every 3 shares held in CBH and in addition 1 PEM option exercisable at $2 for every 20 CBH shares.

 

[Fed23]

Thanks Greens,

Just doing a bit of looking up and CBH plans to spin off some of its shares into Kimberley Metals. 9.2 CBH for 1 KM share when it gets listed in 4-6months time.

I wonder how this will effect the share price of CBH after 12 May 2008 as that is the last day of the spin off.

The merger isn't planned to be completed until late july.
Point to note thou after buying CBH you will own 3 companies.

 

[countryboy]

Presently the best way to buy into CBH is via PEM ....today for example PEM were $1.08 ish and CBH 39c apply the 3:1 and you are buying CBH for around 34-35c. I keep coming back to CBH as I search for the best stocks to take advantage of in the present market conditions/prices.

Do CBH still own a slice of PDZ?

 

[arms]

The price difference between the two can be part explained by the fact that CBH shareholders will, besides the 3:1, also get the free attached option and also the share spin off next month.

What price you attach to these is what price you feel the price differential should be.

A holder of both and hopefully once all this is finalised we may get back on track.

Arms

 

[Fed23]

Arms, do you think after the spin of Kimberley Mines the share price will come down for CBH?

need to fell space

 

[arms]

I really wish i knew what will happen with the share price, but the market is very skittish at the moment and with Opes Prime etc small caps are seen as poison by a lot of people.

I spent a fair bit of time watching CBH last week and it traded up slowly during the week before dropping back on Friday. I actually liked the trading and thought it looked pretty positive. Tommorrow may be a different story.

After the spin off it may come back a bit, but the free option should see alot of people see it as the better entry into the merged identity.

At the end of the day where the market is will determine what will happen. I see the PPI figures and profit reporting in the states this week as the catalyst for the whole market and feel this week will determine what happens with the market in general.

This for me is a long term hold, over 12 months from now, topped up at 34.5c so confident the future of the merged group will see it prosper in the future.

 

[Stan 101]

Sold out of CBH today at an average of 39.5 cents. I still like this share, but it's stagnating. Should have taken a sell when the first merger excitement ramped things. I'll look for a lower buy in opportunity before the spinoff but there are just too many trading opportunities at the moment to wait for CBH to be fruitful. I have been patient and CBH has been good to me, but now the strategy must change.

cheers,

 

[UMike]

Arms, do you think after the spin of Kimberley Mines the share price will come down for CBH?

need to fell space

Well it hasn't dropped to much looking at it after the fact.

So does anyone have any idea what these Kimberley Mines shares are worth?

 

[Stan 101]

No idea on the price of Kimberly. It has been quiet on the announcement front from both CBH and PEM. PEM dropped 5% in yesterday's trade. CBH did creep back also, though not as heavily and with the spinoff of Kimberly one would have assumed a bigger hit.

The waiting game continues..

 

[rustyheela]

any CBH scrip holders any idea of the "instinsic" value of kimberlly metals. Even a ballbark figure?