Worst May Be Over For Straits Resources

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From a share price of more than $4.50 in the middle of last year it has been a downward slide to levels close to $3.00 in recent months for copper producer Straits Resources (SRL), but Austock Securities suggests this offers a chance for investors to reassess the company’s prospects.

The broker rates the stock a Buy as in its view the weakness has been the result of a combination of factors that are being or will shortly be addressed, leaving the company on a much more positive footing in terms of its future outlook.

Part of the run of bad news in recent months was a disappointing September quarter production report, but in the broker’s view the key has been the company’s off-take agreement with Sempra Metals for production from the Tritton project.

Amazingly, the company started to lose money even as copper prices were at record highs, as TC/RC tolling charges were set as a percentage of the copper price but the company had hedging in place that meant revenues were fixed. Negotiations are underway to address this, the broker suggesting some news may accompany the company’s December quarter production report due next week.

If a deal can be worked out, the broker sees as likely a go-ahead of plans to expand production at Tritton to 40-45,000 tonnes annually, up from 22,000 tonnes now. It notes a number of other new projects are also expected to receive the go-ahead this year, including the Hillgrove development of 90-100,000 ounces of gold equivalent annually and an expansion of production at Sebuku from 3.5 million tonnes to 6.0 million tonnes per year.

There is also the Salt Creek project, projected at around 3.0 million tonnes annually, and the Whim Creek concentrate project that is expected to add 20,000 tonnes per annum to the company’s copper production.

With such projects on the books the broker expects strong future earnings growth after what is likely to be a disappointing profit result for 2006. It is forecasting a profit of $47.2m for the year just finished compared to $45.7m in 2005, but sees this increasing to $76.5m in 2007 and $110.8m in 2008.

Assuming its estimates prove correct the stock would be on a P/E of around 7.8x earnings in 2007, falling to 5.4x in 2008. Wish cash on hand and a suite of new projects the broker suggests its valuation of $4.00 is conservative and a number above $5.00 is not unrealistic. Despite this it has adopted a conservative stance and set its price target at $3.95.

Straits has a market capitalisation of just more than $600m at current levels, so the stock is big enough to be on the radar screen for some larger investors. However, the company is not covered by any of the brokers included in the FNArena database.

Shares in Straits are down slightly in today’s trading, as at 1.20pm the stock was 6c weaker at $3.15.