Kagara Ltd (ASX - KZL)

Open Briefing^®. Kagara. December Quarter Discussion & Outlook

Record of interview:

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Kagara Ltd (ASX code - KZL) announced an unaudited profit before tax of A$51 million for the December quarter 2007 with record copper production and zinc and lead production in line with budget. Can you explain how the profit figure compared with expectations or budget?  How is production tracking against your expectations for the year?

Chairman Kim Robinson

The unaudited profit was well in line with our expectations.  We were always expecting to have a more subdued first half for the year, with increased production in the second half of the financial year.  We still expect a big lift in our copper production in particular for the remainder of this financial year.

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The unaudited profit before tax of A$51 million for the December quarter 2007 compared with A$58 million for the previous corresponding period.  How did you achieve a profit broadly in line with the pcp when zinc and copper prices were much lower?

Chairman Kim Robinson

For the corresponding period in FY07, we only had a small contribution from the Thalanga plant, which is currently our biggest copper producer, so it stands to reason that we would produce more copper in the current six month period, but metal prices were much lower in the December half compared with the pcp.  So overall it was a very satisfying profit result, particularly as the zinc price fell by some 50%.

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Cash operating margins for copper and zinc decreased from the previous quarter mainly due to lower zinc and copper prices.  What was the cost performance?  Do you expect an easing of cost pressure now that zinc and copper prices have fallen? 

Chairman Kim Robinson

There will be a reduction in costs as a result of lower smelting participation charges if metal prices remain at lower levels, but the cost per pound of copper production will be more impacted by the grade of ore being processed which we expect to be higher this quarter. Zinc cash costs will probably remain at December quarter levels.

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What longer term production and operating cost trends do you expect? 

Chairman Kim Robinson

Importantly, we have the Mungana plant coming on stream around the end of the March quarter 2009 and this project has significant copper, silver and gold by-product credits.  We would expect our cash costs at Mungana to be close to US$0.30/lb, even in today’s high cost environment.  We expect Mungana to have a fairly significant impact on our overall cash costs of production as we will be producing 50% of our zinc from Mungana.

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You stated that several important discoveries were made during the quarter and are now progressing towards development including Admiral Bay, Waterloo and Lounge Lizard.  Can you explain the results and how they have added to the understanding of each discovery?

Chairman Kim Robinson

Admiral Bay is a very large deposit drilled over a 2.5km section of an 18km strike length and it’s likely to be a Company-changing development.  It has been an exciting time over the last six months, but because of its size it is a longer term project, with production expected in about five years.

Recently, at Lounge Lizard, we’ve had some exciting results including wide zones of disseminated mineralisation underlain by basal massive nickel sulphide zones.  We expect to be drilling the strike extensions to Lounge Lizard for a considerable time to come.

The recent announcement of a significant upgrade to the base metal resource at Waterloo, located near the Thalanga plant, has shown that this deposit will be a very low cost producer when we begin processing the ore through either the Thalanga plant or the Mt Garnet plant.   It has only been drilled to a depth of 250 metres and we expect the deposit to grow larger.

One of the more exciting things we’ve found in recent times is the Victoria mineralisation, which we’ve just started to drill out.  We’re discovering very wide zones of high grade zinc and copper mineralisation, which we would expect to be feeding into the Mungana treatment plant when that comes on stream.  Victoria is located only 5km to the east of the Mungana deposit. It’s early days for Victoria, but it does have the potential to be larger than anything else we’ve found in the Chillagoe district.

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Some of the intersections have been very high grade.  How consistent is each orebody in terms of grade continuity?

Chairman Kim Robinson

The Lounge Lizard nickel deposit is turning out to be very predictable.  Continuity of mineralisation in all of the other deposits is also predictable.  We’ve not had any surprises in terms of consistency.  Admiral Bay in particular is returning very significant widths of mineralisation grading between 6% lead and 14% zinc in every hole drilled over a 2.5 kilometre strike length.

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What are your current objectives with each of the exploration programs? 

Chairman Kim Robinson

The objective in North Queensland is to maintain at least a five year mine life at all of our operations, collectively producing 45,000 tonnes of copper and 100,000 tonnes of zinc in concentrate per annum.

At Lounge Lizard, our objective is to establish sufficient nickel resources to justify a standalone, high-grade massive nickel sulphide mining operation, or alternatively a large tonnage, low-grade operation capturing wide zones of disseminated mineralisation overlying the massive sulphides.

At Admiral Bay, our initial target is to outline a resource large enough to sustain a mining operation for at least 10 years at 5 million tonnes per annum.  In the longer-term, at Admiral Bay, we believe the 18 kilometres of known mineralisation could ultimately sustain a 50-year operation.

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At what stage of exploration is each project?  Can you map out an expected development program for each deposit?

Chairman Kim Robinson

In terms of the new projects we’ve discovered in North Queensland, the recent Victoria deposit is very exciting, but it’s still early days.  Waterloo seems to be growing each day.  As the recent resource upgrade shows, it has only been drilled to 250 metres depth and is open along strike and at depth, so it has the potential to be much larger.

On Admiral Bay and Lounge Lizard, we will be calculating initial resources in the second quarter of this year.

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Kagara received welcome news from Queensland’s Environmental Protection Agency (EPA) on the Mungana basemetal development. Can you explain the implications on this decision not requiring an environmental impact statement (EIS)?

Chairman Kim Robinson

The decision by the EPA not to enforce an EIS was an important one for us.  We’ve been through the process with the Federal Government a couple of years ago and were given the all clear.  The State Government did not require an EIS because initially we had carried out our environmental work to an EIS standard before we made the applications. Now, it’s just a matter of working through an amendment to our existing Environmental Authorities with the EPA.

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A fully franked dividend of A$25.9 million (A$0.12 per share) was paid during the quarter. With cash on hand of A$16.5 million, how will you manage your growth projects?

Chairman Kim Robinson

We have a loan facility in place, which we can utilise when required and we may be looking at increasing this facility to back our future growth plans.  We are producing strong cash flows, much of which is going into development, as well about $35 million a year on exploration.  

When the current exploration program has been completed at Admiral Bay, we will look at options for development, including debt, equity and possible joint ventures to fund this massive project.  In the medium term, we will also have a capital requirement to develop the large Mungana and Red Dome precious metal deposits if our current exploration program proves successful.

We are currently funding the development of the Mungana plant and base metal mining operation mostly out of cash flow.

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How do you rank the value of each of your growth projects?

Chairman Kim Robinson

They’re all valuable in their own right for one reason or another.  Obviously, the North Queensland operation is extremely valuable.  The amount of mineralisation we’re finding up there has surprised us.

However, the project which is potentially Company-changing is Admiral Bay.  It’s a world class project, which we know extends for an 18 kilometre strike length and potentially can be in production at 5 million tonnes per annum of ore, for in excess of 50 years, as long as we prove that to be a viable proposition.

The Lounge Lizard nickel project at Forrestania is shaping up to be a substantial asset as well.  It’s at an early stage of development, but we’re hitting mineralisation in every hole we drill.  We would expect that to continue and we wouldn’t want to be constrained in our thinking about its ultimate size. 

The wild card in our portfolio is a potential large-scale, gold-copper-molybdenum development at Red Dome and Mungana.  We will be adding to the existing 53 million tonne resource there this year.

We’re pretty excited about all of our projects and it’s difficult to rank them.  We always expected to be able to keep adding to our reserves and it seems to be panning out that way. 

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Thank you Kim.

For further information on Kagara Ltd visit www.kagara.com.au or contact Kim Robinson on 08 9481 1211.

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