Citigroup optimistic on Resource Pacific

BROKERAGE Citigroup has given Resource Pacific the thumbs up, initiating coverage on the New South Wales producer this week with a buy/high risk recommendation at a target price of $A1.82.
Citigroup optimistic on Resource Pacific Citigroup optimistic on Resource Pacific Citigroup optimistic on Resource Pacific Citigroup optimistic on Resource Pacific Citigroup optimistic on Resource Pacific

Courtesy Resource Pacific.

Angie Tomlinson

Citigroup was positive on the company’s future earnings once the longwall is commissioned at its Hunter Valley Newpac mine in January 2007. Current bord and pillar operations produce 900,000 tonnes per annum, but output is expected to increase to 4.2 million tonnes per annum of semi-soft coking coal and export thermal coal once the longwall ramps up.

The brokerage forecast a substantial lift in earnings from $4 million in financial year 2006 increasing to about $19 million in financial year 2007, up 375%. However, it said the big earnings would come in 2008 with the first full year of the expanded production rate, with earnings forecast to rise to $60 million.

Citigroup was also positive on the Newpac mine’s future, with 225Mt of resources and reserves of 73Mt and mine life of 20 years.

The brokerage said this resource base left it open for Resource Pacific to operate a second longwall, potentially increasing earnings.

“On a bigger scale, we believe the company could introduce a second longwall unit into the mine to extract the Liddell seam. The result could be a possible optimal ROM production of 8-9Mtpa from the operation, which could be accommodated by the existing surface infrastructure that was designed to process 14Mtpa,” Citigroup said.

It said an additional upside also existed in bord and pillar operations, which could continue in underlying seals to produce an additional 1.2Mtpa.

Citigroup rated Resource Pacific on the riskier side, due to the company’s one-mine status, with no production to fall back on if the mine runs into difficulties. Other risk factors include potential delays in completion of longwall development, coal price fluctuations and foreign exchange movements.

Resource Pacific has much of its capital costs tagged, having already awarded a number of the major contracts for Newpac’s development.

DBT was awarded the longwall equipment contract for $69.4 million and Roche Mining has been contracted to engineer, supply, install and commission coal handling systems and refurbish the CPP for $71.9 million.

Nepean Conveyors was contracted to supply a coal clearance system for $18.2 million, plus installation costs of about $8 million.

Total capital expenditure on the development is not anticipated to exceed $190 million.

Resource Pacific closed at $1.18 yesterday, up 1.29%.

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