Production Report Makes Independence's Day


- Independence Group increases production & grades - Reduces costs - Exploration potential - Two brokers upgrade to Buy

By Greg Peel

If commodities analysts had to pick one metal/mineral offering little in the way of enthusiastic price upside in 2013 it would likely be nickel. That does not, however, imply a reduction in global nickel demand and the subsequent demise of nickel miners, it simply means that in order to operate a profitable nickel mining operation production, grades and costs must be favourable and lead to healthy free cashflow. Australian nickel miners are also battling a stubbornly strong exchange rate.

Throw it all together and Australian nickel producer Independence Group ((IGO)) has struggled to improve profitability in recent times. However, the release of the company's December quarter production contained numbers which pleasantly surprised analysts, and has led to broker upgrades.

Of the three FNArena database brokers reporting on the Independence Group report to date, two ? Deutsche Bank and Credit Suisse -- have upgraded to Buy from Hold (or equivalent). BA Merrill Lynch retains Hold following a significant target price increase.

The Jaguar section of IGO's Jaguar/Bentley mine has now served its purpose and was closed down in the quarter, thus reducing the company's net costs. Bentley, in the meantime, returned grades in excess of 11% nickel, along with by-products zinc, copper and silver, the sale of which is offset against net cost. Cash costs (including royalties) were down to 41c/lb in the December quarter compared to 69c/lb in the September quarter. Bentley mine reconciliation has outperformed its ore reserve estimate by over 30%, Credit Suisse notes.

IGO is on schedule to start up a new mine in the December quarter this year, which one might be forgiven for assuming would be called "Aston Martin" but is instead known as Tropicana. So much for themes. The bad news is IGO has increased its capital and operational expenditure estimates for Tropicana by around 10-15% but Merrills points out initial estimates were made back in 2010, and hence the increases invoked little surprise. Over that time the mine's resource base has been upgraded by 2.9moz which, as Merrills notes, more than offsets the higher capex/opex.

Deutsche Bank sees several exploration opportunities for the company, near the closed Jaguar mine and particularly at the yet to be renamed Bentley South, which the broker hints might just justify "Rolls Royce" given its potential. Other various other non-British-marque-named sites add to the potential, while Stockman testing has shown up massive sulphides, Deutsche notes, offering up improved nickel economics through zinc/copper/silver by-products.

Merrill Lynch sees the improvement in IGO's outlook as leading to improving profitability and has increased its 12-month target price to $5.00 from $4.50. The analysts see Tropicana as providing the opportunity for a step-change for the company and they are sticking to Neutral for now. Deutsche has also lifted its target to $5.00, this time from $4.37 previously, which provides enough impetus for an upgrade to Buy from Hold. Credit Suisse has set a new $5.40 target ? a lesser hike up from an already enthusiastic $5.20, yet still enough for CS now to upgrade to Outperform from Neutral.

Other brokers have yet to comment.

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