What the Brokers say

WHAT THE BROKERS SAY: Interesting news and views from across the Resource Analyst universe 

Empire Resources (ASX: ERL)

Empire’s flagship Yuinmery project currently hosts the Just Desserts deposit with a JORC (Indicated and Inferred) resource of 1.07 million tonnes at 1.82 per cent copper and 0.8 grams per tonne gold.

The nearby ‘A Zone’ prospect, located approx. 1.3km north of Just Desserts, has recently been the subject of a drilling campaign where intercepts include 10m at 1.8 per cent copper and 0.87g/t gold from 222m and 19m at 1.8 per cent copper and 0.3g/t gold from 240m with mineralisation still open at depth.

A new six diamond hole drill program is set to commence imminently ahead of the estimation of a maiden JORC Resource.

Reinterpretation of geophysical data over the Yuinmery project has identified an additional two ‘extensional targets’ between A Zone and Just Desserts which appear on the same horizon and may well link the two deposits.

The identification of mineralisation in this area would have major positive implications, significantly enhancing the economic viability of the project.

Empire also recently acquired a 70 per cent interest (under highly attractive terms) in a prospective gold exploration project at Point Kidman, 40km east of Laverton, WA.


Tenement Location Map and Local Geology. Source: Empire Resources


No previous drilling or old gold workings exists over the licence area, however recent prospecting has identified a 2.5km anomalous gold zone where numerous gold nuggets have been found.

The anomalous zone demonstrates similar geological characteristics to that of the nearby and world renowned 4 million ounce Granny Smith gold mine.

Penny’s Find, WA – Gold
60 per cent interest – seeking to divest from this project

The Penny’s Find gold project already hosts a near surface JORC compliant resource of 314 thousand tonnes at 5.2g/t gold for 52,500 ounces.

The project is located on a granted mining lease and is in close proximity to the mining ‘hub’ of Kalgoorlie.

Empire recently entered into a staged sale agreement with JV partner Brimstone Resources (40 per cent interest) whereby Brimstone can either acquire 100 per cent of the project by payment of $2.5 million by June 30 2013 or earn up to a 75 per cent interest by continuing exploration and development.

An eight hole RC and diamond drill program has recently been completed at Penny’s Find which was designed to upgrade the current resource in both size and JORC category as well as to aid mine planning and provide samples for metallurgical test work.

Drilling highlights include:

–    3m at 8.89g/t gold from 173m;

–    3m at 17.41g/t gold from 66m; and

–    8m at 5.16g/t gold from 155m.

Opportunity exists for a small scale, open pit operation which could potentially be followed up with an underground mining operation.

Currently, the resource does not justify a stand-alone plant and toll treatment would be the likely processing route.

Empire has stated that they expect some form of transaction on the Penny’s Find project in 2013.

Recommendation: Speculative BUY

Rio Tinto Ltd (ASX: RIO)

Rio’s risk-reward ratio no longer looks attractive enough after:

1) A 33 per cent rise in the iron ore price since December;

2) A much lower earnings impact from cost efficiency programs than headline figures suggest;

3) Limited tangible changes from its sharpened focus on capital efficiency.

Renewed focus on cost and capital discipline.

Rio launched several new cost initiatives and increased its focus on capital discipline in 4Q12. Its aim is to turn around underperformers like aluminium/coal and provide assurance that it will re-invest the free cash flow from iron ore with care. However, not all savings are new and the dividend policy remains unchanged so far.

Only US$1.75 billion of US$3.25billion group savings is “new” we estimate, the rest reflecting savings from existing programs, unit cost savings rather than YoY declines in cash opex, or reversion of one-off effects.

Higher prices needed to get aluminium to cost of capital.

The US$1.25 billion EBITDA improvement program is not enough to cover the cost of capital by 2015, we estimate. This, in turn, prevents potential strategic steps as part of Rio’s step-up in portfolio management in 2013.

Iron ore unit cost target of US$35.5 too ambitious.

Either Rio assumes too much depreciation in AUD/USD or too little underlying cost inflation until 2012, we think. Achieving its target adds A$6.80/sh in our £57 bull case.

Commitment to capital efficiency needs visible steps.

We see a move to a counter-cyclical investment policy with a better balance between re-investment and distribution of cash as key to a re-rating. Each PE point adds A$6 per share. Unfortunately, so far Rio’s dividend policy is unchanged and portfolio management is hampered by poor profitability at certain assets.

Rating: Overweight to Equal-weight
Price Target: A$64.60 to A$69.70

Disclaimer: The above
is intended as a guide only. The Roadhouse accepts no responsibility for
investments made from this advice.