Mirabela Nickel Ltd Ord MRBAF

RBC raises target to $2.80A from $2.30

[wise_investor]

Finally RBC sees the light!

RATINGS REVISION | COMMENT

MAY 19, 2011

Mirabela Nickel Limited (ASX: MBN; TSX: MNB)

The Time Has Come; Upgrade to Outperform & A$2.80

target

Outperform (prev: Sector Perform)

Above Average Risk

Price: 2.10

Shares O/S (MM): 491.6

Dividend: 0.00

NAVPS: 2.77

BVPS: 1.26

ROE: (8.0)%

Float (MM): 461.5

Debt to Cap: 41%

Price Target: 2.80 ­ 2.30

Implied All-In Return: 33%

Market Cap (MM): 1,032

Yield: 0.0%

P/NAVPS: 0.8x

P/BVPS: 1.7x

Enterprise Val. (MM): 1,637

Avg. Daily Volume (MM): 2.25

Priced on the ASX at 3pm on 19 May 2011

Event

Upgrade to OP, Target to A$2.80 (A$2.30) as diminishing risk skews returns

potential to the upside.

Investment Opinion

Our judgment is that it is time to build a holding in MBN. The company has

significantly de-risked the large low grade Santa Rita nickel project in Brazil.

Finances have stabilised after the recent capital raising and debt refinancing and

we believe that operational issues such as waste removal and low recoveries from

persistent chloritic material are being overcome. Even though the ramp up

continues well into next year, in our opinion, share price risk is skewed to the

upside, and from a risk-reward perspective we are comfortable raising our target

and thus our rating ahead of confirmation of success at Santa Rita.

• Why Buy? MBN is trading at 0.76x P/NAV, an implied return of 33% to our

target. It could become the "go to" nickel name when at its targeted 25ktpa next

year. Lastly, operational issues are well understood and manageable, in our

view. MBN has strategic value due to size, long life and scarcity and an open

register leaves it vulnerable to corporate activity.

• March Q: A headline loss of US$11m was not as severe as we forecast

following capitalisation of pre-stripping in excess of life-of-mine 5 to 1

average. A US$22m shipment to Norilsk was delayed till 5 April and the SAG

mill failure in Jan impacted Q1 by US$8m. We forecast that sales will exceed

production in Q2. Cash burn over the Q was US$48m but cash on hand of

US$56m has been boosted to ~US$200m by refinancing.

• Earnings: CY11 earnings rise 11% to US$19m and we raise our NAV a

similar 11% to A$2.77/share.

• Leverage: RBC estimates assume US$9/lb for CY12-14 resulting in "below

street" forecasts. Despite residual hedging moderating cash flow, leverage is

very strong. For example, CY12 earnings rise more than four-fold at spot nickel

of ~US$11/lb. Hedging is 42% of CY11, 24% of CY12 & 17% of CY13 sales

on RBC forecasts.

• Valuation: We raise our rating to Outperform (SP) and raise our price target to

A$2.80 (A$2.30) based on an unchanged P/NAV of 0.9-1.0x. These multiples

remain below comparable nickel peers due to Mirabela's somewhat higher risk

during ramp-up.

Risk Reward Skewed to the Upside - Upgrade to Outperform

We believe it is time for investors to accumulate holdings in Mirabela