Australia | May 24 2007
By Greg Peel
While the name might suggest otherwise, Sally Malay Mining (SMY) is an Australian company undertaking nickel sulphide mining in the Kimberley region of Western Australia. According to the company’s website: “Sally Malay was an Aboriginal/Afghan stockman born under a bough shed at Sally Malay bore, about 12 kilometres from the proposed mine site, on the 24 December 1924.” So dismiss all misconceptions of some association with Malaysia.
The price of nickel has increased by 50% since the beginning of 2007, much to the sheer astonishment of increasingly mortal resource analysts. The price of Sally Malay shares has increased from around $1.00 a year ago to over $5.00. It has pulled back in the last couple of days to around $4.60 on the back of recent nickel price weakness. Either way, that’s a pretty amazing run for a company that has no uranium.
As the nickel price has pushed ever higher, analysts – at their peril – have predicted an overdue correction. But as it has not yet been forthcoming (unless we’re in it now), and because the supply side simply refuses to catch up while Chinese stainless steel production just keeps growing, analysts have continued to ratchet up their longer term nickel price forecasts. For example, UBS recently increased its long term nickel price by 55%. To put that into perspective, the forecast moved from US$4.50/lb to US$7.00/lb. Spot nickel is trading at over US$22.00/lb.
Either way, with nickel up 50% this year and Sally Malay up 400% in twelve months it might be considered a brave move to continue to call SMY a Buy. But Patersons Stockbroking has.
The upgrading of the recently discovered Deacon resource within the Lanfranchi joint venture (SMY 75%) has been “one of the largest nickel sulphide discoveries of the last few years and the most recent driver for SMY”, notes Patersons’ resource analyst Levi Spry. The company is on track to produce 12kt of nickel in FY07, generating a $110m profit, and Patersons is forecasting 14.5kt for FY08.
That would put SMY as trading at only 4.8x FY08 earnings. In the first half of FY08, Spry expects SMY to pay off all outstanding debt and announce its first dividend.
The analyst also suggests signs of the “stronger-for-longer” nickel story can be found in Xstrata’s and Norlisk’s battle to takeover LionOre. With SMY’s quickly reducing hedgebook, says Spry, and growing production profile, the stock still represents value. At 58,100t of contained nickel, the Deacon orebody holds twice the contained resource assumed when SMY bought the operation. Minimal development is needed to bring it online. Throw in existing production from Helmut South, and production commencement this year at Winner, and SMY’s production share of the JV should grow to 6,500t in FY08, says Spry. The original Sally Malay operation should also produce around 8,500t of nickel per annum, underpinning performance.
Patersons has set a target of $5.88 on SMY with a Buy rating. Only two brokers/advisors in the FNArena database have paid any attention to SMY although one – Macquarie – hasn’t piped up since March last year. Aspect Huntley couldn’t help but take profits in March this year, downgrading to Reduce.
