Metals & Mining
Australian nickel sector -
weathering corrosive markets
Paul Young
Research Analyst
(61) 2 8258 2587
paul-d.young@db.com
Brendan Fitzpatrick
Research Analyst
(61) 2 8258 1519
brendan.fitzpatrick@db.com
Nickel sector weathering near term market weakness
We are initiating coverage on the Australian nickel sector with a positive medium
term view but cautious near term outlook. We see a potential rebound in the
nickel price in 4Q 2008 driven by an expected increase in stainless steel demand.
However the upcoming reporting season (production and earnings results) and
company specific news flow (exploration, project approvals etc) are likely to
dictate stock movements in the near term. We rate Mirabela a BUY on the basis of
deep value and we rate Minara a SELL on downside earnings risk.
Deutsche Bank AG/Sydney
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DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
Initiation of Coverage
Top picks
Mirabela (MBN.AX),AUD6.01 Buy
Companies featured
Mincor (MCR.AX),AUD3.21 Hold
2007A 2008E 2009E
P/E (x) 4.8 10.0 7.6
Div yield (%) 0.0 0.0 0.0
Price/book (x) 6.1 2.9 2.0
Minara (MRE.AX),AUD2.85 Sell
2007A 2008E 2009E
P/E (x) 10.6 30.9 29.3
Div yield (%) 0.0 0.0 0.0
Price/book (x) 4.1 1.9 1.8
Mirabela (MBN.AX),AUD6.01 Buy
2007A 2008E 2009E
P/E (x) – 42.6 103.2
Div yield (%) 0.0 0.0 0.0
Price/book (x) 2.5 2.7 2.8
Independence Group (IGO.AX),AUD4.61 Hold
2007A 2008E 2009E
P/E (x) 6.8 9.3 12.1
Div yield (%) 0.0 0.0 0.0
Price/book (x) 10.0 3.0 2.4
Western Areas (WSA.AX),AUD10.10 Hold
2007A 2008E 2009E
P/E (x) – 210.3 39.6
Div yield (%) 0.0 0.0 0.0
Price/book (x) 9.2 14.0 10.6
Global Markets Research Company
Sector waits for 4Q demand rebound as margin squeeze continues
On top of a poor 12 months for the nickel price, operating costs across the nickel
industry have increased considerably. Combined with a strengthening AUD,
margins are being squeezed across the entire sector. We believe the nickel
sector’s marginal cost of production (90th percentile) is now at least US$9-9.5/lb,
which supports our long term nickel price of US$9/lb. Saying that, in the near term,
sector catalysts are lacking with a rebound in stainless steel demand unlikely
before 4Q 2008, and we note that major Asian stainless steel mills were cutting
production during 2Q.
Initiating coverage on the Australian nickel sector
The Australian nickel sector has a combined market cap of around A$6bn and is
dominated by half a dozen or so mid-tier producers. Of these we are initiating
coverage on (in order of preference):
Mirabela (ASX: MBN, TSX: MNB, BUY, A$10.00 price target)
Mincor Resources (ASX: MCR, HOLD, A$3.50 price target)
Western Areas (ASX, TSX: WSA, HOLD, A$9.00 price target)
Independence Group (ASX: IGO, HOLD, A$4.50 price target)
Minara (ASX: MRE, SELL, A$2.50 price target)
Value emerging in 2H 2008 post negative earnings momentum
In our opinion the coming reporting season could disappoint. The focus will be on
costs, particularly for Minara (high sulphur costs and operational disruptions due to
gas shortage), which has considerable downward earnings momentum if sulphur
prices remain at US$800/t. We believe that exploration news could surprise for
Western Areas, Mincor and Mirabela. In addition, recent poor stock performance
could encourage M&A, with several companies offering significant production and
resource growth (Mirabela and Western Areas). Some valuations are stretched
(WSA), however Mirabela offers deep value (~50% discount to our base case
NAV) and Mincor upside potential (~15% discount to our upside case NAV).
Our price targets are NAV based (DCF derived). We have captured part of our
upside valuation in our price targets with the exception of Minara. Our Minara
price target is set at a ~10% discount to our base case NAV as we believe
earnings risk is to the downside if sulphur prices remain at ~US$800/t. Sector risks
include movements in the nickel, copper, gold, AUDUSD and USDBRL. (See pages
11-12 and company sections for detail on valuation and risk.)

Table of Contents
Investment thesis .............................................................................. 3
Sector waits for 4Q demand rebound as margin squeeze continues .......................................3
Mirabela Nickel.................................................................................. 9
Strong leverage to the long-term nickel price ...........................................................................9
Expected near term events/news flow ...................................................................................10
Valuation and risks ..................................................................................................................11
Project analysis – Santa Rita Resource and scope likely to grow............................................12
Management, capital and shareholder structure.....................................................................16
Investment thesis ...................................................................................................................17
Mincor Resources............................................................................ 18
New projects and exploration to drive re-rating......................................................................18
Expected near term events/news flow ...................................................................................19
Valuation and risks ..................................................................................................................20
Project analysis – exploration and operational improvements provide potential production
upside ....................................................................................................................................21
Management, capital and shareholder structure.....................................................................27
Investment thesis ...................................................................................................................28
Western Areas.................................................................................. 29
Impressive but expensive growth and exploration .................................................................29
Expected near term events/news flow ...................................................................................31
Valuation and risks ..................................................................................................................32
Project analysis – Flying Fox shaft and Spotted Quoll to drive production growth .................33
Management, capital and shareholder structure.....................................................................38
Investment thesis ...................................................................................................................39
Independence Group....................................................................... 40
A tired nickel asset pulling along a marginal gold project .......................................................40
Expected near term events/news flow ...................................................................................41
Valuation and risks ..................................................................................................................42
Project analysis – transitioning from nickel to gold in 2013 ....................................................43
Management, and capital and shareholder structure..............................................................48
Investment thesis ...................................................................................................................49
Minara Resources ............................................................................ 50
Higher costs erode profitability ...............................................................................................50
Expected near term events/news flow ...................................................................................52
Valuation and risks ..................................................................................................................52
Project analysis – Heap Leach and sulphur price the swing factors........................................53
Management, capital and shareholder structure.....................................................................59
Investment thesis ...................................................................................................................61
Nickel industry review.................................................................... 62
This section includes excerpts from “Commodities Quarterly” published on June 27, 2008.62

Investment thesis
Sector waits for 4Q demand rebound as margin squeeze
continues
The nickel sector has weathered a turbulent 12 months of volatile price movements with a
rapid rise in the nickel price to a record US$28/lb in May 2007 resulting in a switch by the
major global stainless steel producers to lower nickel grade stainless steels and a reduction
in stainless steel production due to lower demand. This has resulted in a gradual decline in
the nickel price to below US$10.0/lb. On top of a poor 12 months for nickel, costs across the
industry have increased considerably, particularly for the laterite operations due to escalating
sulphur and energy prices. Combined with a strengthening AUD, margins are being squeezed
across the entire sector. The emergence of the technically simple but expensive Chinese
nickel pig iron production, which now contributes 6-8% of total global nickel supply, resulted
in a surplus in 2007 after the market recorded a deficit in 2006. Despite the ability of nickel
pig iron to rapidly respond to price spikes we view this industry as unsustainable due to high
production costs (estimated north of US$10/lb), environmental concerns and reliance on
blending with ferronickel and refined nickel to achieve required stainless steel compositions.
We believe the nickel sector’s marginal cost of production (90th percentile) is now at least
US$9-9.5/lb, which supports our long term nickel price of US$9/lb. Saying that, near term
sector catalysts are lacking with a rebound in stainless steel demand unlikely before 4Q 2008
and note that major Asian stainless steel mills were cutting production during 2Q.
The Australian nickel sector has a combined market cap of around A$6bn and is dominated
by half a dozen or so mid tier producers that predominately operate in Western Australia. Of
these we are initiating coverage on (in order of preference): Mirabela (ASX: MBN, TSX:
MNB, BUY, A$10.00 price target), Mincor Resources (ASX: MCR, HOLD, A$3.50 price
target), Western Areas (ASX, TSX: WSA, HOLD, A$9.00 price target), Independence Group
(ASX: IGO, HOLD, A$4.50 price target), and Minara (ASX: MRE, SELL, A$2.50 price target).
With only a small chance of a nickel price bounce before 4Q 2008 we believe that the market
will focus on the upcoming reporting season. This, in our opinion, could disappoint. Focus
will be on costs, particularly for Minara, however exploration news could surprise, particularly
for Western Areas, Mincor and Mirabela. In addition, recent poor stock performance (with the
exception of WSA) could encourage M&A, with several companies offering significant
production and resource growth. Valuations in some cases are stretched, particularly with
Western Areas, which is trading above our base and upside case valuations.
We have ranked the companies in Figure 1 below using some key quantitative and qualitative
measures. Company valuations and earnings, sensitivities, cash costs, margins and asset
comparisons are shown in Figures 2 to 16.

Company summaries (in order of preference)
1. Mirabela (BUY, A$10.00 price target) – Mirabela offers investors exposure to a large,
relatively low cost greenfields nickel sulphide project with strong leverage to the long
term nickel price, along with attractive exploration upside and takeover potential. The
company is developing the large (current resources of 613kt of nickel and reserves of
508kt) Santa Rita deposit (100% owned) in Brazil, with first production scheduled during
Dec Q 2009. At full production in early 2010 Santa Rita should produce ~18,000t of
nickel in concentrate from a Stage 1 4.6Mtpa mine, and 25,000t of nickel with a Stage 2
expansion to 6Mtpa from early 2011. We rate Mirabela a BUY and believe that the stock
should receive a re-rating as project construction advances and risks decrease. We value
Mirabela at A$11.62/share. Our price target of A$10.00/share is set at 0.8x our NAV. We
rate Mirabela a BUY based on the upside to our A$10.00 price target. We believe that
the stock should receive a re-rating as project construction advances and risks decrease.
We believe that Mirabela should trade at a 20% discount to NAV until construction and
commissioning is complete and nameplate capacity is achieved in late 2009. Company
specific risks include potential capital cost overruns and project delays exist at the Santa
Rita project. Additional downside risk could result from equity dilution from funding of
the Santa Rita Stage 2 expansion.
2. Mincor Resources (HOLD, A$3.50 price target) – In our opinion, Mincor is an
undervalued nickel producer trading at just a ~15% premium to our base case NAV of
A$2.91/share and at a 15% discount to our upside NAV of A$3.82/share. We believe that
the market applies a low premium on the stock due to the short life and high cost nature
of its operations, but we think this is about to change. The company’s acquisition of the
Otter/Juan mine in July 2007 for A$68m, in our opinion, was a company changing
acquisition allowing Mincor to reach the production target of 20kt of nickel in
concentrate per annum by 2010 and reduce the company’s average C1 cash cost by
~5% to US$6/lb, although we note costs are likely to remain above Mincor’s peer group.
Most importantly the Otter/Juan operation provides Mincor with exploration upside that
could result in the discovery of multiple and major nickel deposits (50kt+) within the next
18 months. We rate Mincor as a HOLD as the stock offers just 10% upside to our price
target A$3.50 price target. We value MCR at A$2.91/share. Our price target of A$3.50 is
formulated at ~50% between our MCR base case and upside case valuation of
A$3.82/share. After a review of Mincor’s assets we believe that there is a 50% chance
Mincor could discover additional resources that would underpin our upside case
valuation. Company specific risks include potential capital cost overruns and project
delays exist at the Durkin North, Canilya Hill and McMahon projects. Additional downside
risk could result from higher than excepted costs at existing operations for diesel, labour
and explosives. Upside risk includes the potential for further exploration discoveries
and/or a significant increase in current resources, particularly at the Otter/Juan operation
which could increase mine life significantly at this operation.
3. Western Areas (HOLD, A$9.00 price target) – Western Area’s Forrestania nickel
project in Western Australia is quickly emerging into a potential world class nickel
province. The project already contains around 180kt of high grade nickel (greater than
3%), and the company is well on its way to increasing total resources to 300kt of nickel
by the end of 2008. On paper, it also has the best growth profile in the sector with
production forecast to increase from 8kt of nickel in concentrate in F2008 to 26kt by
F2012. The discovery of the shallow and high grade Spotted Quoll deposit (35kt of nickel
@6.4% Ni) in 2007 has given the company a new dimension, and we now believe the
potential is high for further shallow high grade discoveries. However we believe that the
market is paying up significantly for future exploration success and a production profile
that we believe carries above average operational and execution risks. WSA is trading
well above our base case NAV of A$4.42/share and even above our optimistic case NAV
of A$9.35/share. We rate WSA a HOLD. We rate WSA a HOLD as the stock is trading
above our A$9.00 price target. We believe WSA should trade close to our upside case
NAV as we view the likelihood of our assumptions under this scenario being achieved as
high. Company specific risks include potential capital cost overruns and project delays

exist at the Flying Fox, Diggers South, Cosmic Boy Concentrator and Spotted Quoll
projects. Additional downside risk could result from higher than excepted costs at Flying
Fox for diesel, labour and explosives. Upside risk includes the potential for further
exploration discoveries and/or a significant increase in current resources, particularly at
depth at Flying Fox and Spotted Quoll and along strike to the South of Spotted Quoll.
4. Independence Group (HOLD, A$4.50 price target) – With nickel production forecast to
decline from F2010 and a minority stake in the large (4Moz) but arguably marginal
Tropicana gold deposit, IGO has few growth prospects. We believe the Tropicana gold
project requires a long-term gold price (2013 onwards) of greater than US$800/oz to be
economic. The company is essentially an exploration call, with potential value upside
offered from perhaps an additional two years of mine life at Victor/Long and a potential
doubling in the Tropicana gold resource to 8Moz. Our NAV for Independence Group is
A$3.32/share. We rate IGO as a HOLD as the stock is trading broadly in-line with our
A$4.50 price target. Our NAV for Independence Group is A$3.32/share and our upside
case NAV is A$5.82, which is our break-up valuation of the company. Our price target of
A$4.50 is formulated as the half way point between these two valuations. Company
specific risks include the possibility that the Tropicana project does not progress to the
Bankable Feasibility Study level stage due to escalating industry wide capital and
operating costs. Additional downside risk could result from higher than excepted costs at
Victor/Long for diesel, labour and explosives. Upside risk includes the potential for
further exploration discoveries at Long North and South. However we view the chance of
a significant discovery as low.
5. Minara (SELL, A$2.50 price target) – Minara operates the Murrin Murrin High Pressure
Acid Leach (HPAL) nickel laterite project located around 300km north east of Kalgoorlie.
The company is 53% owned by Glencore, which also owns 40% of the Murrin Murrin
project, equating to an effective project ownership of ~70%. We believe that Murrin
Murrin’s production could be capped at 36-38kt per annum due to expected higher
impurities from the heap leach potentially lowering nickel recovery, and processing
bottlenecks in the backend of the HPAL plant. The medium term outlook for Minara is
negative due to upward pressure on sulphur and gas prices. We estimate that cash costs
are likely to increase from US$5.3/lb (net cobalt credits) in 2007 to US$7.5/lb in 2008.
Costs could remain at these levels for at least three years. We value MRE at
A$2.71/share. We rate MRE a SELL as there is greater than 10% downside to our
A$2.50 price target and we believe that earnings risk is to the downside. Our price target
of A$2.50 is set at a ~10% discount to our base case NAV as we believe earnings risk is
to the downside if sulphur prices remain at US$800/t. Upside risk includes the potential
for higher than expected production from the heap leach project and softening in the
sulphur price in the near term, although we view the likelihood of these occurring as low.
Key sector risks
Macro risks include movements in the nickel, copper, gold, AUDUSD and USDBRL. Weaker
than expected demand for stainless steel and higher than expected increases in chrome and
manganese could both affect stainless steel production and therefore the nickel price, which
is the most sensitive input to our company models. Upside risks to our forecasts include the
potential for a higher industry cost-curve to lift commodity prices going forwards.