The first construction crew has arrived at the Mungana project near Chillagoe to build a plant set to be in production by April next year.

West Perth-based Kagara Ltd (ASX: KZL), rated by many analysts as Australia's cheapest zinc producer, said the new mill will more than double company production to 100,000 tonnes per annum of contained zinc.

Executive chairman Kim Robinson said the initial ore feed will be sourced from the underground Mungana orebody which has been fully developed below the first mining panel in the past two years.

Crosscuts to the ore body are currently being developed on several levels and the first high grade development ore will be mined from the 2005RL level next month, Robinson said.

The 2005RL level access has now advanced well into the gold halo that envelopes the base metal ore body and gold ore is currently being stockpiled for processing through a future dedicated gold plant at Mungana.

Some of the latest diamond drilling at Mungana included a gold interval of 69 metres grading 2.44 grams/tonne, including 16m @ 4.54 g/t. This intercept was between the two base metal lenses. Another diamond hole, at a higher level in a similar structural position, encountered 23.6m @ 5.81 g/t.

Robinson said the new mill would enhance the company's status as one of the world's lowest cost zinc producers.

In the March quarter Kagara's existing operations that utilise the Mount Garnett plant produced 9,524t of zinc, 5,917t copper and 2,048t lead, while one of the new discoveries in that area, Waterloo, now has a resource of 464,000t grading 15.5% zinc, 2.9% copper, 2.2% lead, 76 g/t silver and 1.39 g/t gold.

A recent report by Macquarie Research Equities said that Kagara was weathering the zinc price slide storm well, particularly as the December quarter was exceptionally wet in north Queensland.

Macquarie said it was maintaining an outperform rating for the company and set a target share price of $A5.60 ($US5.37).

Kagara remains an exposure to high-grade, expandable polymetallic assets, both operating and in development, the broker said.

The stock continues to offer a strong organic growth pipeline, combined with significant further development potential and exploration prospectivity.

Macquarie Research said Kagara's reported profit in 2007/08 of $A89.8 M ($US86.2 M) would be virtually matched in the current fiscal year and in fiscal 2009 could rise to $A123.4 M ($US118.46 M).