This area in Tas is very rich in Zinc,
To affirm, I like BSM for 5 reasons,
1. Small Mkt Cap
2. Excellent Land holdings
3. Focus on near term cash flow from JORC Zinc Deposits
4. Huge Blue Sky discovery opportunities around ZFX’s Roseburry Operation,
5. Blue Sky is so huge that ZFX is doing a JV with BSM,
Now how many JV’s are ZFX doing? = 2
1 with TZN $100m + Mkt Cap
1 with BSM $10m+ Mkt Cap Choose your exposure!
Zinc bull takes future by the horns
Robert Gottliebsen, Vision 2000
July 08, 2006
ZINIFEX believes the next three years will be good for zinc and that the stock market is under-pricing its future prospects.
Chief executive Greig Gailey says analysts have not factored in his long-term plans to ensure the company will still be prospering in 15 years. So when you ask him whether he would recommend a bid at a 30 per cent premium to the market, he comes back quickly: “We would probably hold out for 60 per cent.”
But Gailey is a realist and knows the resource industry is undergoing dramatic consolidation and Zinifex has an open register, making it vulnerable. But the zinc boom has given him strong cash flow, which means that Zinifex could itself do a share-exchange deal with a company that had major developments requiring finance.
Gailey has had an incredible roller-coaster ride since leaving BP and becoming chief executive of Zinifex’s predecessor, Pasminco, in August 2001. He had barely put his feet under the desk when the operation was put into administration.
But Gailey stayed with the enterprise and worked with the administrator, finally helping to engineer the float. In the year to June 30, he will be rewarded because analysts expect Zinifex to earn $950 million – paradoxically, the exact sum the banks received in the public float which crystallised their $2 billion loss.
Zinifex’s 2005-06 earnings received a big boost from zinc prices in the second half so analysts are looking for a profit in the vicinity of $1.5 billion, or around $2.70 per share, in 2006-07. That puts the company on a projected price/earnings ratio of between three and four.
It is at this low level because around 80 per cent of the Zinifex profit comes from the Century zinc mine, which is a discrete ore body that will produce at full capacity (500,000 tonnes) until 2016 when production will suddenly come to an end. Until 2011, the company will need to spend around $100 million annually on overburden removal. In the final five years, cash generation will skyrocket, depending on the zinc price.
Gailey is a zinc price bull for at least the next three or four years. He points out that during the decade to 2000, many big new zinc mines, including Century, were commissioned, flooding the market and causing the price to slump to uneconomic levels. Exploration was halted and new projects mothballed. Then demand from China took out the surplus production, and there are no new major, committed projects, so the price has risen to above $US3300 a tonne – a more than fourfold increase from the level of the tough years.
After 2011, whether the price holds that level, goes higher or slips back will depend on demand at that time and whether the major miners ramp up major new mines. But Gailey points out that because no major company has committed to a significant new mine, it will be four or five years before one is started.
There are very few major ore bodies awaiting development because exploration was stopped. The biggest undeveloped ore body is in Iran and, not surprisingly, the political risks are deterring capital investment. Others are in frozen areas of North America that will be very costly to develop. The majors are hesitating because capital costs have ballooned and they need a sustained zinc price that is substantially above previous levels to justify investment.
The memory of the slump of 2000 is still fresh. The market is pricing Zinifex shares on the basis that by 2016 it will have only token zinc production and will be left with four smelters.
Gailey has a four-point plan to prove the market wrong. The first step is to develop the Dugald River mine near Cloncurry. Dugald River was sold to Zinifex (then Pasminco) by Rio Tinto as part of the Century zinc sale. It is high-grade zinc ore which contains manganese which previously made it very unattractive to smelters. But modern Chinese smelters can treat zinc concentrates containing manganese.
The company is conducting a pre-feasibility study and, if this proves successful in 2007, there will be a full feasibility study leading to a mine that will produce around 200,000 tonnes of zinc a year (two-fifths of Century).
Zinifex has no net debt and will be able to fund the $500 million Dugald project from cash flow.
Gailey’s second plan is to accelerate exploration around Century. When Rio Tinto explored the area, it was looking for copper and Gailey is optimistic that he can find at least one ore body that will enable zinc production from the company’s Century facilities to continue after 2016.
Zinifex exploration outside these two projects is designed to take a majority stake in highly prospective areas found by junior miners. In South Australia, it is funding an $8 million exploration program to earn a 70 per cent stake in the highly prospective Minninnie zinc deposit owned by Terramin. If the exploration produces disappointing results, Zinifex will walk away. It has done a similar deal with the Base Metals group in Tasmania.
Zinifex also believes the company should do joint deals with junior explorers in North and South America where there are highly prospective zinc prospects.
In all, it plans to spend $90 million over the next three years on exploration.
Greg Gailey’s policy of not attempting to peg out leases in areas outside of the mining sites but to allow junior explorers to do the early work is a radical departure from conventional exploration thinking.
The third plan is to further develop the company’s second mine at Rosebery, Tasmania, which has been producing for around 70 years. The company is to spend $19 million to determine exactly how much ore is in the mine and, once again, the company is confident Rosebery will still be producing well after 2016.
Modern, conventional miners rarely have a substantial investment in smelting. Indeed, one of the reasons why companies are reluctant to bid for Zinifex is its ownership of four smelters. Potential bidders fear that if any of these smelters need to shut, the company will be hit with an enormous clean-up bill.
Gailey disputes this, pointing out that the cost of closing the smelter at Cockle Creek was less that $50 million. The company has no plans to shut any of its smelters, but, theoretically, if it shut its Dutch smelter, the value of the real estate would yield a profit on the closure. The Dutch smelter is very profitable and expanding because it is efficient and Europe is now short of smelter capacity.
The company receives periodic bad publicity from the historic problems at Port Pirie. Gailey says the company is moving to overcome the Port Pirie problems created by Zinifex’s heritage. Longer term, he believes the Port Pirie complex will help the company make an important thrust into zinc recycling.
Gailey can see smelting as an important source of future profits for Zinifex but does not plan to open new smelters because that would involve investing in new projects in Third World countries. Any surplus cash will be returned to shareholders.
If Gailey is wrong (and the market is right), then by 2010 Zinifex will only have six years to run at Century, although it should be starting to ramp up Dugald.
But Gailey’s vision is that the company will have by then found two ore bodies the size of Rosebery so that it can maintain production beyond the Century closure.
Most resource giants have projects coming forward and are not faced with the stark reality of mine closures as a result of a failure to explore. But the zinc boom has given Gailey and his people the cash to reverse their history and create their own future.
Gailey might, of course, recommend a bid a little lower than a 60 per cent premium on the market. But it won’t be much lower because he is supremely confident Zinifex can be a major zinc producer well beyond 2016.
He believes demand for zinc will continue to rise because of the development of China and the high cost of alternative products like aluminium and stainless steel.
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