Australia | Jul 12 2006
By Chris Shaw
Last Month Credit Suisse upgraded Zinifex (ZFX) to Buy, attracted by the huge amounts of cash the company is generating and how this could benefit shareholders through either higher dividends, acquisitions or investment in extending the company’s current mine life.
It is now Intersuisse’s turn to sing the company’s praises, the broker reiterating its Buy recommendation for much the same reasons as Credit Suisse. The broker expects high metal prices to continue for several years at least thanks in part to the increased use of zinc in the coating of steel. The steel market is of course enjoying the benefits of strong economic growth in China and India, which has led to a significant lift in global steel demand in recent years.
Intersuisse expects the strength in the company’s markets to flow through to earnings, the broker forecasting the company will report a profit this financial year of $939.5m, rising to $1,300.5m in FY07 and $1,465.7m in FY08. In earnings per share terms this equates to 189.8c this year, 261.5c next year and 297.5c in FY08.
The company offers strong leverage to the zinc price, the broker estimating an increase of US1c/lb in the zinc price adds $18.8m to the company’s earnings on a before interest, tax, depreciation and amortisation (EBITDA) basis. With the spot zinc price currently above the FY06 average of US96c/lb, the broker sees more upside than downside risk to its earnings estimates.
It expects the cash flow being generated by the company will be used wisely, management pointing out they plan to invest some money on a program of accelerated stripping and overburden removal at the flagship Century mine, while also lifting the group’s exploration budget to $27m in an attempt to extend the current mine life.
The question of mine life is interesting as in Intersuisse’s view the market is being too conservative in its estimates, as the company should have little trouble extending mine reserves to at least 2012 given the exploration potential at its current operations. This is before the upside of the Dugald River project is factored in, management indicating some funds will be allocated to the pre-feasibility study at Dugald River to prove up additional reserves.
This leaves a significant amount of free cash flow, which in combination with a strong balance sheet and little debt leaves the company with the option of either making acquisitions or returning funds to shareholders. The broker suggests the latter is more likely, forecasting dividends of 85c in FY07 and 95c in FY08, compared to 4c in FY05 and a forecast 60c this year.
On the broker’s calculations Zinifex is currently trading on a P/E of 4.1x earnings in FY07 and 3.6x in FY08, which is simply too low. It argues the company should be priced on about 5.5x earnings in FY07, which implies a share price of $14.30. This is not far below the Credit Suisse target of $15.08, which is currently the highest in the market according to the FN Arena database. Add in the dividends and Intersuisse suggests the stock is offering a total 12-month return of about 40% at current levels.
The broader market view is not quite as positive, the FN Arena database showing the stock receives five Buy ratings, three Holds and two Sells currently with an average price target of $12.04, while Thomson One Analytics shows a median target price of $14.00.
Zinifex shares closed yesterday at $10.65 but have traded as high as $10.98 today.