Australia | Aug 25 2006
By Greg Peel
Zinifex is essentially all about zinc, and at the moment it’s pretty valuable to be of the world’s leading zinc producers. Valuing Zinifex is extremely dependent on what one’s assumptions are about the long term zinc price. A slight adjustment in the distance equates to wild swings in today’s discounted value.
Hence it’s no surprise that Zinifex boasts one of the widest range of target prices of any stock in the FN Arena database. After posting a profit of over $1 billion, brokers had another go at bumping up targets. Consensus was only around the $900 million profit mark.
Zinifex closed yesterday at $10.99, but targets range from $9.00 (JP Morgan) to $15.08 (Credit Suisse). That’s a massive 55% swing around yesterday’s close. But wait, we forgot about Merrill Lynch.
The broken record award for 2006 must go to Merrill Lynch’s resources analysts. The 52-week range on the Zinifex stock price is $2.87 to $13.45. That’s a 368% increase. But on the way up, Merrills started despairing.
“Are you all mad?”, Merrills analysts as good as said. “You are assuming these levels of zinc price are going to be sustained for two to three years. Haven’t you ever heard of cycles?”
To be fair to Merrills, in the same 52 week period the zinc price has rallied from around US$0.60/lb to peak at around US$1.75/lb. The usual, albeit delayed, response from the world following such a rally is to madly start ramping up production and looking for more deposits. In theory, the supply will begin to catch up to demand, and the zinc price will fall. That Merrills believes the market is pricing in such high levels for a whole 2-3 years ignores the fact that supply should have started catching up by then.
The problem is, there are few signs yet of this occurring. Demand has not abated at higher prices, and not only is supply struggling to catch up, it is beset with delays, strikes and shutdowns. Despite the May correction, zinc is still trading around US$1.50/lb. Most of the resource analysts around town simply see zinc prices staying this way for a while yet.
Merrills has a Sell on Zinifex (and has had for some time). The analysts don’t set a target on a Sell, but are on record as advising clients to sell down to $8.00, and not to buy before $6.00. This makes our target range even wider – $8.00 to $15.08, or 64% around yesterday’s close.
In concert with the differing target prices, are the spread of analyst ratings. Zinifex rates 4/3/2 on FN Arena’s Buy/Hold/Sell ratio.
So armed with such disagreement, what is a poor investor to do? Buckle up, is probably the best advice. If your’re in Zinifex, you’re having the ride of your life.
But this story doesn’t end at targets and ratings. There has been speculation all year as to just what dividend the company might pay out. This is very important, not just because part of the value of any stock is its yield, but because in the case of runaway Zinifex, the dividend represents a quantum of the zinc rally an investor can actually crystallise. Even if the zinc price suddenly collapsed, the dividend, based on an exceptional year of high zinc prices, is in the bag.
Analysts were in about as much agreement on the dividend as they were on the price. Lo and behold, the average dividend expectation was $0.70, and that’s exactly what Zinifex paid. The only problem is, the range of prior estimates was all the way from $0.30 to $1.10.
$0.70 represents a payout ratio of 81% and a healthy yield of, well, who knows? You could say around 7%, which is pretty good for a speculative stock, but the stock price is a moving target. Analyst estimates for next year’s yield are equally as wild.
Despite differing views, brokers are in agreement that ongoing value in Zinifex lies in its exploration program. If the company can produce more zinc, and prices stay up here, the company will make even more substantial profits.
If the company finds more zinc, and prices collapse, well at least it will have more zinc to sell at lower prices.
If the company, or anyone else, finds an awful lot of zinc, then this will only help the price to collapse.
When will the world’s appetite for zinc begin to plateau? When will supply finally catch up? Those are the questions required to be answered before deciding to invest in Zinifex. And no one can much agree on any answer.