Australia | Jul 30 2007
By Chris Shaw
Zinifex (ZFX) has delivered a record quarterly in terms of zinc production from it flagship Century mine but the story is unchanged in terms of the market’s assessment of the company’s outlook, which in the view of equity brokers continues to depend a lot on the outlook for zinc prices and the upcoming sale of the company’s zinc smelting assets.
The reason is the production story is a secondary one at present given on Citi estimates the company could have as much as one-third of its market capitalisation in available cash to spend on either adding to its reserves or returning cash to shareholders or a combination of both.
This assumes the sale of the zinc smelters achieves a good price, something Merrill Lynch suggests is far from certain. In the broker’s view the final sale price will depend on zinc prices between now and when the sale goes ahead in the next couple of months, as well as the market’s outlook for equity risk at the time of the spin-off. With its view being the risk for both is to the downside the broker retains its Sell rating.
Also among the doomsayers is JP Morgan, as following the quarterly the broker has retained its bottom-of-the-market price target of $11.00 per share, which compares to a current market price of around $19.00.
The broker’s argument is the current share price factors in both ongoing stronger zinc prices and the company itself becoming a corporate target, while it sees both outcomes as unlikely. As a result, it cautions the share price cannot be sustained at current levels and so it continues with its Underweight rating.
The counter argument according to Credit Suisse is there are a number of potential sources of upside for the share price, including a re-rating against its peers once it becomes simply a mining and exploration story following the smelter sale. Add in the possibility of either significant capital management or increases to reserves resulting from the sale of the smelting assets as well as potential for upside to earnings from the company’s sensitivity to zinc prices and the broker has little trouble justifying a Buy rating.
Citi too remains a supporter as while it has cut its earnings estimates this year by around 9% on lower smelter output and in FY08 and FY09 by 10-20% given the stronger Australian dollar it points out the company’s earnings outlook is very much at the mercy of the zinc price.
As an example it points out while it forecasts earnings per share (EPS) increasing from 279.9c this year to 309.5c next year before falling to 164.5c in FY09, earnings in both years would be flat compared to this year if the current spot price for zinc held.
Its estimates are significantly more aggressive in FY08 than are JP Morgan’s forecasts, which are for EPS of 259.5c this year, 249.9c in FY08 and 163.9c in FY09, while Credit Suisse expects earnings of 286.4c, 244.8c and 192.9c respectively.
Thomson One Analytics shows median earnings per share forecasts of 279c this year, 240c next year and 171c in FY09, while it gives a median price target on the stock of $19.71.
According to the FNArena database, which shows the company as rated Buy twice, Sell twice and Hold five times, the average price target is $18.49. Shares in Zinifex are little changed today and at 3.00pm were trading 6c higher at $19.16.