Australia | Feb 26 2008
By Chris Shaw
Zinifex ((ZFX)) is a very different company since selling its smelting interests to Nyrstar last year, but the change leaves open the question of where the company can deliver on growth in the future. The proposed acquisition of nickel play Allegiance Mining ((AGM)) gives some insight, but as Macquarie notes further acquisitions are clearly on the cards.
The broker points out management has indicated the future balance of the company could be something along the lines of 30% copper, 30% nickel and 40% zinc and lead. To achieve this balance additional acquisitions would be necessary and ABN Amro notes the company would not be adverse to raising either debt or equity if a suitable opportunity presented itself.
Post the profit result there is clearly some acquisition risk associated with the company, though the level of such risk is difficult to quantify as no deals post the Allegiance offer have yet been announced. This leaves the focus on earnings in the short-term and here the news in terms of yesterday’s profit result appears reasonable.
Earnings for the period were broadly in line with market expectations and in terms of underlying earnings a little better than Macquarie had expected, though the outlook is clouded by the fact costs continue to increase in the group’s mining operations.
According to ABN Amro the increase in treatment charges is likely to flow through into an impact on margins, which means pressure on earnings going forward. To reflect this the broker has cut its normalised earnings per share (EPS) forecast by 7% this year to 93c, though it has increased its forecast in FY09 by 10% to 23c. (This is not a typo, ABN Amro foresees a 75% drop in EPS in fiscal 2009).
Others in the market are more positive on the FY09 earnings outlook, as for example Macquarie expects a full year EPS outcome this year of 93c but a FY09 outcome of 60.1c. While forecasts are relatively closely grouped this year there is a wide range of market estimates for next year, UBS forecasting FY09 EPS of 103c and Thomson One Analytics showing a median EPS forecast for FY09 of 95c. Much of the variability in forecasts is due to different expectations for the zinc price and for the Australian/US dollar exchange rate.
Macquarie argues the outlook for both factors means investors should be a little more cautious with respect to the stock, backing up its view by downgrading its rating to Underperform from Neutral and suggesting holders of the stock should look for periods of short-covering in the zinc market to reduce their exposure. The broker doesn’t recommend going too short the stock though as it remains something of a takeover target thanks to the cash on hand following the sale of the smelting assets.
Citi rates the stock as a Hold but offers similar arguments in support of its view, seeing risk from a stronger Australian dollar and potentially weaker zinc prices. The broker also points out the Allegiance deal will be dilutive for earnings based on existing resources, while JP Morgan similarly questions the price being paid given the offer has been pitched at a 60% premium.
Credit Suisse continues to rate the stock as a Buy, suggesting the higher than expected dividend payout is a sign management is confident in the earnings outlook. Deutsche Bank offers another Buy rating in the FNArena database given it expects the strong cash flow the company generates will assist it as it looks for expansion opportunities, though the broker suggests management needs to do a good job in picking its targets going forward.
Overall the FNArena database shows three Buys, two Sells and five Hold recommendations with an average target price on the stock of $11.54, whcih is down from $12.35 prior to the result thanks in large part to Citi cutting its target to $11.00 from $15.20 following a reinstatement in its coverage of the stock. By way of comparison Thomson One Analytics shows a median price target of $11.53.
Shares in Zinifex today are weaker despite a slightly stronger overall market and as at 2.20pm the stock was down 46c or 4.4% at $10.04.