Zinifex seems to have undergone a major re-rating as the sagging world zinc price and the stronger Australian dollar trashes its share price.
The shares have fallen from around $18.50 to $14.38 yesterday.
A looming oversupply and slowing consumption seems to be the major causes, but the exiting of many commodity markets (especially oil, gold and copper) in the past day or so by major financial investors, is also another factor. The LME three month zinc price fell more than 3% on Monday night.
The price is now around $US2,650, down from a high this year of just over $US4,000 a tonne. That was in April and the price has been in decline since, despite some bouncing around in the rebound in September after the half a per cent cut in interest rates by the US Federal reserve.
Yesterday the country's biggest miner, Zinifex, which is also the world's third- largest miner, forecast that 2008 revenues would fall because of declining prices and the stronger Australian dollar.
Acting CEO, Tony Barnes, told an investment conference in Singapore that prices may decline because of extra supply from new mines and expansions. His presentation was released on the ASX yesterday.
Prices have already comeback sharply, although the price of the companion heavy metal, lead, remains firm because of strong car battery demand in Asia and India and supply disruptions. The lead market remains in under supply.
According to Mr Barnes: "Lower zinc prices and higher Australian dollar, US dollar exchange rates will lower revenue. Cost pressures persist, a similar rate of increase to fiscal year 2007 is expected.''
Zinifex shares fell by up 75 cents, or 5.1% at one stage on the ASX, before re-tracing some ground to end 48C down at $14.38.
The 21% fall in the shares came despite the successful IPO of the Nyrstar processing assets (ZFX sold its processing businesses into a joint venture with Umicore and floated it in Europe) which netted Zinifex around $1.6 billion.
Investment bank, Citigroup has cut its zinc price forecast for the first half of 2008 by 35% on rising supply.
The price of zinc has fallen 38% this year and is the worst performing metal on the London Metal Exchange.
Citigroup said an expected 57,000 metric-ton surplus in 2008 would be the first in three years.
"Our estimates and target price for Zinifex have been mauled by a 29% downgrade to our 2008 zinc price forecast to US$1.25/lb, from US$1.75/lb previously.
"An upgrade to our 2008 lead price forecast to US$1.38/lb, from US$1.05¢/lb previously, partially offsets the change to our zinc price/Treatment Charges (TC).
"The potential to boost Century lead production, through blending in high-grade, vein-style lead ore from a satellite deposit in 2008, provides upside risk to our production and earnings estimates.
"The zinc market appears to be pricing in a smooth ramp-up of new/re-commissioned mine production in 2008. Were any disruption to occur, the zinc market would be in deficit in 2008E, potentially resulting in significant price spike, particularly in 1H.
" Zinifex's bulging cash wallet of about A$2.6b gives it substantial options to undertake M&A, fast-track projects (Dugald River & Wolfden assets), buy back shares and/or increase dividends. In an ever-consolidating sector, the company is also a self-funding potential acquisition target, in our view. We have updated our zinc, lead and treatment charge (TC) assumptions to take account of recent market pricing.
"A rising tide of bearish sentiment has arisen in the zinc market and is depressing prices, caused by expected new mine supply, notably the San Cristobel mine in Bolivia. The expected mine supply has also changed the balance of power in the mine-smelter treatment charge negotiations, with annual contract zinc TCs now expected to increase in 2008.
"In contrast to zinc prices, there is continued strength in lead prices, driven by strong battery demand in China, and a mine supply shortfall following the forced closure of the Magellan mine in Western Australia.
"Given that the key sensitivity for Zinifex is the zinc price, the combination of the above changes has driven a 32% downgrade to our FY08 NPAT estimate, to A$820m. Also factored into this downgrade are the lower-than-expected proceeds on sale of the smelting assets (Nyrstar pricing range slightly lower than we had assumed).
"For FY09 and FY10, our estimates have been downgraded by 28% to A$560m and 7% to A$485m, respectively. Our target price is based on a combination of NPV and P/E and has been downgraded by 18%."
