Despite reporting a record first half profit of $751 million, zinc miner, Zinifex copped a small trashing at the hands of investors yesterday.
The record result produced a surge in the ZFX price to the day’s high of $17.70 before late selling tore 79c off the price and the shares finished at the day’s low of $16.91, off 29c overall from Wednesday’s close.
That was despite the strong day overall for the market.
The huge improvement in earnings was signalled several times during the half as the company pointed out the sharp improvement (actually record-breaking) in the zinc price.
Sales rose 97 per cent to $2.2 billion. ZFX earned $1.54 a share, compared to the 46c earned in the first half of 2006 (when net earnings totalled $227.6 million).
“We remain positive on the outlook for zinc with London Metal Exchange stocks at historically low levels and a moderate deficit expected during 2007,” ZFX said in its profit announcement.
And it seems that sentiment wasn’t quite bullish enough for the market.
The company indicated in a statement several weeks ago that it saw more supply entering the market during 2007. That prompted price weakness for the shares and for zinc which eased.
(The price rose one per cent yesterday to $US 3,352 a tonne on the LME.)
Zinc prices are down 21 per cent so far this year and Zinifex has blamed increasing exports from China and a shift in commodity portfolios weightings by speculators and fund managers.
As a result the company said yesterday that second half profit will be lower than the last half of 2006, should zinc prices remain at current levels.
That’s the reverse of the statements in the first half when the company said metal prices were substantially higher than in the same period of 2005 (up to 160 per cent higher!).
That’s why the company’s share price fell yesterday and why there will be some volatility from now on.
The result was a little higher than forecast by analysts who say the company will earn around $1.5 billion for 2007. Those estimates may now be trimmed in view of yesterday’s comments.
Cost increases were another concern: the company has been telling the market costs would be higher because of the program of quick stripping of overburden at the Century mine in Queensland.
Operating costs rose by 10 per cent in the period and “pressures will remain while commodity prices are high and labor and capacity constraints continue,” the company said in the profit statement. But it said that an overall increase in the zinc price over the year would more than offset the cost increases.
The company said production slipped 10 per cent because of longer than normal planned shutdowns at its Century mine and Port Pirie smelter, as well as lower lead grades at Century, and output should return to more normal levels this half, except for the output of lead concentrate from Century.
First half dividend was raised to 70 cents a share, from 10 cents a share in the same period of 2006, so shareholders are being rewarded for the patience since the float out of the ashes of Pasminco.
Zinifex said earnings before tax for the six months to December were a record $967 million, “a 377 per cent increase over the corresponding period last year. Significantly higher zinc prices were achieved which more than offset moderately lower production and sales volumes.
“Net profit after tax (“NPAT”) at $751 million was close to the June 2006 half-year record and was more than three times that declared for the same period last year. Having now recognised substantially all of its available tax losses, the company incurred a tax expense during the period.
“Net cash flow from operating activities increased strongly by more than 350 per cent to $859 million. An impressive result given that working capital increased by some $190 million, largely due to higher metal prices.
“Mining earned the majority of the Zinifex’s profit although all of our operations contributed positively with Hobart and Budel delivering the largest percentage increases.”
“Metal prices were exceptional with both zinc and lead prices rising strongly on the back of rapidly depleting LME stocks. The average LME zinc price for the 6 months of US$3,775 per tonne was 157 per cent higher than for the comparative period in 2005.
“After having paid a dividend of $340 million, cash held at the end of the period of $834 million was more than three times that held at the same time last year. Net cash at 31 December was $683 million after deducting debt of $151 million.”
This year it’s got the acquisition in Canada of Wolfden Resources which will cost almost $380 million; the restructuring of its smelting and processing operations and separation into a new joint venture with a Belgium company and more work at Century and on Dugald River and Rosebery in Tasmania.
