cadence capitals reason for being short zfx

ZFX position from the May 2008 Monthly Investment Update for Cadence Capital Limited. www.cadencecapital.com.au

Zinifex (ZFX) – Short (6.0%)
Zinifex is soon to merge with Oxiana. The combined group will derive most of their revenue from zinc and copper mining.

The drop in the zinc price from just above US $2 per pound to just below US $0.85 per pound has had a huge impact on the profitability of Zinifex. The rise of the Australian dollar against the US dollar has made the impact even worse. If we input current spot prices for zinc, lead and the Australian dollar into our model we determine that Zinifex (excluding Oxiana) is on a price earnings multiple of over 50.

Based on our modeling of the combined entity, Zinifex and Oxiana will trade on a price earnings multiple of around 20 once Oxiana’s Prominent Hill mine begins operations in late 2008, which we believe makes the combined entity overpriced.

The market appears to agree with our view as both companies shares have been trending downward recently.