zfx 20 dollar target

CitiWarrants: Zinifex Ltd - Budel Too Hot to Handle
27/04/2007

StockFocus
FY07 Estimate Trimmed — FY07 estimate trimmed 2% to A$1.54b driven by delayed Century shipments and restricted Budel roaster throughput. MQ07 mine production was in-line with Citigroup Investment Research’s (CIR) estimates and Zinifex remains CIRs preferred base metal stock driven by FY08 zinc of US$2/lb, smelter spin-off and dividend yield. CIR rate ZFX Buy, High Risk with a $20.00 target price.

Mine Production In-Line — Mine production was in-line with CIRs estimate and flat on the prior quarter at 142.5kt of zinc and 15kt of lead. Century concentrate stocks built up ~70kt after barge cyclone damage, but shipments will be largely caught up by end FY07 through the use of the Macarthur River vessel. Lead production at Century will increase in FY08 as grades improve in the transition to Stage 6.


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Budel Running Hot — Zinc production of 159kt was slightly below CIRs estimate with high carbon content Century concentrate causing elevated temperatures in Budel’s roasters. Use of more oxides and blending of concentrates should alleviate the problem in FY08, but CIR has reduced its June quarter production by 7kt that also allows for the pull forward impact of a 10 day roaster outage.

Zinc Set to Bounce — Zinc stockpiles are back below 100kt and CIR expect an 80kt market deficit in 2007 to drive prices to US$2+lb in 2H07. Zinifex also expect the zinc price to be well supported by the closing of the price arbitrage between the SFE/LME further curtailing Chinese exports, and strong demand.

Smelter Spin-Off — The smelter spin-off is on track for late-3Q07, and an IPO shortly thereafter, with a binding agreement signed. CIR value the smelters at A$2.8b using NPV, increasing to A$4-5.5b at peer group multiples.