re:madness, page-9

mbl report Tuesday, 25 July 2006
Data as at Tuesday, 25 July 2006

Recommendation

Recommendation: Neutral
volatility index: very high

Investment Fundamentals

code: ZFX AU
volatility index: very high

year end 2005a 2006e 2007e 2008e
reported e $m 235.10 855.80 1,264.28 882.34
adjusted e $m 235.10 855.80 1,264.28 882.34
gross cashflow $m 422.50 1,072.78 1,547.56 1,167.74

cfps c 84.80 218.71 317.65 239.85
pgcfps x 3.59 4.58 3.12 4.13

eps adj c 47.20 174.52 259.50 181.23
pe x 6.44 5.74 3.82 5.47

dps c 4.00 72.00 159.00 111.00
yield % 1.32 7.19 16.04 11.20
franking % 100.00 100.00 100.00 100.00
ev/ebitda x 3.55 4.22 2.30 2.88


Tuesday, 25 July 2006
Data as at Tuesday, 25 July 2006

Recommendation

Recommendation: Neutral
volatility index: very high

Investment Fundamentals

code: ZFX AU
volatility index: very high

year end 2005a 2006e 2007e 2008e
reported e $m 235.10 855.80 1,264.28 882.34
adjusted e $m 235.10 855.80 1,264.28 882.34
gross cashflow $m 422.50 1,072.78 1,547.56 1,167.74

cfps c 84.80 218.71 317.65 239.85
pgcfps x 3.59 4.58 3.12 4.13

eps adj c 47.20 174.52 259.50 181.23
pe x 6.44 5.74 3.82 5.47

dps c 4.00 72.00 159.00 111.00
yield % 1.32 7.19 16.04 11.20
franking % 100.00 100.00 100.00 100.00
ev/ebitda x 3.55 4.22 2.30 2.88

ZFX AU vs. All Ordinaries


Short term recommendations:
O Outperform, N Neutral, U Underperform

Source: ASX/Reuters & Macquarie

All figures in AUD unless otherwise stated.


Zinifex
fourth quarter production

Stock: ZFX AU
Volatility Index: very high

Event
We have completed a detailed review of our modelling assumptions for Zinifex (ZFX) and reconfigured our forecasts for the company. Additionally, Zinifex reported fourth quarter 2006 production figures which were in line with our estimates. Full year production was 599 thousand tonnes of zinc-in-concentrate, and finished zinc metal of 615 thousand tonnes.
Impact
Earnings to quadruple: Following the detailed review of our modelling we have made modest changes to our forecast earnings profile, and expect the company to report 2006 pre-tax earnings of $852m (ahead of 2005 pre-tax earnings of $207m).
We believe the biggest risk to the market's expectation for Zinifex earnings is the taxation line. The likelihood of non-cash accounting entries of up to A$100m at the tax line are likely to distort the underlying performance of the business.
Show me the money. Given Zinifex's statement that all excess cash that cannot be utilised by the company will be returned to shareholders, the market will be looking for a significant uplift in the dividend. Our base case sees a total dividend yield of around 34% over the next three years (ie >10% pa average). If we assume that all available cash is paid out, the upside potential for dividends is significant, at around 45% total yield over three years. However, tax issues and a typically conservative management team are likely to cap the eventual payout.
Looking for incremental value: Zinifex does have some promising exploration targets, however our modelling already assumes that once the Century and Rosebery ore bodies are exhausted, the smelters continue to operate into perpetuity (sourcing concentrate from third party mines). Accordingly, the acquisition/development of additional mining reserves will not impact on our smelting valuations at all. We believe the key to additive value for Zinifex is extension of current operations which can leverage off the existing infrastructure. By way of example, our early stage modelling of Dugald River suggests the project may only add less than 20c per share of value given the requirement for significant upfront capital expenditure.
Earnings revision
Following our modelling review: 2006 earnings per share forecast +1.8%, 2007 -7%, 2008 +4%.
Price catalyst
12-month price target: A$10.00.
Catalyst: volatility likely to persist in the short-term as the market digests increasing Chinese mine production and broader concerns surrounding inflation and its impact on global growth.
Action and recommendation
We expect a robust dividend yield to provide downside support for the Zinifex share price (at least over the medium-term). Meanwhile, Zinifex remains supremely leveraged to movements in currency and commodity and the forecast yield will only be as good as the movements in the zinc price allow.
Accordingly, we expect the stock to continue to trade in line with movements in the zinc price, and given our forecasts for increasing mine supply, we do not see why zinc prices should be stronger in 2007 than in 2006. Maintain neutral recommendation.