the australian today

Zinc in the pink
CRITERION
Tim Boreham
January 31, 2007

Perilya (PEM) $5.37
FOR zinc bulls - there's enough around to form a herd - the investment road usually ends at Zinifex. But folks mention this Broken Hill stalwart as a cheaper zinc exposure.
Not that Perilya is undiscovered: the stock last year was the best ASX 200 performer, with a total return (including divs) of 450 per cent.
It's enough to make holders of the failed Pasminco weep: Perilya bought the Broken Hill mine from the receivers for $90 million in early 2002 - and this year alone should post a net profit of around $120 million.

The world's 10th-biggest producer, Perilya yesterday delivered slightly soft December-quarter production numbers: 28,000 tonnes of zinc and 16,927 tonnes of lead.

Perilya forward sells only 10 per cent of reserves and so is well placed to benefit from the virile zinc price, which more than doubled in 2006. Like the new precious metal nickel, zinc has been driven by inventory tightness and the lack of new supply coming on stream.

Zinc isn't the easiest metal to find, and with the exception of Century (Queensland) and Red Dog (Canada), deposits are small.

As with Zinifex, Perilya's key challenge is to beef up its reserves position. Broken Hill has a mine life of only six years, but there's a magic pudding element to the deposit in that extension drilling can be relied on to find more stuff.

"We have been able to replace four years' production with five years of reserves," says Perilya chief Len Jubber. "So after years we now have more reserves than we inherited."

A side project, the Flinders Zinc (Beltana) development in South Australia, involves extracting 150,000 tonnes of high-grade (38 per cent) ore, as well as stockpiling 242,000 tonnes of lower-grade material.

Jubber says Flinders can be either a quickie one-year project generating high returns at little cost, or a more sustainable project if more ore is proved up.

Perilya is sitting on $175 million of cash, which leaves plenty left over for dividends after the $15-20 million earmarked for exploration.

According to Jubber, Perilya plans to focus on base metals, which may involve takeovers.

Perilya's smallish Daisy Milano gold mine - originally acquired as an earnings hedge against low base metal prices - is up for sale.

On the cost side, Perilya has a few advantages over West Australian miners, thanks to a captive workforce in a township which boasts a 127-year mining history.

Perilya trades on a current-year forecast earnings multiple of less than five times.

While the zinc portents look great on paper, it's prudent to assume a retraction. Even if the price falls 30 per cent, Perilya's business model still stacks up. BUY