This was a research paper done by Aspect Huntley on 9/01/2008
Recommendation: Buy Sector Zinc & Lead Miner Market Cap $5,645.2m 52 Week High/Low $21.60 - $11.10
ZFX pledges Allegiance to nickel
Anointed MD Andrew Michelmore, previously of WMC Resources, has made his first corporate move with ZFX looking to acquire Allegiance Mining (AGM). AGM’s main asset is the Avebury nickel mine near Zeehan on the west coast of Tasmania. Avebury is expected to produce 8,500t of nickel in concentrate annually with processing to start in early 2008. AGM sees potential to increase output to about 14,000t by expanding mill capacity.
Both ZFX and AGM estimate low cash costs of about US$3.00/lb of payable nickel. This would place AGM in the lower half of the cost curve. ZFX believes low mining and processing costs more than offset low grades but some skepticism is justified. Mining and milling costs per tonne of ore will need to be about one-third of the Kambalda miners. Michelmore knows the nickel business well but probably arrived late on the scene.
The bid is 90c a share. If more than 30% is captured or the AGM board recommends the offer, it will rise to $1.00ps, valuing AGM at $807.1m fully diluted. Our initial AGM valuation is $640m or 80c a share fully diluted. This assumes long term US$10.00/lb nickel, an A$/US$ exchange rate of 0.80 and a 10% discount rate. It incorporates expected exploration success. We include the mooted expansion to 14,000t of nickel a year from FY10 and forecast life to 2020 based on mining 110% of resources. Resources total 158,000t of nickel grading 0.97%. The grade compares unfavourably to Kambalda miners like Sally Malay and Mincor with their typical 2-3%.
On our numbers, the acquisition dilutes our ZFX valuation by 35c a share to $13.35. A reduction of that size is of little consequence. If the acquisition works and costs and production are as expected, the benefit from diversification would more than make up for the decrease. Long term assumptions of US$0.90/lb zinc, US$0.70/lb lead, an A$/US$ exchange rate of 0.80 and a 10% discount rate are unchanged. The acquisition should be mildly earnings accretive from FY10. Our earnings forecasts are unchanged for now with ZFX yet to acquire a meaningful slice. Despite the lower valuation, we upgrade to Buy due to the recent share price pullback. The strong balance sheet, cashflow and yield attract, particularly if zinc prices can hold up or even advance. ZFX is strongly leveraged to zinc and has mining risk. It is not for conservative investors.
ZFX Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
