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Tuesday, December 12, 2006


What Will Zinifex Do With All Of Its Cash?

Zinifex and Umicore announced today that both companies will spin off their zinc smelting/refining operations and combine them into one new company, which will have an IPO planned for late next year. The new company will be the largest refined zinc producer in the world, though it really would only be the middle man, processing the valuable and scarce zinc concentrate produced by zinc miners to create the refined zinc whose spot price is widely quoted (over $2.00 per pound now).

Zinifex, one of the largest zinc mining companies in the world, plans to "sell out completely as soon as practicable, thus severing all links with its smelter activities." Zinifex will focus on their higher margin mining business, which we believe means they will be looking to replace their depleting zinc reserves via takeover: "With the cash from the smelter sales and an ungeared balance sheet, Zinifex certainly would have the capacity to undertake large-scale takeovers if it wished, both locally or overseas." Zinifex only has less than 5 years of mine life left at Rosebery and less than 10 years left at the huge Century mine, with its smaller Dugald River project only going through prefeasibility studies at this point. If they can't extend the mine life at the Century mine, they'll need to replace that production with other large zinc projects soon.

If Zinifex decides to buy a world class preproduction zinc project that has already completed a feasibility study to prove economic viability, it won't have much to choose from, as we explained in our last article: "If MMG can successfully complete the feasibility study for their Sierra Mojada project at anywhere near expected production rates, the problems at Mehdiabad and San Cristobal could make Sierra Mojada the only world-class sized zinc project in the world proven feasible and scheduled for production in the next few years. At a time of zinc crisis, where MMG is also the only zinc junior miner listed on a major exchange in the U.S., MMG’s 100% owned Sierra Mojada project could become the premier mining takeover target."

Since that article, the situation with Mehdiabad in Iran has worsened, as the Iranian government has decided to cancel agreements with its Australian partner who was managing the project.

Metalline Mining could be completing their feasibility study on their zinc project around the same time Zinifex sells out from their smelter operations, raising a significant amount of cash. It could be a perfect match for a Zinifex buyout. However, as we explained in January, we believe Anglo American will try to buy Metalline's zinc deposit, and in an August article we explained that there are a number of other major mining companies in a similar situation to Zinifex, filling up their coffers "with incredible sums of cash while their reserves and resources decline. Rather than investing heavily in exploration, decreasing reported profits and making them look less attractive to the financial community, large mining companies are buying other companies with large mineral deposits."

As we expressed last time, "We expect multiple takeover bids at much higher levels from cash rich major mining companies looking to replace their depleting reserves. While we believe shareholders would best be served by MMG going to production alone, takeover bids would ensure MMG a more appropriate market valuation for their premier assets." MMG currently trades at a small fraction of expected annual cash flow from their zinc project, but we don't think that will remain the case for long.

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