Plenty of zinc, but it's not the metal of the month

WHEN it comes to commodities, zinc is not exactly the flavour of the month. Yesterday alone, Perilya announced it was downsizing its Broken Hill operations to focus on higher grades - sacking more than half its staff in the process - and OZ Minerals revealed its Zinifex arm had turned an operating loss in the second half.

So Kagara hasn't exactly picked the best time to announce a maiden resource at its Admiral Bay zinc project in Western Australia - at least if it hoped for a strong share price bounce.

Xchange understands that Kagara, which entered a trading halt yesterday, expects to release a resource substantially bigger than its initial target of 50 million tonnes. It should also include some scoping study numbers indicating the expected production level from the world-class deposit. This initial resource - about 1400 metres deep - covers only 2.1 kilometres of the 18-kilometre strike length in the enormous, $1 billion-plus project. Kagara plans to sink an exploration shaft to assess the resource more effectively.

Kagara, which this week did not declare a dividend after two years of doing so, expects to fund the project in part by selling its Lounge Lizard nickel deposit. But with the negative sentiment in the zinc market, this may not be the best time for it to focus attention on Admiral Bay rather than its copper and gold projects.

An RBC Capital Markets analyst, Geoff Breen, yesterday wondered what value the market would place on a deep zinc-lead project at this point in the cycle. But Goldman Sachs JBWere noted Admiral Bay was where Kagara's true value lay.

Virgin turbulence

Virgin's boss, Brett Godfrey, will be hanging on today for the beginning of a wild ride.

The airline's share price will be under pressure because of the impact of Toll Holdings offloading its 62.7 per cent stake in the airline to the transport company's shareholders. They will be able to trade from today the Virgin shares they receive from Toll's distribution.

All of which doesn't bode well for Virgin's share price - in the short term, at least. That's because at least some large investors are unlikely to want to keep the shares. Macquarie Equities believes several large institutional investors in Toll and other fund managers will reduce their stakes in Virgin once they gain their shares because the airline is not included in the major sharemarket indices.

"Secondly, many existing Toll shareholders are unlikely to be long-term holders in airlines, regardless of Virgin's short-term prospects, which would suggest a substantial dumping of shares in the short term," it said recently.

It's certainly been back to the future for Virgin's share price, after gains in recent weeks almost evaporated in just a few days. The stock closed unchanged at 59c yesterday - just 12c off an all-time low reached in June.

Petajoules potential

Valuing Queensland coal-seam gas assets is truly a difficult proposition.

Companies such as Petronas, Shell and BG Group have placed a value per gigajoule (GJ) of reserves, but that value is only as static as the amount of reserves a company has on its books - and those seem to increase practically by the week.

For example, Sunshine Gas, which on Wednesday accepted a friendly $895 million bid from Queensland Gas (QGC), has 1100 petajoules of possible reserves, for which QGC is paying roughly 70c a GJ excluding Sunshine's cash balance and tax benefits. That is less than Petronas paid for Santos's reserves but in line with other recent transactions.

But as some analysts noted, Sunshine hasn't issued a reserve upgrade this year. It had targeted an upgrade to 2000 petajoules within a few months, meaning QGC is likely paying half of the mooted 70c a GJ price.

And when you factor in Sunshine's 30,000 square kilometres of exploration acreage, it's likely it will prove up many more petajoules in years to come.

BG has admitted it took a similar view when it bought into QGC's projects. It assumes there is enough gas there to underpin two liquefied natural gas production trains, even if the possible reserves aren't there at the moment. Yet it somehow claims Origin Energy's acreage - some of it the same fields as QGC - doesn't have the same upside.

That makes one wonder how much Origin - or for that matter, any of these coal-seam gas companies - is truly worth and how much upside is remaining.

Unlike QGC's scrip bid for Sunshine, BG is offering only cash. So if Origin manages to increase its reserves by an enormous amount in the future, the 50c to 70c a GJ that BG is offering now will eventually seem like a bargain. A land-grab is on, and investors need to consider whether it is worth cashing out of coal-seam gas companies now despite their early stages of proving reserves, or if the future prospects - albeit risky - could be many times brighter.

Bally good show

While the poker machine maker Aristocrat flounders amid profit downgrades and the loss of its boss, its rival Bally Technologies is raking it in, with more customers in the fourth quarter boosting profit by nearly 70 per cent. There's an Australian second-in-command at Bally, who may be in the running for the top job at Aristocrat.

xchange@smh.com.au