Zinifex: More Than a Miner

Background, by Eureka Report editor James Kirby. Greg Gailey, chief executive of Zinifex, may be sitting on Australia's cheapest mining stock (see Mike Mangan's story today), but the group's heavy exposure to a single commodity '” zinc '” and more specifically, a single mine '”Century mine '” has kept institutional shareholders away from the stock.

However, as Gailey makes clear to Robert Gottliebsen* in today's video interview, Zinifex has been making every effort to ensure that once the Century mine runs out in 2016, his company will be well placed to extend its operations through new mining projects already under development.

Zinifex is a two-year-old company but it carries the baggage of one of the mining industry's biggest recent failures. The company was reborn from the ashes of Pasminco, which went under after a hedging program went spectacularly awry in the mid-1990s.

Rising costs across its mining operations mean Zinifex is now heavily dependent on strong industrial demand to drive zinc prices higher in the near future. As Gailey stresses throughout the interview, Zinifex is more than just a mining company: it also has extensive and profitable smelting operations.

The interview

Robert Gottliebsen: What’s your view on the outlook for the zinc price over the next three or four years?

Greg Gailey: We’re very bullish about the zinc market and the reason we’re very bullish is we see China demand as continuing for a prolonged period; that is, what’s happening in China today is not just a couple of years; this is a decade-long phenomenon. Second, we see constrained supply. It takes some four to five years to bring a major project to market '” a new mine and those projects are simply not in the pipeline, so we think an ongoing shortage of supply is with us for at least a couple of years and possibly beyond that.

But there’s a big deposit in Iran which could change the outlook at little.

I don’t know that it’ll change things. That deposit is certainly earmarked for development by a company called Union Resources in cooperation with the Iranians, but Iran’s a very difficult political environment and I think companies are going to require relatively high rates of return to operate in those countries.

Around 80% of the Zinifex profit comes from the Century mine. What are you doing to maintain it and how long will it last?

Century is due '¦ the current ore body will expire in 2016. It’s a well-defined discrete ore body. We hold some 2000 square kilometres of exploration leases around Century and we’re very active in exploring in that area, looking for another deposit that we will be able to exploit through the infrastructure that exists there. We’re also actively exploring in Tasmania; and we’re in partnership with Terramin in South Australia; and we’re actively looking for other joint venture opportunities to explore. So we believe that we will be successful in discovering additional orebodies and the company will renew its resource base.

What are you doing at Century to maintain production to 2016?

Century was constructed to operate at 500,000 tons a year and it will do that right through till the last day, effectively, and we therefore have no issues in terms of the production out of Century over the life of the mine. Costs are certainly a key problem for the industry at this point in time. Costs are escalating. Operating costs are up. Capital costs are up and we’re doing everything we can to contain that. We have a project called Project Productivity, which was designed to take 450 positions out of the company over two years. We’re 12 months into that. We’ve taken more than 200 out in that period so we’re doing everything we can to contain costs, but quite frankly they’re escalating at a more rapid rate than we can contain them.

Are you accelerating the removal of overburden?

We are at Century. We are bringing forward overburden removal over the next three years and that will mean that costs in the last few years of that mine’s life will decline and the cash flow therefore coming out of Century increases actually as the mine nears the end of its life.

Zinifex has four smelters. Do you see that as a long-term business for the company?

Smelting’s actually a good business and, interestingly enough, despite the fact that the treatment charge the smelter gets '” which is what the mine pays the smelter to convert the concentrate to metal '” are actually at record lows, smelting profitability is actually at record highs. And the reason for that is one of the idiosyncrasies in the zinc market: that smelters only pay for about 90% of the metal they receive so they actually recover about 10% more than they pay for. With current metal prices, that incremental metal is very valuable and hence smelters are actually making record profits. We see smelting as an ongoing part of the company and one that will make a contribution to its profitability.

Does the clean-up factor and the pollution worry you in the smelting business?

No. We have a very clear policy that we want to be good corporate citizens and we want to be welcomed in the areas we operate. We are addressing legacy issues and we acknowledge we inherited some when we acquired the assets from Pasminco. We’re actively addressing those. We have a plan to spend, for instance, $56 million in the next three years in South Australia addressing some of the lead issues in Port Pirie, and we believe that the clean up ultimately is manageable, when and if it occurs, when a site is closed. But we have no intention to close any of our smelters.

Greg if you’re right about the zinc price, the market is taking a very conservative view about the prospects of the company.

One of the issues we have with the market is the market doesn’t give us any value for the ultimate renewal of the assets we have, and in a resource business if you can’t renew the assets then clearly you disappear. We have a very active exploration program. We think we have some exceptional prospects in highly prospective areas such as around Century in Queensland and, quite frankly, the market is giving us no credit for us being successful in that regard.

What are you going to do with your cash?

Again, we’ve got a very clear policy on that, which we’ve stated and we’ve lived by '”that is, that if we cannot use that cash internally to shareholders’ benefit then it will be given back to shareholders, and in our short life of two years we’ve had two dividends and a share buyback.

If I made you a takeover offer of, say 30% on the current market price, would you take it?

No it wouldn’t be enough.

How much do you want?

As much as I could get.

Seriously, do you see a likelihood of more global mergers in the mining business?

think it’s inevitable, for two reasons. One there is clearly advantages to the industry in having fewer larger players, and when I say advantages, the key advantage to me is you get a more sensible scheduling of increments and expansion. One of the industry’s biggest problems is too much additional capacity comes in in too short a time frame and the price drops. So you get a more sensible structuring of project development. The other reason is that it’s the nature of the beast; that is, if you look at most of the large mining companies that exist today they’re products of amalgamations and that amalgamation will go on. The other interesting thing about the industry is that as the food chain '¦ people move up the food chain '¦ a whole lot of new people come in at the bottom and there’s never a shortage of new companies coming into mining. So new companies coming in all the time and amalgamations occurring and bigger companies emerging.

And, of course, you’re using those new companies as part of your exploration?

Absolutely.

* Robert Gottliebsen is a national business commentator for The Australian.