I bought at $1.80 in Sept. 2004. ZFX was undervalued by the market for many months since the IPO in April 2004, due to the negative perception of its "linkage" from the Pasminco saga.
IPO was $1.85. The banks that had lent to Pasminco had to swap debt for equity as part of the restructuring process. Upon listing, ZFX was sold down to $1.49 in May 2004 as some of the banks decided to have closure and close their files on a negative chapter.
Over the ensuing months, the commodities market boomed, but ZFX has only zinc and lead, metals that tend to lag price rise trends of other base metals. Despite announcing two profit upgrades, the market continued to shun ZFX. The players that were burnt by Pasminco were not prepared to take another risk. Brokers were reluctant to recommend ZFX due to Pasminco.
I viewed this as a serious market mispricing when I bought at a forward P/E of 5. I relish in such positions as they are rare.
ZFX started its price rise in Dec. 2004, after another profit upgrade (this was how dense the market was that it took 3 upgrades to be noticed).
ZFX hit $3.41 on 8 March 2005 but has fallen back to $3.13 today.
It is at P/E of 8.8 FY 05 and forward P/E of 8.4 consensus FY 06.
This is a low P/E. However, the critical aspects for analysis of ZFX are the expected LME price for zinc (because ZFX does not hedge), which is expected to continue the upward trajectory and the falling stock piles of zinc, which would underpin the spot price, other things being equal.
ZFX announced an on-market share buyback for $70 million commencing April 2005. This exercise (subject to resolution with ATO) will underpin the share price of ZFX. Looking at the figures, I reckon this on-market buyback will be of value to shareholders. My thinking is that ZFX's price will rise over the next few months. I will hold.
ZFX's balance sheet is strong. It has no derivative exposure and thus, no sudden surprises from such contracts.
To me, ZFX is still undervalued by the market, but by a much lesser margin than before. Should this undervaluation continue, the likelihood of ZFX becoming a takeover target increases.
Only time will tell.
Note: This post is not investment advice. Investing in mining shares are inherently of a higher risk profile compared with consumer non-discretionary sector.