Zinifex rides wave of commodities boom
Date : 23/04/2006
Reporter: Alan Kohler
ALAN KOHLER: When the zinc miner, Zinifex was floated out of the wreckage of Pasminco two years ago it had few friends and dubious prospects. Memories were still fresh about how panicking banks scuttled the one-time great mining house which was then wallowing under $3 billion of debt, a disastrous hedge-play and an abundant supply of a rather unfashionable metal. Well, as you can see from this graph, Zinifex is the champion surfer of the commodities wave, easily outpacing even the extraordinary performances of its peers, like BHP Billiton thanks to its relatively pure zinc play. I spoke to Zinifex boss Greg Gailey who's been at the helm through the highs and the lows.
Greig Gailey, Zinifex floated from the ashes of Pasminco a couple of years ago for less than $2, it's now more than $11, capitalised at $5.5 billion. I guess its ironic, isn't it, that Pasminco went broke betting that the zinc price would do exactly what it's done, it was just too early.
GREIG GAILEY, CEO, ZINIFEX: Pasminco's problems were complex and it failed for a number of reasons. However, Zinifex has had a spectacular performance since it listed in April of 2004.
ALAN KOHLER: I guess you're pretty happy you decided to stick around? You were appointed about a month before the company collapsed, I think?
GREIG GAILEY, CEO, ZINIFEX: That's correct.
ALAN KOHLER: It must have been tempting when the collapse occurred to bail out.
GREIG GAILEY, CEO, ZINIFEX: It was. However the three years, Alan, in all honesty, was the most fantastic career experience one could ever have. I mean to take a public company through administration which not many CEO's quite frankly would like to do, and I don't blame them for that, but that was an enormous learning experience to restructure it in the way that I was able to do and to bring it back to market as Zinifex and then see the spectacular success is just an amazing experience and it's a true tribute to all of the people in the company that worked so hard to create what Zinifex is today.
ALAN KOHLER: Now obviously as you say, no-one predicted what would happen to the zinc price, but do you think what's happening to the zinc price now is rational?
GREIG GAILEY, CEO, ZINIFEX: Absolutely in the sense that, really the seeds of where we are today were sown in the early 2000's. It was pretty miserable time in zinc. Nobody made any money, companies like Pasminco failed, and as a result of that, nobody did any exploration, nobody was interested in developing zinc mines and what we're seeing today is the fruits of that, i.e. there's an acute shortage of raw material.
ALAN KOHLER: So do you believe that this current price can now be sustained?
GREIG GAILEY, CEO, ZINIFEX: Well if you look at the cure, which is more raw material coming to market, it takes today somewhere in the order of three to five years to develop a new zinc mine. We have a very large deposit in Queensland called Dugald River, which is about 50 million tonnes, so it's half the size of Century, could be a very substantial mine. We're currently in the phase of doing a pre-feasibility study but even if we fast track that project through, i.e. we said feasibility then immediately into development, it would not be in the market before 2010 or 2011.
ALAN KOHLER: I've been reading some analyst reports which say that zinc, unlike other minerals, tend to be small mines, small deposits, more easily developed than others, and that there are - this was Merrill Lynch - has identified 234 potential zinc mines in the world. I mean it is likely isn't it that there will be much more of a response to the price in terms of supply, than you can come up with?
GREIG GAILEY, CEO, ZINIFEX: Well there certainly will be a response to price but we believe it will be somewhat slow in coming and even though there are a lot of zinc mines, many of them are very small, and not only that - the other issue that plays in here - because there was no exploration carried out during this period, many of the deposits that are being looked at today for development like Dugald River, have actually been around a long time and the reason they haven't been developed before today is that either they have technical challenges or they have high costs, and that has issues I think for what the long-term sustainable price is going forward.
ALAN KOHLER: And what about the demand outlook? Is there any push back from customers about the trebling of the cost of, for example, of galvanising iron?
GREIG GAILEY, CEO, ZINIFEX: Well, in the issue...zinc's primary use is galvanising, rust protection, and in the terms of a sheet of galvanised steel it's a very minor cost component. So in terms of what drives the demand for galvanised steel it's really the price of iron ore not the price of zinc. I mean your options in galvanising is you move to something like aluminium which is not cheap either. You paint it, which has high costs in terms of maintenance or you simply let it rust. And in many cases - are you going to buy a car that's not galvanised?
ALAN KOHLER: It's a relatively simple business in some ways I guess, I mean, you dig the stuff out, you sell it and it's driven by the price, so what sort of price do you think is implied - zinc price is implied by the current Zinifex share price and is it, is that kind of sustainable?
GREIG GAILEY, CEO, ZINIFEX: Well, I think the issue you're asking is hard to answer because what price is required to justify the current share price depends on not one year but going out a whole series of years. It's what is the price in the next three years but also what is the long-term price. And I can't answer that question in terms of detail because it would require all sorts of different assumptions. But clearly the market determines what our stock price is and if you look at our other criteria like PE multiples, we actually trade at a PE multiple well below most of our peers.
ALAN KOHLER: That's right, which is remarkable in a sense. Given the rise in Zinifex share price over the past couple of years which has been far greater than BHP Billiton's and Rio Tinto's yet your PE is much below their's, isn't it?
GREIG GAILEY, CEO, ZINIFEX: I think you have to look at where we came from. There's no question that when Zinifex was created and put into the market, the ghost of Pasminco hung over the company, and certainly at the time of the float, it was the lack of support by Australian institutional investors which really led the offer to go into the market at such a low price and I believe we had a period to prove that we could run this company successfully, and I believe we've done that, and I think that's a component also in the uplift in the share price.
ALAN KOHLER: Now Zinifex, I think, is virtually debt free, if not entirely.
GREIG GAILEY, CEO, ZINIFEX: We are more than debt free, we have cash in the bank.
ALAN KOHLER: Right, and what's your free cash flow generation at the moment?
GREIG GAILEY, CEO, ZINIFEX: We don't put actual numbers in the market but our free cash flow at the moment is very healthy. We're generating a lot of cash.
ALAN KOHLER: So what are you going to do with it all?
GREIG GAILEY, CEO, ZINIFEX: Well, we've got a pretty clearly stated policy and that is if we can invest it to grow the business for the shareholders and to their benefit then we will do that. If we're unable to do that because we can't find the right opportunities we will simply give the money back to shareholders.
ALAN KOHLER: At what point will you make that decision, that you need to give it back?
GREIG GAILEY, CEO, ZINIFEX: That decision's made every half. We declared a dividend at the last half and I'm sure when the accounts close for the June period, the board will come to a view as to what the cash surplus position is, whether it has opportunities to use that cash and if it doesn't it will do as it has stated, it will return that cash to shareholders.
ALAN KOHLER: Are there sufficient opportunities, do you think, in zinc?
GREIG GAILEY, CEO, ZINIFEX: There are clearly opportunities to explore and we're busily doing that, we're investing $75 million over 5 years to explore in and around the properties we have and in joint ventures with others. But when it comes to acquisitions there's no doubt that the market for resource companies today is pretty well priced.
ALAN KOHLER: $75 million's probably a few hours cash flow.
GREIG GAILEY, CEO, ZINIFEX: Possibly, but $75 million is still a significant investment in exploration and exploration itself is an interative process in the sense that you spend some money, you learn a bit more and you spend a bit more, and there are clearly limits on how much one wants to spend very quickly.
ALAN KOHLER: I suppose the question is whether you're considering diversifying outside of zinc?
GREIG GAILEY, CEO, ZINIFEX: Again the strategy is clearly stated. We like the metals we're in. We also like other base metals which are related to our business. As well as zinc we produce lead, copper, silver, gold and in any of those materials we would feel very comfortable.
ALAN KOHLER: Right. So each of those materials, because you're known, obviously, as a zinc company primarily, and the other metals you mentioned are minor. So can you see a time in the future when one or more of those metals equal zinc in terms of Zinifex's portfolio?
GREIG GAILEY, CEO, ZINIFEX: I wouldn't like to look forward in that sense because I think what the future holds is not necessarily certain, but it's also worth mentioning that we are the world's third-largest silver refiner, so we're a big producer of final silver as well - doesn't contribute a huge amount to our profit, because we pay for what we bring in to Port Pirie, but we are a major player in the silver market.