Zinifex’s $2.2 Billion War Chest.

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Zinifex’s $2.2 Billion War Chest.
November 27th. 2007 - Australasian Investment Review – (AIR

Zinifex is cashed up and looking to either spend via acquisitions or by way of capital return to shareholders.

But it would seem the money isn’t burning a hole in the balance sheet.

Shareholders at yesterday’s AGM were told that the world’s third-largest zinc mining company has more than $2.2 billion to make acquisitions or return to shareholders.

They were also told not to expect another big profit this year given the fall in world metal prices, especially zinc and copper, and the strength of the Australian dollar. Higher costs are also having an impact.

But the company has cash, lots of it which was raised after selling its stake in smelting company Nyrstar NV through an IPO earlier in the year. Nrystar holds the processing assets that used to be part of Zinifex.

Chairman, Peter Maunsell told the meeting that Zinifex will “pursue the acquisitions option vigorously”.’ And if targets could not be found, the company will give shareholders their cash.

The company’s shares ended 25c up at $14.71 in yesterday’s bullish market which was boosted by speculation about a possible Chinese financed intervention in the BHP Billiton play for Rio Tinto.

Earlier this month Zinifex named former WMC Resources boss, Andrew Michelmore as its new CEO and he is presently familiarising himself at the company which is now a pure mining operation.

The shares rose by around 39c at one stage yesterday amid the slightly hysterical reaction to the ‘China bid’ rumour. The company’s shares kicked higher just over 10 days ago when there was another outbreak of speculation of a possible takeover offer from Australian rival Oxiana. Mr Michelmore’s appointment killed that story off.

Zinifex shares have lost considerable ground this year as world zinc prices have tumbled more than 20%.

“While today our revenues are generated in Australia, we believe our future opportunities will come from around the globe,” Mr Maunsell told the meeting.”We have a substantial war chest of more than $2.2 billion.”
The company has warned that the 2008 operating profit won’t repeat last year’s record because of the sharp fall in metal prices this year, which is expected to carry over into 2008. As well the much higher Australian dollar and higher costs will also eat into earnings.

Acting CEO, Tony Barnes told shareholders:

“One third of the current financial year is now behind us. Production, as we announced in our recent quarterly production report, was better than for the same period last year. Last year we had a longer than normal planned maintenance shutdown at Century which was not repeated this year enabling the 16% increase in zinc output. Rosebery also continues to perform well.

“Like everyone in the resources sector we continue to experience cost pressures. Oil prices have recently resumed their upward path. Other commodity prices remain high and shortages of many skilled mining personnel and supplies are continuing.

“While we cannot control the prices for many of the things we use in our business we do closely manage how much of each item we consume to ensure we operate our business as efficiently as possible.

Although we are only a third of the way through the current financial year, we anticipate our operating costs will increase by approximately 10% this year, a similar level to last year.

“We are also planning to significantly increase exploration and development expenditure to deliver on the ambitious growth objectives Peter outlined earlier. We expect to spend some $100 million this year, a three fold increase over last year.

“On balance lower zinc prices, a stronger Australian dollar and higher costs will impact profits. In this environment it would not be reasonable to expect a repeat of last year’s record operating profit.

“However if prices and exchange rates continue at today’s level our net profit should exceed that of last year when we take into account the profit earned on the sale of our shares in Nyrstar.

The chairman told shareholders (in comments echoed by Mr Barnes) that the cost pressures were ‘the dark side’ of the resources boom.

“We do not year see signs that cost pressures are easing to any noticeable extent. The good news is that cost pressures don’t seem to be getting any worse either.”

Copyright Australasian Investment Review.
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