By John Helmer in Moscow
As Chelyabinsk Zinc issues new shares, is the market ready for a pick-me-up?
Chelyabinsk Zinc, Russia’s dominant zinc miner and refiner, is to issue 49 million new shares this week to existing shareholders, at par value of 1 rouble (4 US cents). The company, known as Chelzinc for short (CZP is the Russian acronym) said the share issue is not designed to raise additional funds. Instead, the restructuring of the shareholding will give each shareholder 9 additional shares for every common share already held; 10 common shares will now equal a single Global Depositary Receipt (GDR), first listed in London last November.
In the past 52 weeks, Chelzinc’s share price has ranged between a high of $17.70, when the metal price was moving up, to a low of $11.12. The current price is around $12.
Mineweb first introduced Chelzinc to readers in July: see Galvanising value – Russia’s zinc players hit the stage .
Since then two selling pressures have been disadvantageous for the company. The price of zinc fell steadily from mid-July to early September, dropping through the $3,000/tonne level, and reaching down almost to $2,600, before starting a recovery. This week, zinc is trading at $3,002 for cash on spot; $3,010 for three months forward; and $2,8810 for 15 months forward.
In parallel, Russian market analysts noticed that a minority shareholder in Chelzinc was dumping his shares. Market analysts aren’t sure who this was; they are certain who it wasn’t — the three core shareholders of the Russian company, who own about 52% of the company through NF Holdings BV, and Arkley Capital, a management unit. The troika comprises Vadim Shevtsov, with 26% of Chelzinc; Andrei Komarov, 45%; and Alexander Fedorov, 3%.
There is speculation that the share selling came from a fund which had bought into the GDR listing last November, and was spooked by the dropping zinc price. The speculation is that the seller was outside Russia, and betting on non-Russian indicators, primarily metal price. There is no sign that a notable Russian risk is materializing for Chelzinc and its controlling shareholders; although this month the domestic price of steel rebar, the key form of steel required for building construction, started to retreat. When steel prices go down, zinc, a key ingredient for galvanizing, usually follows their lead.
At any rate, according to Moscow analysts, the Chelzinc share selling stopped at the start of this month, and the Chelzinc price has started to recover. It has proved difficult to gauge the volume of the shares actually sold, since the rumour of the sale also acted to shave the price. Such sale rumours are a “loose cannon”, according to one metals analyst in Moscow.
A reassessment of the Russian zinc position was issued by Kirill Chuiko at Uralsib Bank on September 25. He acknowledges that “our 2007 average zinc price forecast of $3,700/ton [is] overly optimistic. To account for the recent zinc sell-off and more bearish sentiment towards the metal, we have reduced our 2007E price forecast by 8% to $3,400/ton.” At the new metal price estimate, Chuiko has recalculated Chelzinc’s 2007 revenues at $589 million, down 8% on the earlier forecast. Ebitda would become $26 million, and net income $131 million.
With these parameters, and a prevailing share price of $12.05 (market capitalization of $653 million, Enterprise Value of $686 million), Chuiko argues that Chelzinc’s price/earnings ratio (P/E) would be 5.0. Comparing that, and the other pricing dynamics to those of the international zinc producers, Chuiko claims that Chelzinc is “ready for a rebound”. Among the international zinc miners, Breakwater Resources (Canada) is trading at a market cap of $1.1 billion, and a P/E estimated for this year of 5.6. Kagara Zinc (Canada) is also capitalized by the market at $1.1 billion, with a P/E of 8.9. Among the integrated zinc producers and smelters, Zinifex (Australia) has a current market cap of $7.4 billion, with a P/E of 8.3. Boliden of Sweden is capitalized at $6 billion, with a P/E of 7.4.
A chart of the movement of these zinc shares since the July collapse of the metal price shows that they fell more sharply than Chelzinc, but, equally, on the rebound they have increased in value by a larger percentage than Chelzinc, whose price has been almost flat through the summer.
According to Chuiko, “Chelzinc is a great infrastructure bet on the Russian economy, as the company sells its zinc domestically at a 15% premium to the London Metal Exchange (LME) price. Moreover, domestic zinc consumption should rise substantially with the boom in construction and resurgence in demand for galvanized steel.”
Last year’s annual report from Chelzinc indicates that the company accounts for two-thirds of the Russian consumption of zinc. The reason for the premium pricing is that Chelzinc produces certified Special High Grade (SHG) zinc, essential for quality coated steel. This in turn is what the construction and auto industries require. According to Chelzinc, 62% of the zinc consumed in Russia goes into galvanized steel. This is a substantially larger proportion than zinc consumption worldwide.
Chelzinc’s annual report identifies the company’s vulnerabilities as primarily its dependence on third-party suppliers of zinc concentrate, a situation it is trying to remedy by acquiring mine sources in Kazakhstan, and developing a new zinc mine in the Chelyabinsk region of Russia. Relative dependence on just four client buyers of its zinc products is also identified as an operating risk. The potential for transfer pricing and tax claims from the government is reported in the small print of the report. This, a refrain now standard in most integrated Russian mining and metal companies, shows no sign of materializing as a concrete threat.