Zinifex, Oil Search Mixed

By Glenn Dyer | More Articles by Glenn Dyer

Zinc miner Zinifex seems to be warming the market up to expect a good first half profit on February 22 but also a less bullish June half, if a reading of the company’s December quarterly report is any guide.

On the one hand CEO Greg Gailey said “Metal prices were again exceptional. Both zinc and lead prices rose strongly during the December quarter on the back of rapidly depleting LME stocks.

“LME zinc prices averaged US$3,775 during the first half of this fiscal year, 157% higher than for the comparative period in 2005. Lead prices were also at record levels with a year to date average of US$1,404, a rise of 45%.

That much we know and Zinifex’s share price reflected that in its run up to an all time high of $19.08 just after the start of January.

But the price has shed 10 per cent in the intervening three and a half weeks with the price falling further yesterday after the quarterly report was released. ZFX shares finished around $16.95.

That was down 60c and the stock was the biggest loser on the ASX on the day.

Another fall in zinc prices last night, on the back of the comments in the ZFX quarterly report, will put the stock under more pressure today.

Zinc prices have lost their zip and the upward pressure seems to have vanished. Prices have tumbled to around $US 3,500 a tonnes, down around 10 per cent, with almost four per cent of that happening on Monday.

In his commentary yesterday Mr Gailey said that “So far in January, zinc and lead prices have eased in response to re-weighting of global commodity indices and stabilisation of LME stocks.

“We remain positive that zinc and lead stocks will continue to remain tight, although zinc concentrate is more readily available than it was at this time last year. Accordingly, for 2007, we do not expect to see a repeat of the large zinc market deficit which occurred in 2006.”

And that’s the change in market sentiment in a nutshell and why ZFX shares might get a little cheaper over the next short while.

The company said yesterday that production in the six months to December will be 10 per cent lower than last year.

This followed planned maintenance shutdowns at Century, Port Pirie and Clarksville and a short loss of output at Century for technical reasons which were quickly rectified.

Zinifex said production improved in the December quarter and would be returning to normal levels over the second half of the June year.

Offsetting the growing production pressures on prices, the company says it expects to obtain much higher prices for zinc metal sales in Europe and the USA which could end up over 100 per cent above 2006 levels.

December also saw Zinifex complete a pre-feasibility study on its Dugald River project in Queensland (in the same area as Century), indicating it could be developed as a 16-year, 200,000 tonne per annum zinc mine.

The company is spending $25 million over the next year and a half on a full feasibility study. If its economic Dugald River will significantly extend Zinifex’s presence in far north Queensland to well past 2020

Zinifex last week announced three exploration projects in Tunisia, Mexico and Sweden as it moves to diversify away from Australia, the US and Europe.

It also agreed to split its processing and mining businesses into two and combine the former with a Belgium processor.

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Medium sized oil group Oil Search has revealed a small dip in 2006 sales revenue to $US628.2 million ($880 million)

Sales the year were down two per cent, thanks to fourth quarter sales of $US171.3 million which were up from the third quarter, but down from the $US203.9 million of the last quarter of 2005.

The company said oil and gas production fell sharply last year 2006 to 10.181 million barrels of oil equivalent (mmboe) from 12.177 mmboe in 2005 but the company said it sees a small rise in production this year to the range of 10.5 to 11 mmboe.

Production during the fourth quarter fell to 2.646 mmboe, from 3.390 mmboe in the same period of 2005.

Managing director Peter Botten said the small fall in annual sales revenue came despite a sharp decline in production, attributed to reduced field interests following the sale of assets to AGL Energy Ltd at the beginning of the year, a number of weather-related operational incidents, and a production adjustment following the establishment of the Greater Moran Unit, which includes NW Moran.

“Despite the production interruptions, gross production rates from the PNG (Papua New Guinea) fields rose by four per cent in 2006, attesting to the remaining potential of these mature assets,” Mr Botten said in a statement released yesterday to the ASX.

“The major upwards driver for revenues in 2006 was higher oil prices, with strong market demand for PNG’s light sweet crude resulting in Oil Search realising a premium to the Tapis oil price, the Kutubu benchmark crude.

“This premium has increased since Oil Search took over the marketing of its own crude in the final quarter of 2006.”

The Oil Search boss defended the on-off Papua New Guinea gas pipeline project.

“Oil Search, in conjunction with AGL and other partners, continued to pursue the PNG Gas Project, which, despite the set-backs experienced during the third quarter of 2006, appears to be economically viable, even after changes to the planned pipeline route, markets and capital costs,” Mr Botten said.

“Interest remains strong from a range of customers in Australia in buying PNG gas, particularly given that there are indications that without PNG gas, gas prices in the eastern seaboard are likely to rise,” Mr Botten said.

The company said that “Efforts to commercialise the Company’s large static gas resource intensified during the quarter, with unprecedented interest from a range of gas buyers and project developers wishing to base their developments on PNG

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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