EZM- New research report out today from TD WATERHOUSE. New target price of $3C. Note that 50c EPS is estimated for next year and that assumes only a $1.75 copper price.
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April 3, 2006
Action Notes Equity Research
11 of 32
Company Profile
EuroZinc is a Canadian-listed mining company that currently owns two base metal
mines in southern Portugal. The company operates the Neves Corvo copper mine and
owns the currently sidelined Aljustrel zinc mine. Zinc production is expected to
commence in H2/06 at Neves and in 2007 at Aljustrel.
Please see the final pages of this
document for important
disclosure information.
EuroZinc Mining Corp.
(EZM-T) C$2.03
Cash flow to surge on revised metal price outlook
Event
We are increasing our target price for EuroZinc to C$3.00 (from C$2.25) in
light of our revisions to our copper and zinc metal price forecasts and the
resultant cash generating ability of the company
Impact
Positive. With its current copper production and the commencement of zinc
production in H2/06 EuroZinc is ideally positioned from the more robust
outlook for copper and zinc prices now forecasted over the next couple of
years. In addition, with its strong balance and growth potential we also
believe EuroZinc could be viewed as a takeover candidate. As such EuroZinc
remains one of our favored names in the sector. We maintain our BUY
recommendation and we are increasing our target price to C$3.00 at this time.
Details
In light of the higher than expected metal prices seen in Q1/06 for zinc and
copper we have upgraded our commodity price forecasts as outlined in our
industry report released today and noted in exhibit 1
Exhibit 1: Key Metal Price Forecast Changes
Old New Old New Old New
Zinc (US$/lb) $0.80 $1.12 $0.85 $1.20 $10.65 $0.90
Copper (US$/lb) $1.80 $2.13 $1.50 $1.75 $1.20 $1.35
2006 2007 2008
Source: TD Newcrest Estimates
The higher than expected metal prices can be attributed to stronger than
anticipated demand, ongoing supply problems, low and declining inventory
levels and a lack of new supply being delivered into the market. Given this
environment we do not believe that metal prices are likely to decline
significantly over the coming year and in the case of zinc the fundamentals
continue to suggest higher metals prices are possible for 2007 based upon
continued supply woes, inventory levels approaching critical levels and the
industries inability to rapidly activate significant new sources of supply in the
next few years. While our forecasts remain below current spot prices and
could be viewed as conservative, they are at the high end of the consensus
range and as such, we anticipate further update revision in the months to
Metals & Minerals
Recommendation: BUY
Unchanged
12-Month Target Price: C$3.00↑
Prior: C$2.25
12-Month Total Return: 47.8%
Market Data (C$)
Current Price $2.03
52-Wk Range $0.57-$2.10
Mkt Cap (f.d.)($mm) $1,157.1
Dividend per Share $0.00
Dividend Yield 0.0%
Avg. Daily Trading Vol. (3mths) 5,302,916
Financial Data (C$)
Fiscal Y-E December
Shares O/S (f.d.)(mm) 570.0
Float Shares (mm) 544.0
Net Debt ($mm) $10.0
NAVPS (current)(f.d.) $2.13
Estimates (US$)
Year 2004A 2005A 2006E 2007E
EPS (f.d.) 0.09 0.23 0.34 0.50
EPS (f.d.)(old) 0.09 0.23 0.25 0.35
CFPS (f.d.) 0.13 0.28 0.39 0.55
CFPS (f.d.)(old) 0.13 0.28 0.30 0.40
Valuations
Year 2004A 2005A 2006E 2007E
P/E (f.d.) 19.3x 7.6x 5.1x 3.5x
P/CFPS (f.d.) 13.4x 6.2x 4.5x 3.2x
Supplemental Data (US$)
Year 2004A 2005A 2006E 2007E
Copper ($/lb) 1.30 1.67 2.13 1.75
Zinc ($/lb) .48 .60 1.11 1.20
Copper -MM lbs 208 203 230 230
Zinc - MM lbs NA NA 25 210
All figures in US$, unless otherwise specified.
Cliff Hale-Sanders, CFA
Action Notes April 3, 2006
Equity Research 12 of 32
come.
With the Neves Corvo mine positioned to produce in excess of 200 million pounds of copper, the
commencement of zinc production in the H2/06 at Neves and the likely restart of the Aljustrel zinc mine in
2007 (a positive development decision is expected in the near future) EuroZinc can be viewed as being in the
“sweet spot” with respect to realizing extremely high metals prices at a time when it is growing its production
volumes. This should translate into robust cash flows for the next two years at least, increasing the company’s
financial flexibility from which it can continue to grow.
Earnings Revision: In light of our revised metal price forecasts we have undertaken a significant revision to
our earnings and cash flow estimates. Our new EPS and CFPS estimates are $0.34/$0.39 and $0.50/$0.55, up
from $0.25/$0.30 and $0.35/$0.40, respectively. We would note that these estimates are based upon our
revised zinc and copper price forecasts, which remain below current spot prices and could price to be
conservative if price levels remain near current levels.
While we are bullish on the outlook for both metal and equity prices we do caution investors that the Spring
period has historically been subject to a correction in prices after a robust October to march period. That said,
given the strong underlying fundamentals and the anticipated strong Q1/06 results for the industry we would
expect any pullback to be relatively short lived if it occurs at all and would view it as a buying opportunity.
Valuation and Justification of Target Price
We are raising our target price to C$3.00 from C$2.25. Our target price increase reflects our positive outlook
for the zinc industry and increased confidence in the timing and development of the Neves Corvo and Aljustrel
mines. We use a 5.5 times multiple to our blended 2006 and 2007 CFPS to derive our target price of C$3.00.
This remains at a small discount to the group average multiple of 6 times due to the major shareholder
overhang. Our target price also reflects a 1.4X multiple to our NAV of C$2.13 (up from C$1.67) which is in
line with the current peer group average. Despite our positive outlook for zinc prices, which could warrant a
more premium valuation approach due to the scarcity of zinc related equities, we have tried to remain
conservative pending further details on the final development plans and costs for the Neves Corvo zinc
program and the Aljustrel mine. Our NAV is calculated using a 10% discount rate and long-term copper and
zinc prices of US$0.95/lb and US$0.50/lb, respectively.
Key Risks to Target Price
The key risks to our target price are actual commodity prices relative to our forecasts, ongoing development
risks associated with the Neves zinc zone and the Aljustrel project, higher than expected capital costs,
unforeseen operating disruptions and future exploration results
Investment Conclusion
While we remain somewhat cautious in the short term due to the recent and rapid price appreciation of most
base metal related equities as we enter what has historically been a period of seasonal weakness, over the
longer term we continue to believe EuroZinc is positioned to generate robust returns due to its solid operating
base, strong forecast growth profile, rising exposure to zinc and its strong balance sheet. We are maintaining
our BUY recommendation and increasing our target price to C$3.00 from C$2.25.
April 3, 2006
AI
