Zinifex is Over and Headed Lower

MELBOURNE AUSTRALIA 7 February 2007 – There is the saying when looking at stock charts that share prices “go up the stairs, but down the elevator.”  This hasn’t quite happened with Zinifex (ASX: ZFX), but a quick look at the chart could make the faint hearted think that the cable is hanging on by a thread.  The slightest bit of pressure and… whoomp!  It could be gone.

And it isn’t as though Zinifex hasn’t been subjected to a sizeable retreat before.  Less than a year ago the shares fell from $13 to $8 within the space of a month.  As it stands now they are down by around $3 from the peak reached only a month ago.  Having broken through a couple of support levels there isn’t much to stop it from hitting $12 or even lower.

Charlie Aitken at Southern Cross Equities certainly thinks there is more room to the downside, he told Marcus Padley that “Everyone has been long Zinifex. There are momentum investors all over the register, but both the share price and earnings momentum has turned negative.”

He went on to say, “ZFX is probably cum -30% downgrades to consensus earnings, and this won’t be pretty as the over-exuberance towards this stock unwinds. Don’t be tempted to buy the dip in ZFX; it’s over and it’s headed lower.”

The problem with Zinifex?  That it is seen as a one trick pony.  The argument is that if you are still reasonably bullish on the commodity sector you are better off punting on a diversified company such as Rio Tinto or BHP Billiton.  At least with them, if one metal turns sour they’ve got a bunch of others they can turn to.

Only when/if the whole resources sector goes pear-shaped will they suffer too.  In fact Padley suggests “For Resources action you’d start trawling the Gold Sector as a safer commodity price bet in the face of a US dollar on the way down.”

Joe Singer, a Shanghai-based director of Penfold Ltd., who specialise in zinc told Reuters that China’s sway on international prices was waning, “China’s important but it is not the overall driver of the zinc price… It is very close to becoming self sufficient by balancing its zinc production and consumption.”

All this thanks to the fall in metal prices overseas on Friday night our time.  As the Australian Investment Review reported yesterday, “Zinc fell more than 9 per cent to $US3,065 a tonne, and briefly dipped below $US3,000 for the first time since July. Zinc was down 15 per cent over the week even though zinc stocks are still at relatively low levels of under 100,000.But they are moving higher and last week’s forecast from Zinifex that the metal would become easier to obtain in 2007 didn’t help sentiment.”

This was, according to the AIR the biggest fall that Zinc has had “in at least 18 years and copper dropped as much as 6.3 per cent at one stage. Aluminum, lead and tin also were also weak.”

But just as commodity prices start to take a tumble, they come back not quite with a vengeance, but almost.  Overnight according to Reuters, “copper futures settled up over 3 percent on Tuesday as a third straight decline in London copper stocks bolstered speculative interest and provided some price stability following last week’s heavy losses.”

“I think if you begin to see further declines in the stocks, the argument for Chinese restocking becomes more prevalent,” one copper dealer told Reuters.

“There are forecasts calling for Chilean production to jump by close to 6 percent. We’ve seen how the market achieved a global surplus with flat output growth in Chile. If Chilean production were to meet these expectations, demand in China and elsewhere would have to increase by an extraordinary amount to draw this market back into deficit,” Sholom Sanik, futures analyst with Friedberg Commodity Management, Reuters reported.

On top of that BHP Billiton releases its results which saw the share price rise by over 5% in early trade and even Zinifex has managed to recoup most of yesterday’s losses.  Clearly the market and the company continue to see plenty of further upside for the company, whether that has now been fully built into the share price is another thing, but as BHP’s presentation this morning says, the “Outlook remains positive.”

Kris Sayce

Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005.
He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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No mention of the other zinc stocks. Won’t they do the same thing ?

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