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The Chelyabinsk Zinc Plant (ChTsZ) posted negative financials results for 1Q 2008, citing unfavorable price trends on the zinc market, due to which most zinc producers have seen their financials deteriorate in recent months. Further cuts in zinc prices may cause an outflow of invested capital from the industry and the closure of a number of projects, which would impair supply on the market and trigger price hikes on the metal. In our view, it is now high time to buy the company's shares, given their current quotations. We do not rule out a further downturn in the company's stock valuations should market prices for zinc fall.
On July 31 the Chelyabinsk Zinc Plant reported its 1Q 2008 financials, which revealed a downturn in most of its financial indices. Revenue on metal sales fell by 24%, against a 29.9% drop in average zinc prices on LME, as sales by the company expanded by 10%. The cost of production declined by just 3%, which led to a deeper downturn in profit margins. Revenue fell faster than production costs as the company had to spend more on energy, fuel, payroll and other expenses unrelated to raw material purchases. Raw materials costs dropped by 23.56%, in line with the fall in revenue from zinc sales.
Table. ChTsZ: financial and operating results for 1Q 2008
| Indicator | Unit of measure | 1Q 2008 | 1Q 2007 | 1Q 2008 / 1Q 2007 |
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| Revenue | mn RUB | 2909.1 | 3642.8 | -20.14% | | Gross profit | mn RUB | 316.5 | 970.1 | -67.37% | | Gross margin | - | 10.88% | 26.63% | -15.75% | | EBITDA | mn RUB | 323.1 | 978.4 | -66.97% | | EBITDA margin | - | 11.1% | 26.86% | -15.76% | | Operating profit | mn RUB. | 74.5 | 745.5 | -90% | | Operating margin | - | 2.56% | 20.46% | -17.9% | | Net profit | mn RUB | 108.9 | 550 | -80.2 | | Net margin | - | 3.74% | 15.1% | -11.36%. | | Average price of zinc on LME | USD/ton | 2425.8 | 3460.4 | -29.9% | | Zinc production | thou tons | 42.27 | 40.15 | +5.28% | | Zinc sales | thou tons | 37.1 | 33.7 | +10.1% |
Source: company data, Finam estimates
The fall in zinc prices has already been priced into the company's market capitalization. In view of this, we would like to underline the factors that contribute to growth in the company's shares. To begin with, the company makes high-quality zinc, enabling it to sell it not only under contracts but also on metal exchanges. To add to this, the plant currently acts as a smelter, having a broader scope for product sales than zinc concentrate producers. Thirdly, under its development strategy, the company is building a vertically-integrated structure through the development of its own deposits. By 2010, the company is set to become self-sufficient in zinc concentrate. Finally, dwindling investments in the industry and the possible shrinkage in the existing production capacity in the face of low profit margins may lead to a lower supply of the metal on global markets in one or two years. Therefore, the plant, which has a broader scope for metal sales and the potential to become self-sufficient in zinc concentrate, may become an attractive vehicle for investment in one or two years.
We currently do not have a recommendation on ChTsZ shares. Sulinov Aleksey
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Chelyabinsk Zinc Plant
Capitalization: $81 293 115,00
Common shares:
Price: $1,50
Delta week: 0,00%
Delta month: -18,9%
Delta year: -87,8%
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0.569
0.073
