Zinifex Ltd.

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Zinifex Ltd.

Level 15, 380 St. Kilda Road
Melbourne, Victoria
Australia
Telephone: (61 03) 9288-0333
Fax: (61 03) 9288-9191
Web site: http://www.zinifex.com

Public Company
Incorporated: 2004
Employees: 2,509
Sales: AUD 2.86 billion (2006)
Stock Exchanges: Australian
Ticker Symbol: ZFX
NAIC: 212231 Lead Ore and Zinc Ore Mining

Based in Melbourne, Australia, and listed on the Australian Stock Exchange, Zinifex Ltd. is one of the world's leading integrated zinc and lead companies. About 80 percent of its products are distributed outside of its home country, primarily to Asia, and most notably China, to support that region's explosive growth in construction and vehicle production. The lead is used in car and truck batteries, while the zinc is used to galvanize steel and in die-casting. Zinifex operates two mines, the most significant of which is the open-cut Century Mine in Queensland, Australia, which produces zinc and lead concentrate. A second, smaller underground mine, the Rosebery Mine, is operated in Tasmania, producing silver, gold, and copper in addition to zinc and lead. Zinifex also operates four primary smelters. Two are situated close to the mines while the other two are strategically located in the Netherlands and Clarksville, Tennessee. The company also maintains small marketing teams in the Netherlands and at Clarksville. Zinifex owns a half interest in Australian Refined Alloys, an acid battery and lead recycling company.

FORMATION OF PREDECESSOR COMPANY: 1988

Zinifex grew out of the reorganization of Australia-based Pasminco Limited. In July 1988 Pasminco was created when the zinc, lead, and silver mining, smelting, and marketing operations of CRA Limited and North Broken Hill Peko Limited were merged. Initially called the Pacific Smelting and Mining Co., the 50-50 joint venture assumed the shorter name of Pasminco. The new company controlled more than AUD 1 billion in lead and zinc assets, making it the largest zinc producer in the world, and one of the top two combined lead and zinc operations. It accounted for about one-tenth of the world's zinc production and 7 percent of lead, resulting in annual revenues in the range of AUD 1.5 billion. The reasons for bringing the assets together were manifold. Just two years earlier base metal prices had dipped lower than anytime since the Depression of the 1930s. A number of international zinc producers fell by the wayside and production was curtailed, leading to low levels of zinc stocks. This shortage coupled with a steady rise in consumption soon presented an opportunity for CRA and North Broken Hill. By merging their assets through Pasminco, they hoped to enjoy economies of scale and rationalization, leading to lower production costs and a chance to fully profit from rising commodity prices. The partners also looked to make a public offering of stock while the opportunity availed itself to the benefit of both companies' shareholders. Furthermore, the sale of stock would help establish Pasminco as a viable independent company and also raise funds for the company to reduce its debt load. In forming the company, Pasminco acquired some AUD 1 billion in assets from its parents, and with no cash in the bank at the start, it had to borrow additional sums, estimated to be around AUD 300 million, for working capital.

After months of delay, caused by regulatory hurdles and market conditions, Pasminco made a public offering of stock in March 1989, raising $203 million. All told, 20 percent of the company was sold, while CRA and North Broken Hill each retained 40 percent stakes. Pasminco then began trading on the Australian Stock Exchange.

With Peter C. Barnett serving as the founding chief executive, Pasminco wasted little time in modernizing its operations, an effort that stretched into 1990. The company also formed two new units: The Pasminco Exploration Unit and Pasminco Research Centre. The company was not alone in ramping up zinc production, however. As stocks began to build around the globe, zinc and lead prices dropped. Much of the increase in zinc stocks was the result of the collapse of the Soviet Union and its satellites. Moreover, the world's economy slowed down, curbing the demand for base metal and putting further pressure on prices. Pasminco experienced a 6 percent drop in earnings between fiscal 1989 and fiscal 1990 to AUD 153.7 million.

As zinc and lead prices continued to fall, Pasminco entered the following year operating at a loss, forcing the company to take steps to cut costs and conserve cash. Operations at the company's Elura mine were scaled down and the Mining, Metals, and Corporate offices were consolidated in Melbourne. The company still recorded a net loss for 1991 and continued to lose money as zinc and lead prices continued to languish. Pasminco's corporate parents began considering reducing their exposure to the company. Finally in August 1992, shortly before more poor financial results were to be announced for Pasminco, they sold nearly 30 percent of the business for AUD 285 million. As a result, CRA held a 31 percent stake and North Broken Hill retained a 19 percent interest.

More cost containment measures followed. Not only were there staff cuts, but the company also closed some of its Broken Hill mining operations. With the continuation of difficult conditions, Pasminco sold its U.K. operation, the country's only zinc smelter but made expendable because of an excess of production capability in Europe. Pasminco received AUD 111 million for the plant from MIM Holdings Ltd. in November 1993. In that same month about 10 percent of the company was sold to institutional investors, raising AUD 88 million. Six months later Pasminco raised another AUD 40 million by selling a 40 percent stake in its Elura lead and zinc mine in New South Wales to Korea Zinc Co. Ltd. Much of that money was then used to upgrade the mine. In May 1994 CRA sold a 38.9 percent interest in Pasminco for AUD 525 million, the funds earmarked for the development of the Century mine that CRA owned. CRA controlled just 10 percent of Pasminco, and a year later this too was divested, fetching another AUD 135 million.

RETURN TO PROFITABILITY: 1995

Pasminco posted a net loss of AUD 86.9 million in fiscal 1993, but cost reductions and gains in productivity helped the company to post better results in 1994, when the loss was trimmed to AUD 14.4 million. Improving lead and zinc prices, caused by increased demand in Europe and Asia, led to a return to profitability in 1995, when the company earned AUD 12 million on revenues of AUD 1.04 billion, and Pasminco was once again able to pay a dividend to its shareholders. The following year zinc prices dipped, but higher lead prices more than compensated, as revenues increased to AUD 1.32 billion and net income rose to AUD 41 million.

Pasminco agreed to take half of the production from the new Century Mine, owned by RTZ-CRA and slated to become the largest zinc mine in the world when it became operational, but then in early 1997 Pasminco reached a deal to purchase the mine along with the Dugald River zinc deposit for AUD 345 million. The purchase was completed in September 1997, paid for by the $600 million Pasminco raised in a global placement of stock to institutions and a rights issue.

COMPANY PERSPECTIVES

We are a new company headquartered in Melbourne that has been formed to own and operate two mines (including the world-class Century mine) and four smelters that were owned by Pasminco Limited.

While the Century Mine continued to be developed, Pasminco sought to engineer another major purchase, making an unsolicited takeover bid for Savage Resources, a mining concern whose assets in addition to lead and zinc included a coal mine and a copper-gold mine that Pasminco planned to divest. After months of wrangling, Savage, which thought the offer was too low, finally admitted defeat in February 1999 and the acquisition went forward. Included in the deal was the much coveted U.S. zinc refinery located in Clarksville, Tennessee. Commissioned in 1978 by Union Miniere SA, it was one of the newest zinc smelters in the world and was well situated in the United States, located relatively close to many major cities and accessible by barge, rail, and road.

Pasminco's expansive ways proved to be poorly timed, however. The Asian economy plummeted, as did the Australian dollar and the price of zinc, due to an oversupply. It all added up to onerous conditions for Pasminco, a serious erosion in the price of its stock, and a net loss of more than AUD 8 million in 1999. The company also struggled to commission the Century Mine, which was beset with delays. The first zinc-in-concentrate shipped from Century finally came in December 1999, while the first lead shipments followed nine months later. As Century ramped up production the century-old Broken Hill mine was phased out. Once again Pasminco was looking to cut costs in any number of areas to become more efficient and make the best of market conditions. A surge in zinc and lead prices in 2000 was a welcome change, as the stockpiles of zinc had finally been exhausted, leaving just five weeks worth of consumption available, a level not known for a decade. Pasminco hoped this was the beginning of a period of reasonable, and sustainable, prices, so long as everyone in the industry resisted the temptation to add unwarranted expansions of capacity.

In 2000 Pasminco returned once again to profitability, earning AUD 23 million. The company decided not to pay a dividend, instead using improved cash flow to pay down its sizable debt. It was an ominous sign of what was to follow. When metal prices weakened, Pasminco soon found itself struggling to keep up with its debt payments. A business improvement plan announced in December 2000 to make further cost reductions and improved production did nothing to alleviate the concerns of investors, who abandoned the company's stock and made Pasminco's position even more difficult. In June 2001 the price of shares fell to AUD .37, leading the Australian Stock Exchange to ask for assurance that the company was able to meet its obligations. Pasminco maintained that it was indeed able to comply, but the downward spiral only continued. When fiscal 2001 came to a close, Pasminco reported a loss of AUD 715.7 million. The company's talk of selling its mining assets to pay down debt of AUD 3.4 billion and focus on refining and smelting did little to reassure investors or, more importantly, the banks. The trading of Pasminco stock was suspended in September 2001 and it was just a matter of time before the banks, 39 in all, stepped in. After Pasminco failed to reach a six-month "standstill" agreement with lenders, it appointed a voluntary administrator, a form of bankruptcy protection, to help reorganize the business without resorting to a fire sale of assets, though there was still some thought of divesting all of the mines and perhaps the Clarksville smelter. In the end the older Broken Hill mine was sold, fetching AUD 90 million in March 2002, followed by the divestiture of two mines in Tennessee, the Elura mine in Australia, and the Cockle Creek smelter in Australia.

KEY DATES

1988:: Pasminco limited is formed through the merger of assets of CRA Limited and North Broken Hill Peko Limited.
1989:: Pasminco goes public.
1997:: Pasminco mine is acquired.
1999:: Clarksville, Tennessee, smelter is acquired.
2001:: Company seeks bankruptcy protection.
2004:: Pasminco is reorganized as Zinifex.

RENAMED ZINIFEX IN 2004

In May 2002, an agreement was finally reached with the banks, which accepted equity in exchange for debt, the first time Australian banks had ever done so to save a public company. The $2.8 billion deal gave the banks 98 percent control of Pasminco. All shareholders received out of the deal were vague promises of receiving priority when the reorganization was complete and the new company made a public stock offering. In early 2004 Pasminco was renamed Zinifex Ltd. After the sale of assets was completed, Zinifex owned two mines and four smelters, the best assets that Pasminco had to offer. In the meantime, conditions began to improve, as zinc prices increased, due primarily to an increasing demand for raw materials from China. The initial public offering of Zinifex then took place in May 2004. The company failed to receive its targeted price per share, however, and was forced to settle for proceeds of AUD 975 million instead of the AUD 1.35 billion the underwriters had hoped for. Moreover, the price of the new issue immediately struggled to remain level with its issue price once it began trading on the Australian Stock Exchange. The money raised by the offering paid off the creditors, leaving nothing for Pasminco's former shareholders.

Improved conditions, and the elimination of debt from the books, allowed Zinifex to post a AUD 53.2 million profit in 2004. The price of the company's stock followed suit, rising well above the issue price. Business continued to improve in 2005 when revenues topped AUD 1.9 billion and net income approached AUD 235 million. With Zinc prices still soaring, Zinifex enjoyed another record year, with revenues soaring to AUD 2.86 billion and net income of AUD 1.2 billion in 2006. There was every indication that the demand for zinc would remain strong until at least 2007, and as long as the price remained high Zinifex was positioned to prosper.

Ed Dinger