Description

The recent retreat in resource stocks has provided an opportunity to pick up this well managed, but relatively unknown and underfollowed copper and zinc play at a discounted price. With producers rolling in cash, mergers and acquisitions can not be far behind. Eurozinc could be a prime candidate to participate in this consolidation.


Price 82c $C
Market Cap $C 440m FD
Shares out 509m basic
561m FD

Net Debt 103m + 440m = EV 543m

Brief History
First, the name is a bit of a misnomer. At present the company is a copper producer, but sits on significant zinc deposits as well.

The assets, consisting of the operating Neves Corvo copper mine and the Aljustrel zinc/lead/silver project are located in the Iberian Pyrite belt in Portugal, a stable EU country with very good infrastructure and a skilled labor pool.
EZM purchased the assets from RTZ last year for 128m euros and recently bought out of a price participation agreement for another 48m euros. The sale was part of a larger corporate strategy by RTZ to focus on larger projects. RTZ sold a zinc mine in Sweden to the Lundin Group at about the same time.The Neves Corvo mine is the major employer in this region of Portugal, so there is little incentive for the government to make things difficult for the company. Fortunately for the company the price of copper and zinc have risen dramatically since the purchase.

Trading at less than 3x 2005 estimated cash flow per share and 4.1x 2005
earnings and a 30%+ discount to NAV, Eurozinc shares are trading too cheap.

Estimates:
CFPS 30c for 2005
EPS 20c for 2005 Assuming 1.25 copper.

Should copper prices hold present levels (i.e. signifcantly higher than the $1.25 level) these estimates will prove low. Also, bringing on the Aljustrel zinc/lead/silver project would add to per share earnings once production was under way.


Management
Colin Benner resigned his post as CEO at Breakwater Resources to join Eurozinc this past December. He developed quite following at Breakwater after saving the company from bankruptcy and returning the company to health. The news of Mr. Benner's resignation caused a sharp drop in Breakwater's stock; an indication of the regard in which he was held.
I have met him on several occasions and came away impressed. To me, he has the right combination of a strong mining background as well as an ability to communicate effectively with investors and strategic partners.
These latter qualities are, I think, what prodded the Board to hire Mr. Benner, as the existing personnel were solid technically, but lacked the spark needed to capture the attention of the Street.
Moreover, I think Benner will be aggressive in expanding the company either through acquisitions or by merging with a larger player - perhaps both.

Catalysts:
Increased research coverage. Colin Benner's strong ties on Bay Street should lead to increased visibility for the story. If the shares could trade at only a 6x PE the stock would sit at $1.20, nearly a 50% rise from here.

Imminent production decision on Aljustrel zinc project. This project has an indicated IRR of 25% and my feeling is that they are very close to announcing a decision to proceed with the project.

Neves Corvo zinc deposit - we may see a plan presented for the mining of the zinc rich zone in Neves- Corvo in the June time frame. Benner has told me that he feels this deposit alone, based on its size and quality, could be worth as much as the entire market cap of his former company-currently capitalized at over $C200m., vs. Eurozinc's present EV of $C543m.


Risks:
Commodity Prices-Cash costs run about 60c lb of copper. Obviously a dramatic drop in the price of copper or zinc would impact the attractiveness of the investment. In 2003, when copper was about 80c lb the Neves Corvo asset generated about 25m in cash flow vs. the approximate 130m of cash flow in 2004. While I can’t go into a long dissertation on the outlook for commodity prices, I personally don’t expect copper prices to stay at the $1.50 level. However, the underinvestment by the industry during the last up cycle suggests that this cycle may have quite a bit longer to run. The fundamentals for Zinc appear somewhat stronger and we may see prices hold or even increase from current levels.

Dilution/Debt
The company is carrying 100m of net debt. At these metals prices that debt is being paid down very rapidly, but the the Aljustrel project and mining of the zinc deposit at Neves Corvo will require capital. These projects could probably be financed out of cash flow and additional debt and offtake agreements, but a conservative management team may opt to include some equity to provide a greater margin of safety.

Catalyst

Announcement of Aljustrel zinc mine expansion imminent.
Finalization of plan for mining and processing of zinc rich zone in Neves-Corvo likely by June.
Possible merger or sale of the company.