An old-timer sitting on a gold – and zinc – mine

By Author Charlie Gibson Mar 02, 2006

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Griffin Mining (GFM, 61p) may be “as old as the hills”, says Investors Chronicle, but there’s life in the old dog yet. The company, which has been nurturing its Caijiaying zinc-gold deposit since 1987, now looks set to execute its production ramp-up right in the middle of a bull market for zinc.

Hitherto, zinc has been something of a “laggard” in the base metals market. Now, though, it’s “starting to catch up fast” as Chinese demand keeps global stockpiles at historic lows at the same time as other emerging markets seek to accelerate their own infrastructure investment. This in turn makes Griffin’s plans to produce 44,000 tonnes of zinc a year by 2008 an attractive proposition.

The firm’s margins are due to increase “vastly” under the twin influences of higher zinc prices and lower unit costs ($750/tonne from $1,100/tonne). The production of 40,000oz of gold per year from 2007 onwards will further add to top-line growth.

On a forward cash-flow multiple of 16 times for this year, falling to nine times next year, Griffin is cheap for a firm that “is fully funded… carries no debt and will cover all further development costs through its cash flow”.

Using long-term prices for zinc and gold of $1,102/tonne and $400/oz until 2012, respectively, generates a price target of 85p for the shares, according to Collins Stewart – this is 1.5 times net present value, presumably to take account of the project’s 56 square kilometres of ‘blue-sky’ exploration and expansion potential. But even if prices fell back to $815/tonne and $350/oz for zinc and gold respectively, says Investors Chronicle, “Griffin Mining will still be a viable business. Buy.”

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Published in Tips & advice | More articles by Charlie Gibson

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