Gamble of the week: miner to rise on Chinese zinc demand

Gamble of the week: Griffin Mining (Aim: GFM, 92.75p)

Griffin Mining has successfully ramped up production at its Caijiaying zinc-gold deposit in China by 40%, the latest in a run of good news for the company. But there could be much more to come. The plant, which currently runs at a rate of 350,000 tonnes a year, is expected to handle closer to 500,000 tonnes a year by 2008, producing 44,000 tonnes of zinc per year.

When MoneyWeek tipped the stock at 61p at the start of this year, broker Collins Stewart had a price target of 85p, based on long-term prices for gold and zinc of $400 and $1,102 respectively until 2012. But continuing Chinese and Far Eastern demand has seen zinc spot prices soar by about 17% in the past month alone to just under $4,000/tonne. How long this will last is a matter of debate. But if $1,102 generates a value of 85p per share at profit margins of 32%, then the longer the price remains at around $4,000/tonne (implying margins of 82%), the more effect it will have on Griffin's valuation especially given that the company is currently enjoying a tax holiday until the end of 2007, which will be followed by a period of taxation at only 10% until the end of 2010.

Collins Stewart forecasts revenues of around $53m this year, doubling to $99m in 2007, generating earnings of 18c and 36c per share respectively. That puts the shares on a rating of "barely four". Since the first quarter of 2006, Griffin's shares have failed to match the rise in the zinc price, implying that the market thinks the price will fall. But a return to $1,102/tonne in the short, or even medium, term looks unlikely. Meanwhile, the pressure for a higher share price is building all the time.

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