Rothschilds delivers ZCI value shocker

[] — SPECULATORS who were hoping to make a killing from ZCI if and when Vedanta exercised its option to buy ZCI’s 28.4% interest in the Konkola copper mine are licking their wounds now that independent investment bank Rothschilds has issued its long-awaited valuation of the stake.

They seem to have made too little allowance for the fact that the valuation date was August 2005, so misses out on the subsequent – admittedly, now possibly interrupted – copper bull run.

The valuation is binding on ZCI, while Vedanta has a “reasonable time” to decide whether to exercise its option. ZCI has previously said that it will be happy to retain its stake in Konkola if Vedanta walks away, and that’s now looking as if it could be ZCI’s best, if remote, hope.

Simply, Rothschilds has valued the stake at $213.15m. At this morning’s rand/dollar exchange rate of R7.08/$, that’s just over R1.5bn.

Yet ZCI, which was bid up 200c on just 8,000 shares on the JSE on Thursday to 2 700c, before trade in the share was briefly suspended, reached a market cap of no less than R3.4bn: more than double the value of its only significant asset.

By mid-morning today, the share had fallen a whacking 48%, to 1,400c, trimming the market capitalisation to R1.8bn. For my money, it could still have a little way to go.

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As I wrote on January 3, in the six months to September, ZCI’s attributable income from Konkola was $36.3m. Double it, to a notional annual $72.6m, and you arrive at a hypothetical annualised earnings multiple of just 2.9 on $213m.

I accept that that’s a real back of the envelope calculation, but make whatever adjustments you like, and who wouldn’t be a buyer at that sort of figure?

So I have no doubt that Vedanta will go ahead and exercise its option pretty soon, which will in effect leave ZCI as a cash shell – albeit, with R1.5bn in the bank – a more substantial creature than such animals usually are.