OREANDA-NEWS. March 12, 2007. The strategy of Chelyabinsk Zinc Plant Open Joint Stock Company (CZP) (RTS: CHZNG, LSE: CHZN) in the next 3 years will be aimed at further de-bottlenecking the enterprise and expanding mining assets to reach full self sufficiency in concentrate, as well as capitalization on natural location advantages, Sergey Moiseev, Chairman of the CZP Board, told the Alfa-Bank Summit in the Alps, held in Gstaad, Switzerland, reported the press-centre of  Chelyabinsk Zinc Plant Open Joint Stock Company.

In his report Mr. Moiseev covered market factors and trends which influence growth in the zinc industry. In particular he noted that in the previous year zinc price had reached a new high (USD 4,619), which was more than double analysts' expectations. At the same time LME zinc inventories have reached the lowest point. According to Mr. Moiseev, the key reason for zinc demand growth was extraordinary development in China, as well as increased global output of zinc-coated steel products. The current situation, in which the rise in zinc output (10,7 million tons in 2006 source: Brook Hunt) fails to catch up with rising consumption (over 11,3 million tons in 2006 source: Brook Hunt) has led to a dramatic increase in the production shortfall. Over the last three years the global zinc deficit has tripled.
Referring to the situation in the Russian zinc sector, the CZP Board Chairman pointed to increased output of galvanized steel, which represents over 60% of zinc consumption. He added that in Russia, in contrast to the world market, there is no deficit in zinc and output (over 240,000 tons in 2006) is growing faster than consumption (over 170,000 tons in 2006). These figures allowed the Russian zinc sector to take up 9% of the European and 2% of the world zinc markets.

Mr. Moiseev pointed out as an important CZP achievement the shift to long-term contracts with core domestic suppliers of zinc concentrate, leading to 78% coverage of CZP requirements in zinc concentrate by domestic suppliers in the last year. This, in turn, has allowed CZP to pay on average approximately 60% of the LME price for zinc concentrate in 2006.

The domestic market remains the enterprise's top priority in sales. According to Mr. Moiseev, Russia accounted for approximately 60% of sales by volume and 50% by revenues. CZP enjoys long standing relationship with its largest customers, representing approximately 50% of total sales volume.

An important issue for the success of CZP, according to Mr. Moiseev, is the high quality of its production. Having introduced CZP SHG zinc on the LME, CZP allowed itself to gradually increase the premium over the LME zinc price. Last year CZP also introduced a premium over LME pricing for its export sales.

Commenting on CZP’s strategy aimed at development of a vertically-integrated company, Mr. Moiseev referred to the acquisition of Akzhal Ore Mining and Processing Mill in Kazakhstan in 2006 and signing of a license agreement to explore the Amur Zinc Ore Deposit (Chelyabinsk region, Russia). These two events will allow CZP to supply own raw material in order to expand production and further increase business efficiency.

The production development strategy, according to Mr. Moiseev, will be aimed at de-bottlenecking in order to increase production output and profit. Total expansion capex in 2006-2009 will require RUR 1,8 billion.

In general, CZP’s future development is focused on:
• Continued focus on capturing margin through de-bottlenecking to deliver increased yields and profitability, development of mining business, substantial premium to LME zinc price and ongoing rationalization of cost base;
• Capitalization on natural location advantages: proximity to zinc concentrate suppliers and zinc consumers, as well as growing domestic zinc market due to increased output of galvanized products and the construction boom.