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Zinifex, Umicore to Merge and Spin Off Zinc Smelting

Australia's Zinifex and Belgian metals firm Umicore will combine their zinc smelting and alloying businesses to create the world's largest zinc metal producer, which they will then spin off.

The move drove Zinifex shares 7% higher as it was seen giving Zinifex more exposure to fast rising world zinc prices. "The zinc market is very hot right now and it's a good time to sell zinc
smelters," Daiwa senior analyst Mark Pervan said.

The pair will sell shares in the newly formed group on the Euronext exchange some time after it is assembled in the third quarter of 2007, Zinifex said Tuesday.

The merger comes amid strong demand for zinc due to a global supply shortfall. Prices for zinc, used as a rust retardant in galvanized steel making, have more than doubled to around $4,300 a ton in London Metal Exchange trading since January.

LME warehouse inventories of zinc have dwindled to only about 87,000 tons, well down on the the 52-week high of nearly 425,000 tons. "By combining our metals businesses we will be able to create an enterprise that would be a global market leader with greater potential than if they remain separately within our respective businesses," said Greg Gailey, chief executive of Zinifex, in a statement.

The combined assets produce 1.2 million tons of zinc and zinc alloys a year, against a world market of around 11 million tons, and will employ 4,500 people. Canada's Teck Cominco and South Korea's KoreaZinc Co. will be its closest rivals.

The new company will have its own board of directors and executive committee, and be incorporated in Belgium. Senior management will be drawn jointly from the two companies.

Moving Away From Mining

Umicore has been moving away from its mining roots and traditional zinc and copper businesses toward recycling precious metals and making advanced materials, such as germanium substrates used in the solar cells on NASA's Exploration Rovers.

"Umicore's not really big into mining and by linking with Zinifex it potentially gains access to Zinifex's two big mines in Australia," Daiwa's Pervan said.

The agreement will allow Umicore "to concentrate fully on further developing our materials technology business," Thomas Leysen, chief executive of Umicore, said in the statement.

Leysen has previously said that the company planned to separate its zinc alloys activities and that this could lead to a large-scale merger with another major zinc player within five years.

Zinifex and Umicore said shares in the new enterprise would reflect the relative value of the contributed assets. Until the IPO, the joint venture will be structured on an equal ownership basis with a payment being made to Zinifex from debt raised by the joint venture company.

Zinifex will pool its smelting and alloying operations in Hobart and Port Pirie, Australia, Clarksville in the United States and Budel in Holland, as well as shareholdings in Australian Refined Alloys in Australia and Genesis Alloys in China into the venture.

Umicore will add its Balen and Overpelt units in Belgium, its Auby and GM Metal in France, as well as its shareholdings in Padaeng Industry in Thailand, Galva 45 in France, Umicore Yunnan Zinc Alloys and Fohl China in China.

Earlier this year Zinifex beat forecasts with a four-fold jump in annual profit to A$1.08 billion (US$844 million) on strong demand for the anti-corrosive metal and forecast a strong year ahead on expectations of more growth in metals prices as global demand for industrial raw materials, led by a fast-industrializing China, outruns supply.

Zinifex, which mines and refines zinc in Australia, Europe and the U.S. was assembled from the ashes of the bankrupt Pasminco group. Awaiting an upswing in zinc prices, Zinifex delayed relisting on the Australian bourse for two and a half years following the collapse of Pasminco
with A$3 billion in debts.