TMR: Let’s look at zinc, which is a metal market that you have studied extensively. What are the commercial applications of zinc?
JG: About 50% of the zinc market is used for galvanizing steel as anti-rust protection for car manufacturing and construction. The biggest buyers are China at 45% and Europe at 20%.
TMR: What’s the global supply situation?
JG: The market in the Western world has been in a supply deficit for quite some time, and now, for the first time, it is in a global deficit. And the deficit will only get bigger. The zinc market is quite different from the copper market because about 40% of its production comes from junior miners, whereas in the copper space, juniors only account for about 7% of production. As the big zinc ore bodies are tapped out and the large mines close, they will continue to be replaced by smaller zinc operations. Brunswick was the first to close, and Century, Skorpion and a whole host of other mines are following suit.
TMR: Are companies hoarding zinc in anticipation of higher prices?
JG: Hoarding is definitely an issue. For example, the zinc inventories on the London Metal Exchange (LME) are controlled by four big players. The bulk of their inventory is stored in several warehouse facilities in New Orleans. The metal stores are not readily available for distribution and it is in fact due to the multiple locations that warehousing companies can move product among themselves in an effort to keep queues long. Therefore, queuing issues can cause price increases—although it is hard to calculate the extent of the problem at present.
TMR: You have talked about the large zinc mines shutting down, which should drive up prices. Can you expand on that scenario?
JG: The big zinc ore bodies are near an end and there is no replacement on the horizon for two reasons: 1) There are no more big ore bodies available. 2) There is no serious exploration for zinc. The copper business faces the same dynamic of gradual diminishment of raw material. Interestingly, as Brunswick and Century and Skorpion shut down their zinc operations, the sector has been freed up to bring on smaller-capacity mines, which helps the supply situation. And there is undeveloped supply capacity in China. But none of these potential developments can replace the magnitude of what we are losing by way of the big ore bodies going extinct.
TMR: Does the downward trend in terms of supply mean that the zinc market is not cyclical?
JG: All commodity markets have long-term cycles. But right now we are dealing with a special zone of the long-term zinc cycle as the big ore bodies close one after the other and are not replaced. This is a first for the zinc market, even though it was not unforeseen.
TMR: So what features can make the changing zinc market attractive to investors?
JG: Zinc equities are leveraged to the commodity, and there are not many equities left to buy on the TSX. But it is important to look at the zinc cost curve, which is very flat compared to the copper cost curve. As the zinc mine shutdowns cause supply limitations, and warehouse inventories start to peter out, market prices will have to rise. And due to the cost curve, even a small increase in the price of zinc will generate a big increase in revenue for producers.
TMR: Which zinc mining firms do you view as the most promising?
JG: My favorite is Trevali Mining Corp. (TV:TSX; TREVF:OTCQX; TV:BVL) (TOP PICK, BUY rated at Dundee). It is in production and it has access to a great partner in Glencore International Plc (GLEN:LSE) (not covered at Dundee). It is quite rare for a junior mining firm to have a strategic partnership with such a giant as Glencore. And because up to 40% of zinc production comes from the juniors, Glencore is interested in obtaining the zinc feed even though it does not have the time to directly manage small operations. In the Trevali-Glencore symbiosis, Trevali mines the ore and sells the zinc concentrate to Glencore at market terms. Trevali is well positioned on the Toronto Stock Exchange (TSX) to benefit from increases in zinc prices, or even by stability in the price.
TMR: Where are the Trevali mines located?
JG: Trevali has a zinc mine in Peru called Santander, which is operating at capacity of 2,000 tons per day (2 Ktpd). Its New Brunswick complex is composed of one mill and two mines, which are scheduled to go on-line by the end of 2014 at about 3 Ktpd. Trevali can rely on Glencore’s expertise to get these mines and mills into production. And the New Brunswick jurisdiction is very safe.
TMR: Trevali’s stock is down from last year. Why?
JG: Trevali was six months late in delivering on its Peruvian operation and the stock went into the penalty box. To secure financing for the New Brunswick operation, the firm announced a potential $60M debt facility arrangement with RMB Resources, but the deal did not close. Since then, Trevali has raised equity ~$45M at $0.83/share, and its stock has gone up. With the equity deal complete and the debt facility potentially resized to $35M, the financing overhang is gone. It is a good buy now that it has one asset in operation and the other asset is financed and can be put into production by the end of next year.
TMR: Who else do you like in the zinc space?
JG: There are not many players left in the zinc space! I like Canadian Zinc Corp. (CZN:TSX; CZICF:OTCQB)(BUY rated at Dundee). It has just finished a very long and rigorous permitting process that took six years to complete. Now, it is tasked with raising the funds to get the permitted asset into production. Its property is located in the Northwest Territories—a bit remote, but in a safe jurisdiction. The financing in 2014 will probably include a debt off-take deal and an equity portion. The project is undergoing some metallurgical work, but I expect news on the financing to start unfolding in H1/14.
There are also smaller zinc companies, such as Zazu Metals Corporation (ZAZ:TSX) (NEUTRAL rated at Dundee), Rathdowney Resources Ltd. (RTH:TSX.V) (NEUTRAL rated at Dundee) and TriAusMin Ltd. (TRO:ASX) (NEUTRAL rated at Dundee), which I follow. These three firms all have good potential, when and if we see higher zinc prices. Another company is Ivernia Inc. (IVW:TSX) (BUY rated at Dundee), which is a lead producer. Ivernia is the only pure-play lead zinc producer on the TSX and is now in production after some environmental issues. The company operates the Paroo Station mine in Australia, which is the largest pure lead mine in the world, and has a strong partnership with Enirgi Group (a private company). Zinc and lead tend to move in the same direction. Lead is currently outperforming zinc, however.
TMR: Will we see higher zinc prices in the near term?
JG: The price of zinc should respond positively as more shutdowns are announced. The fundamentals are clearly in place for both the zinc price and the equity prices that are leveraged to zinc to increase. The stock price of companies that are already in production, such as Trevali, will increase the fastest, but the others should quickly follow suit.
TMR: Is there some kind of technology that can replace the industrial use of zinc?
JG: Not unless you figure out a way to eliminate rust! Galvanizing is always going to be needed, and there is no cost-effective replacement for it as far as I know. If cars and buildings were suddenly made out of plastic, the need for zinc would fall. But short of total plastification, zinc is here to stay.
IBG Price at posting:
5.7¢ Sentiment: ST Buy Disclosure: Held
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