Well the zinc hand to mouth continues with cancelled warrants...

Well the zinc hand to mouth continues with cancelled warrants jumping up regularly once they drop past 6Kt.

I supose the reasoning behind this would be that the buyers dont want to overheat the current re-rated price by taking too much baseline zinc(physical stockpile minus cancelled warrants) from the LME stockpile via forward sales.

As can be seen from the previous post,cancelled warrants are edging up to their highest % of the stockpile for a while,perhaps an indication that some in the market are getting a little edgy about avaiable supply in the next 6-12 months.

Another reason may be that the Chinese might be pushing the price up to dump their current stockpile but this is a little hard to comprehend as there is still plenty of demand for them to sell into the open market at a good price.The other factor that tends to be against this reasoning is their intention to build strategic stockpiles in all base metals.

The other factor that lends itself to a strategic stockpile arguement is that the tax imposed on SHG zinc(99.9%+ quality)has not increased so why would they not be continuing to sell into this relatively strong market.Perhaps they are waiting for the $2+ prices again.BUT this non-selling action still effectively supports the zinc price above $1.60/lb by taking this material out of the system.

What has really impressed me about the zinc price as of late is its strength in the face of the fund sell down.The latest dropping of fund material into the market has effectively sold 375Kt of contracts but the zinc price has held well.Again this could be construed as consumers buying all they can in the face of the tightening zinc market.

When combining the 2 factors above,that is the Chinese building of a stockpile and the fund sell down it effectively gives the LME and the Chinese the whip hand in determining where the zinc price goes from here.The big question being just how strong will this demand be for the next 2 years Vs the supply side,in other words what the LME and the Chinese have to supply any potential deficit.If the forecast supply side response continues to be pushed back we will see a potential sizeable deficit open up towards the end of this year,depending on what the Chinese do with their current stockpile of course.It may already be happening with what appears to be a second phase of stockpile reduction rate simialr to that pre the Chinese dumping at the end of 2006.And this looks to be continued for the next few weeks with cancelled warrants rising yet again.

Interestingly China has swung(almost visciously so) back to a net importer of zinc in the last month or so.Once again this could be a basic strategic response to dwindling world stockpiles as well as the price decrease we have seen as of late due to the fund sell down.

So not only do they now produce a much higher % of zinc via larger,more efficient smelters but they are also importing material once again.

This brings me to another important aspect of the zinc supply chain and that is the supply of concentrates.In JAN/APR 2006 China imported 225Kt of zinc concentrate.In the same period of this year they have imported 535Kt.Now thats an impressive increase in anyones terms,but what it conveys to this zinc punter is the question "where has all the zinc gone that they produced from this concentrate importing if they have turned back to net importer of SHG zinc?".Some can be accounted for by the build in the Chinese stockpiles but certainly not the amount indicated by the huge increase in concentrate imports,espc in the context of them turning net importer of SHG zinc.

The overall message I am getting from a couple of people I know in the shipping merchant trade is that this Chinese phenomenon has a way to go yet and it will only be a supply side response that will satiate this demand.

So what does this mean for our little Aim?

Well obviously the longer the zinc price holds above $1.60 the better for Aim.It really matters not to me whether they go with an extended hedge position or a shorter hedge.But what must be realised is that if this zinc strength continues for the next few years as the market seems to be implying(ATM!),via it holding at $1.60+ and trending up,then it puts Aim in a very strong position,stock value-wise,IF they go short on the hedging and MF has implied before he's keen to do this.It opens them to a valuation(based on the Lonsec report)of somewhere between 20-100% up on the current UPSIDE valuation of 62c/share based on a zinc price of ONLY $1.40/lb!!!

Now we have all been saying lets just get the damned offtake over and done with and settle down to being a strong zinc producer.Well the above reasoning,if sound,gives this Aim holder reason to believe that this could be the master stroke of all MF's master strokes in terms of giving shareholder value for money.It could also be the worst bet of the decade and a way to stuff a very promising company making project if the zinc price was to plunge,but the accompanying comments/articles above give this holder a bit of a warm fuzzy feeling about it all.

I can now appreciate the reasoning behind DRA/Byrnecut pushing for greater capital expenditure to get the mine/plant moving much sooner than originally intended.

Once again this impresses upon me that MF has surrounded himself with professionals that know what they are doing and has continued to do so with the appointements of Vic Bradley and Bill Cash and the market said so in no uncertain terms the other day by continuing support of the sp post the Mumbwa rise.Very heartening so far.

This is starting to turn into an impressive team the more I reflect on this company,and I do a lot of reflecting(!),some say way too much,and your probably right.But its hard not to get as enthused as this about something this promising,in this day and age of booming base metals,and one gets the distinct feeling its why the North Sounds,Frank Brewers and other significant holders are happy to sink the amount of cash they have into this company.

d.