IT’S been a long time between drinks for zinc miners and the handful of investors who follow the world’s most frustrating metal but what Dryblower saw last week might be the first signs of a sustained price recovery – or it might be another false dawn.
The latest price of US93c ($A1) a pound is hardly enough to write home about because zinc was higher than that just before Christmas and again in February.
What makes the recent gentle upswing in price noteworthy is the way in which it has occurred – as a series of small jumps – and the way it which it has been matched by a steady decline in the world’s zinc stockpiles.
But, more important than the up and down movements in price and stockpiles is the news flow from the zinc market, including a series of deals involving the metal, which are the most positive signs yet that a long-predicted sea change is underway.
Old mines, which everyone knows must eventually close, are within sight of their use-by dates.
Mothballed mines, which were closed because they couldn’t tolerate the low prices of the past five years, are reopening and companies with a deep-seated interest in the metal are buying out smaller producers unable to hang on any longer.
Offsetting the positive news are two negative factors that have some zinc watchers worried about a repeat of previous recovery attempts.
On the stock market, share prices of zinc-exposed stocks have barely moved for months with the positive news being totally discounted by investors as too good to be true, a view compounded by the second adverse feature, a rush to reopen marginal mines.
On balance – and this is where guesswork adds to a logical assessment of the zinc outlook – there is more chance of a lasting recovery this time than at any previous point in the five years that zinc has spent in the sin bin.
What particularly interests Dryblower is the decline in stockpiles and while Chinese stocks remain hidden behind a bamboo curtain of government statistics and dubious Shanghai financing arrangements there is evidence of a significant correction in the stockpile reported by the London Metal Exchange.
Since peaking at an astronomical 1.23 million tonnes in late 2012, zinc stocks being kept in warehouses licensed by the LME have slipped, in a curious zigzag fashion, to 789,000 tonnes.
That 36% fall in the level of LME stocks means its warehouses now hold their least amount of zinc in two years, a result of lower production, mine closures and steady demand for the metal that has one primary use, an anti-rust coating on galvanised steel.
Other people with skin in the zinc game have also been watching the LME stockpile situation carefully and they’re starting to put their money where their hopes are by investing fresh capital in zinc.
Recent moves include:
•Canada-based Teck Resources last week announcing it would reopen the Pend Oreille underground mine in the US state of Washington. A relatively small zinc producer at 44,000 tonnes a year, Pend Orielle will have a modest impact on the 14 million tonne per annum zinc market but a big impact on the much smaller germanium market with the US mine capable of producing up to 10% of the world’s germanium as a by-product
•Trevali, another Canadian miner, dusting off a mothballed project, the Caribou mine in New Brunswick
•Baiyin Nonferrous Metals Company in China announcing that it is restarting zinc smelters closed last year; and
•Glencore, the big miner and commodities trader, joining in the zinc revival speculation by paying Australia-based Blackthorn Resources $US12 million for its 27.3% stake in the Perkoa mine in Burkina Faso.
Layered on top of the activity at an operational level is research pointing to a chronic oversupply of zinc giving way to a supply deficit.
The International Zinc Association reckons that demand will outstrip supply by 117,000t this year while Deutsche Bank estimates that the shortfall will rise to 400,000t next year.
It is forecasts like that, when combined with operational activity, which has led to investment banks, such as Morgan Stanley, tipping zinc to be the top performing metal in 2015.
But if that’s the case and zinc really is on a roll, why are zinc company share prices not moving higher?
There are only two answers to that question. Either investors are right in not believing the zinc revival story, or they are missing the chance of a killing.
Dryblower’s gut feeling, which is not regarded by securities regulators anywhere in the world as a reliable form of investment advice, is that the zinc revival is real and will pick up pace as the word spreads.
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IBG Price at posting:
5.0¢ Sentiment: Buy Disclosure: Held
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