Looming Zinc Supply Shortage Good News For Producers And...

Looming Zinc Supply Shortage Good News For Producers And Explorers

Stefan Ioannou

http://seekingalpha.com/article/396...-good-news-producers-explorers-stefan-ioannou

Apr. 19, 2016 9:45 AM ET|
We definitely have a good medium- to longer-term outlook for zinc, probably sooner to the upside than for other base metals and commodities.

A number of key larger-scale mines have shut down over the last few years.
A fundamental zinc supply gap is forming, which stands to materialize by late this year, as inventory levels are drawn down to critical levels.

The outlook for zinc appears bullish, says Stefan Ioannou of Haywood Securities, spearheaded by mine closures, dwindling production and the dearth of replacement projects. This looming supply gap could mean increased zinc prices by the end of the year, explains Ioannou in this interview with The Gold Report, a prospect that would bode well for one of the few pure-play zinc producers, as well as for an Australian explorer that may be on the cusp of a world-class discovery.

The Gold Report: Many analysts are cautiously optimistic about the price of zinc. Are you?
Stefan Ioannou: Yes, we definitely have a good medium- to longer-term outlook for the metal, probably sooner to the upside than for other base metals and commodities. A number of key larger-scale mines have shut down over the last few years. The most recent one was the Century mine in Australia, which produced about 4% of the world's zinc supply. It shipped its last concentrate early this year. In addition, Glencore International Plc (GLEN:LSE), Nyrstar (NYSE:BSE) and others have made significant production cutbacks. In all, over 10% of world production has come off, so there's definitely a supply issue looming.

Looking to the flip side of the equation-new mines coming on to replace that lost production-there really haven't been any major discoveries or developments in recent times. So we have north of 10% coming off and nowhere near that in new production coming on. A fundamental supply gap is forming, which stands to materialize by late this year, as inventory levels are drawn down to critical levels. Significantly lower year-over-year and spot zinc concentrate treatment charges arguably provide a leading indicator that market participants-namely the refiners-are already anticipating a supply constraint going forward.

TGR: What are your zinc price forecasts?

SI: We are still relatively cautious on the zinc price through this year. We are using $0.80 a pound ($0.80/lb) for 2016, but expect to see some price strength in the latter half of the year. In 2017, we see prices ramping up to $1.00/lb on average and then $1.20 in 2018. It's admittedly a fairly conservative price deck. If you look back to late 2006, when we saw inventory levels get to a critical level, the zinc price spiked up to $2/lb. Nevertheless, our outlook for the metal is bullish.

TGR: Are there any zinc plays you would like to mention?

SI: Given the conditions of the markets, don't forget the midtier producers that have notable zinc exposure in their profiles, such as Lundin Gold Inc. (OTCPK:LUNMF)[LUG:TSX], HudBay Minerals Inc. (NYSE:HBM) and Nevsun Resources Ltd. (NYSEMKT:NSU). They provide the added benefit of a polymetallic profile, which can buffer price volatility associated with one particular metal.