It's zinc or swim with tight supply Robin Bromby February 12, 2007
PANICKY investors are likely to keep pounding zinc stocks following the metal's losses but analysts say supply of the commodity will remain tight. It will be hard to pick where the share prices are going, with one report suggesting zinc producers Perilya and Kagara Zinc could see fluctuations in their share values of up to 30 per cent over the next year. In the past week, zinc - having been cited as the likely star performer among metals in 2007 - was looking as though it was going to plunge beneath the $US3000/tonne level.
Investors would have breathed a sigh of relief when the rout ended - at least temporarily - on Friday with the metal regaining a meagre $US2.50/tonne to close at $US3130.
The metal has been on a sharp downward slide since the news broke that hedge fund Red Kite had sustained big losses on its zinc bets, and there were fears other hedge funds could be in a similar position. Yet the fundamentals have remain relatively unchanged in past weeks: stocks of nickel at the London Metal Exchange were hovering last week around the 95,000-tonne level - a long way down on the one-year high for inventories of 361,375 tonnes.
Commonwealth Bank commodity strategists describe the zinc stocks situation as "tight".
But none of this helped much in the past week. AIM Resources, even though it announced it had got its mining licence for the Perkoa zinc project in Burkino Faso, saw its shares end the week down to 23c, having been sagging from a recent high in November of 37.5c.
AIM has a high-grade deposit, a rail link to the Atlantic Ocean at Ivory Coast's Abidjan port and offtake agreements with such big players as Xstrata Zinc and French commodity house Louis Dreyfus - but none of that was sufficient to repel the tide of bad sentiment towards zinc. Kagara Zinc, which has been one of the brighter stars of the mid-tier producers, has seen its share price ease from $7.72 in November to $4.99 last Tuesday before a mild rebound.
Zinifex and CBH Resources have also been given a whacking. Adviser Fat Prophets, in its latest weekly resources report to clients, said zinc remained an outstanding investment from a supply-demand perspective.
"The short-term focus of some investors never ceases to amaze us," Fat Prophets said. "Despite all the positive evidence, some investors will panic at the slightest hint of short-term trouble."
Both the prophets and another Sydney-based adviser on mining and oil investments, Stock Resource, have just released notes on one zinc player, CBH Resources.
Stock Resource said the company was now getting strong cash flows from its Endeavour zinc-lead-silver operations at Cobar. It has recommended investors stay in the stock at present levels, as did Fat Prophets, which said CBH was one of its zinc sector favourites and would ride out the present volatility.
But Far East Capital's Warwick Grigor is waiting to see whether all the bad news for zinc is over. If the metal breached its present support levels, then investors would have to rethink their positions.
Mr Grigor said some of the zinc stocks might have moved into a pattern that could dominate trading for the next year, with the capacity to fluctuate within those patterns by up to 30 per cent.
But he also sees this as part of a wider picture in which metals stocks generally have been subject to profit-taking.
Mr Grigor urged investors to put more thought into buying value, adding there were too many grassroots exploration companies having unsustainable share prices. "Punters quickly tire of exploration stocks that have no substance as they jump from one to the next," he said.
(20min delay)