Zinc Play Update: Time to Start Moving Down the Food Chain?
By Michael J. DesLauriers
12 Jul 2006 at 06:11 PM EDT
TORONTO (ResourceInvestor.com) -- Back in late January, your correspondent suggested readers take a look at some attractively priced zinc producers; six months later, an update seems appropriate as price action across the board has been considerable and it may be time to revise one’s strategy somewhat.
The three names in question were Breakwater Resources [TSX:BWR], HudBay Minerals [TSX:HBM], and Lundin Mining [TSX:LUN]. At that time shares in BWR were going for C$.74, HBM was C$7.06 and LUN C$23.
In the intervening period Breakwater has seen highs of C$1.69, closing today at C$1.41, HudBay got upto C$16.99 with a close of C$15.53, and Lundin Mining reached C$43.92, closing today at C$31.97.
The price of zinc has also done extremely well in that time period, rising from just under US$1/lb to a close today of US$1.57/lb just off its highs above US$1.70/lb. Furthermore, LME inventories have shed an additional 45% since January and now stand at just over 205,000 pounds, with the number dropping steadily every day. It will be interesting to keep an eye on this number, to see where it reaches equilibrium, much as copper did months ago.
Despite a growing number of analysts calling for cooling global growth, zinc’s fundamentals remain extremely compelling and should be able to sustain prices conducive to positive shareholder returns. The supply side of the market would appear to be coming around somewhat, but not nearly at a pace strong enough to have any kind of downside impact on prices.
When RI brought the aforementioned names to readers at the beginning of the year, we felt quite strongly that these companies offered further upside, and that the underlying fundamentals of the metal were very strong, noting that, “the analyst community has consistently misjudged the direction of base metal prices in this bull market, and even as the trend continues to highlight their flawed analysis, many are sticking to their guns. They have been equally useless in their price projections for the oils and the precious metals.” It was, and remains our conviction that, “given China’s highly encouraging long-term growth prospects, shares of the few publicly listed zinc producers should continue to outperform with solid cash flow and earnings paving the way for higher multiples across the board.”
Zinc’s supporters have been rapidly growing in numbers recently, and your correspondent is always one to seek out the easy money. In this case, quite a bit of easy money has been made on zinc producers, although we believe that fairly meaningful upside remains. That having been said, we feel quite confident that the real multi-bagger returns will now come from quality developers and near-term producers in the space, which the market has, in many cases, completely overlooked. This concept has seen wider application in the precious metals stories and in many cases copper and nickel stories as well.
Because the zinc play is still relatively new to people and because there are so few listed companies in the zinc game, numerous opportunities still exist to generate multi-bagger returns. In the coming weeks, RI will profile a few of these for investors.
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