Zinc

[Lone Clone]

Zinc remains a solid investment as China's demand grows nearly 10 per cent
Wed Jul 4, 6:26 PM
Laura Bobak

http://ca.news.finance.yahoo.com/s/04072007/2/biz-finance-zinc-remains-solid-investment-china-s-dema...

By Laura Bobak

TORONTO (CP) - Despite fears that China may return to its past as a net exporter of zinc, the commodity is still a solid bet for investors looking to cash in on the growing demand for the metal used to prevent steel from corrosion, experts say.

China's demand for slab zinc is expected to grow 9.5 per cent this year and about nine per cent next year, said Patricia Mohr, a vice-president of economics with Scotiabank. In 2006, China, the world's biggest consumer of refined zinc, saw its demand jump 11 per cent.

Worldwide, consumption is expected to jump 4.5 per cent this year and then again next year, which is only a slight decrease from the five per cent seen in 2006.

"These are very strong growth numbers in terms of demand," said Mohr, noting the growth is fuelled by the demand for galvanized steel in Asia, especially China, where overall industrial production was up 18 per cent year in May year-over-year, and Europe, where it is used in construction.

World demand for zinc is currently greater than supply, but that should balance out next year as more mine production comes onstream, she said.

Mohr said investors looking to invest in zinc should consider waiting until late summer, when stock prices will likely drop somewhat in response to summer manufacturing slowdowns in Europe and elsewhere.

Stock prices should then increase in the fall as demand surges, she said.

China has a massive smelter capacity, but a shortage of zinc concentrate, so it has been importing the concentrate in massive quantities to produce the refined metal. When it produces a surplus, it exports it, which has some concerned about downward pressure on the price.

Zinc is now selling for about US$1.57 per pound on the London Metal Exchange. That's down from $1.67 in May, and nearly $2 late last year, but Mohr said her forecast for the average price for this year is $1.65. She predicts that will decrease to $1.35 next year, but that's still very profitable since the break even price was about 63 cents last year. Prices were an average of 48 cents in 2004, she said.

"Anything over a dollar is very good," Mohr said, noting current prices are at a very "lucrative level."

"It's had a really good run," she said.

Canada's Teck Cominco Ltd. (TSX: TCK-B.TO) is a major exporter of zinc concentrate, culled from its Red Dog mine in Alaska and shipped to China.

George Topping, a base metals analyst with Blackmont Capital in Toronto, agreed with Mohr that the metal's fundamentals are strong.

"I'm still very bullish on most commodities, and I think zinc will still continue to do very well," Topping said.

Although prices have dropped slightly from highs last year, "it's important not to let volatility shake you out of the markets," he said, adding he believes the zinc market will remain strong for at least three to five years.

Topping said zinc demand will remain steady as it's used to make products needing by increasingly affluent consumers in Asia. They're buying big-ticket items which use lots of stainless steel, including cars, fridges and dishwashers.

Investors who want to cash in on zinc could consider HudBay Minerals (TSX: HBM.TO), Breakwater Resources (TSX: BWR.TO), as well as Inmet Mining, (TSX: IMN.TO), which is primarily a copper producer but also makes zinc. Lundin Mining (TSX: LUN.TO) is also another Canadian miner with exposure to zinc.

But Canada's biggest zinc concentrate producer by far is Teck Cominco, which is trying to expand its reach into the copper market through its proposed takeover of Aur Resources Inc. (TSX: AUR.TO) at $41 per share.

The generous offer, which is not expected to be matched, will significantly boost Teck's copper production, and could indicate company wants to continue to diversify to protect itself from a drop in the price of the metal used to galvanize steel.

Investor concerns about Chinese exports of refined zinc could impact the stock prices of Teck and other companies with exposure to zinc, and Mohr said these concerns have likely been a factor in keeping zinc prices from zooming up.

HudBay, a Manitoba-based company, is Canada's second biggest zinc producer after Teck. It also produces copper, gold and silver from its four operating mines, and is considered to be a takeover target by some observers of the rapidly consolidating metals industry.

Analysts said in May the 76-year-old company represents a good buy for investors looking to get into the market for zinc.

"HudBay Minerals provides exposure to improving zinc market fundamentals," John Redstone and John Hughes of Desjardins Securities wrote in their May 28 weekly metals and mining research report to investors. Hughes said HudBay was a top pick, with above average risk, and set his target price to $28.50 per share in May. He said the company has a strong balance sheet, due to "conservative fiscal management" and historically high copper and zinc prices.

In the July 3 metals report, the Desjardins analysts forecast world consumption of refined zinc to increase 3.3 per cent this year to 11.7 million tonnes. In 2008, they predict consumption to pick up six per cent to 12.4 million tonnes. They expect world zinc output of 11.6 million tonnes, rising to 12.4 million in 2008.

Adam Schatzker, of RBC Dominion Securities, forecast an increase in spot zinc prices to $1.84 this year in a May 14 note to investors.