A repository of great articles to help make informed investment decisions.
This article is from February, but gives a great overview of the case for zinc and zinc mining stocks.
By Rob Furse
February 10, 2006
Zinc is hot. Everybody is talking about it and buying anything related to it. My interest in the “Great Protector” was piqued about three years ago by the great Jim Rogers who mentioned it in interview as a laggard in the metals cycle. With zinc being the best metal performer in 2005 it looks like Jim is right again. But how sustainable is the current strength in zinc prices?
Let’s start by looking at the inflation adjusted price of zinc. In the early 70’s zinc reached an inflation adjusted price of $10,000 per tonne. At the beginning of 2006, the zinc price is still under $2500 per tonne. This historically low price is less than one quarter of zinc’s inflation adjusted high. If the commodity super-cycle plays out, the ultimate price of zinc could be stunning, perhaps far surpassing the high water mark of $10,000 per tonne.
This technical fact is supported by the long-term fundamentals of the zinc market. Take a look below at this graphic created by Teck-Cominco showing current and future mine supply versus expected demand. This graphic illustrates what is termed the “Zinc Supply Gap”.
It is apparent that years of underinvestment have left few projects in the pipeline. In fact, many producing mines are set to close over the next few years. It is worth noting that in the past, Teck-Cominco purposely choose to not develop any of it’s zinc deposits so it would not undercut the viability of its’ massive Red Dog zinc mine.
Not only are there not enough projects in the pipeline to meet demand. The economics of planned projects continue to degrade. Oil, electricity, even giant tires for mining trucks are all in short supply. More critically, experienced geologists and miners are an aging group and tough to find. To top it off, mining regulations are more rigid than ever before with stringent environmental and aboriginal concerns pushing out development timelines even further.
On the demand side, Asia is the key player, with their hyper-growth expected to drive demand in the zinc market. In fact, growth is now expected to be closer to 4% per year, rather than the 1.5% or 2.5% currently modeled.
Zinc has few substitutes and could easily take out its’ old highs without too much dislocation in the economy. It contributes only a small portion of the end cost for the products it is used in. For example, the average car uses about 17 pounds of zinc. At ten times today prices zinc would only add an extra $170 dollars to the cost of a car.
A slowdown in the U.S. is always a factor when considering base metal prices, but America uses only about 11% of the world’s zinc. Furthermore, World population is growing at an exponential rate, creating more people thirsting for their first taste of Western living standards. North America and it’s housing market could affect base metals prices in the short term, but the future will see Asian economies much less dependent on exports. The ramifications of this inflection point will go far beyond base metal demand, but that is beyond our scope here.
Currently there are a lot questionable valuations for mining companies and zinc miners are no exception. I would look for a quality senior and mid-tier producer along with juniors with proven management and decent land packages. With the price of zinc rising, these companies should do well over time.
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