Zinc has been an investor’s graveyard for most of the past decade which explains why the latest bounce in the price of the industrial metal has been widely ignored – despite a small group of zinc-exposed stocks doubling in price over the past six months.
A metal mainly used to galvanise steel, it was zinc (along with its close associates silver and lead) which funded the early years of BHP Billiton and Rio Tinto but which today has only one supporter among the world’s top mining stocks, the Anglo-Swiss commodities specialist, Glencore.
Since mid-January, as the price of zinc has risen by 36 per cent on the London Metal Exchange, the share price of Glencore on the London stock exchange has behaved like Australia’s penny dreadful zinc stocks, doubling from 72p to 144p.
Other factors are at work in Glencore’s recovery, including the fact that it fell further than BHP Billiton and Rio Tinto, though their price recoveries of 40 per cent and 25 per cent pale alongside Glencore’s 100 per cent.
Whether zinc really is staging a sustainable revival, or simply teasing investors with a short-term price spike for which it is famous is a test which separates investors from speculators.
Investors will wait a little longer to see if the fundamentals of zinc’s supply and demand equation really are as promising as they look.
Speculators are already taking positions in local zinc stocks such as Heron Resources, which is re-developing the Woodlawn zinc mine near Goulburn in NSW, Energia Minerals which is re-developing a zinc project in Italy, and Rox Resources which has a stake in a promising zinc discovery in the Northern Territory.
Over the past six months Heron has risen by 94 per cent from 8c to 15.5c. Energia is up by 84 per cent to 5.7c and Rox has rocketed up by 160 per cent to 2.6c thanks to the combination of its earlier low price of 1c and the potential for the Teena discovery to become a significant mine.
Other Australian zinc stocks, all with modest market capitalisations, have been rising strongly as the zinc price continues to move higher and, perhaps more importantly, the world’s stockpile of zinc shrinks and a surplus of production morphs into an annual deficit.
Ironbark Zinc, which has Glencore as a major shareholder, is up by 74 per cent to 5.9c as interest grows in its technically challenging Citronen project in Greenland. Red River Resources, which is planning to re-develop the Thalanga mine near Charters Towers in Queensland, is up 100 per cent to 16c, and Marindi Metals has risen by 140 per cent to 1.2c, thanks to its exposure to the Newman zinc project in WA.
The low prices of all the stocks mentioned is a clue to the risks involved with zinc, both for the companies involved and investors who should treat what’s happening with great care.
Warnings aside there is an interesting investment case evolving in zinc partly because annual global consumption continues to grow at around four per cent, and partly because the low price over the past decade has caused exploration and mine development to dry up just as some of the world’s biggest zinc mines run out of ore and close.
The best example of supply shrinking was last year’s closure of the Century project in Queensland which was the world’s biggest zinc mine and the source of 500,000 tonnes of zinc a year (owned by Hong Kong listed MMG Group).
Interestingly, a connection can be drawn between the final shipment of ore from the Century site in mid-January to the rise in the zinc price. As the last truck left the Queensland mine the zinc price was sitting at US66c a pound. It has been rising strongly since to its current US90c/lb.
Over the past four years global zinc production has been shrinking even as consumption has steadily risen, with the latest zinc market analysis from Macquarie Bank highlighting the evolving supply/demand squeeze which should continue to drive the price higher.
Last year, as Century moved towards closure, Macquarie estimated global zinc production at 13.25 million tonnes and consumption at 13.78m tonnes with the shortfall drawn from extensive stockpiles which stood at 2.1m tonnes.
This year, supply is expected to drop to 12.1m tonnes while consumption rises to 14m, with the stockpile meeting demand but dropping to 1.6m tonnes.
The squeeze on supply should continue for the next few years with Macquarie tipping a rise in the zinc price to $US1.28/lb in the year 2019 (up 42 per cent on today’s price and double where it was in January) by which time the world’s zinc stockpile should have shrunk to just 166,000 tonnes, or less than one week’s consumption.
A lot can go wrong with forecasts such as those from Macquarie and the incentive for mining companies to boost zinc production will be strong.
But, because the zinc business has been depressed for a decade there are not a lot of mines which can be brought on line quickly which means that the next few years should see continued strength in the zinc market.
How long the zinc revival might last is a question investors should ask because the metal has a habit of extreme moves up and down, just try to not be there at the next downturn.