- Zinc is up 20% in the last 12 months.
- Global zinc inventories and supply deficits might make zinc not just a good investment, but a great investment.
- The problem is that it’s very difficult to find pure zinc plays.
Exactly a year ago, I wrote about how between mine closures with limited mine openings and increasing demand, a supply gap in the zinc market was about to be created (article available here). Since then, zinc prices are up about 20% and were up 46% for a moment in November 2016.
Figure 1: Zinc prices per ton in the last 12 months. Source: Bloomberg.
As since November 2016 zinc prices have fallen a bit, it’s a good time to see whether something has changed in the supply and demand puzzle for zinc or if it’s just some temporary weakness ahead of a new surge.
Zinc miners’ stocks enjoyed a nice rally up to November 2016 but have fallen significantly alongside sliding zinc prices since then.
Figure 2: Those who invested in zinc stocks a year ago have enjoyed significant upside: Teck Resources (NYSE: TECK), Hudbay Minerals (NYSE: HBM) and Trevali Mining (TSX: TV; OTC: TREVF). Source: Bloomberg.
In today’s article, we’ll look at the current supply demand balance for zinc and the outlook in order to see whether there will be a favorable environment for zinc miners in the short and medium term because small changes in zinc prices lead to extremely positive returns, as has been the case in the last year.
Zinc Supply Demand Situation
Many have seen that zinc prices have fallen in the last few months, but the prices they have seen are from the London Metal Exchange (LME). In China, prices are 15% higher as the Chinese zinc premium is currently $358 per ton. Other regional zinc exchanges also have significant premiums over LME prices.
Figure 3: Zinc premiums in regional markets have been shooting up. Source: Scotiabank.
The supply gap is still strongly present as global zinc inventories are declining sharply, and down 30.1% year to date. What’s left in global warehouses is 531,000 tons, or just 13.3 days of global consumption.
Figure 4: Zinc inventories in London and Shanghai are still declining. Source: Scotiabank.
The last time zinc inventories were so low and there wasn’t enough supply to satisfy demand, zinc prices went to $2 per pound (they are currently $1.12).
Figure 5: Zinc prices are at an inflection point. Source: TECK.
High inventories and low zinc prices in the last 10 years have brought about a situation where old mines are getting depleted fast and there aren’t significant new projects ramping up. The Century mine was recently closed and other big mines are about to be closed in the next few years.
Figure 6: Zinc mine closures, recent and upcoming. Source: TECK.
All of the above will lead to a significant and increasing zinc supply gap. Zinc has been in a supply deficit for 5 years already, but there were lots of inventories to cover. However, inventories are almost depleted and in 2020, the supply gap will become much wider.
Figure 7: Zinc supply gap up to 2025. Source: TECK.
Given this, I wouldn’t be surprised to see zinc prices above $2 in the next few years. There will be plenty of volatility up until then as supply deficits are still low, but zinc investments should make up a part of a long term growth oriented portfolio.
Figure 8: As inventory days approach historical lows, there is more room for zinc. Source: TECK.
The fundamentals are clear, and the beautiful thing is that they can’t change abruptly because you can’t just invent a new mine. It takes years to develop one and zinc prices have to be significantly higher for a longer period of time for miners to allocate significant resources to new mines. Plus the easy zinc has been mined, so mining new zinc gets more expensive and more complicated and thus zinc prices can go only higher as demand is expected to increase as the global economy develops and a new player enters its infrastructure development phase, India.
A recession is always a risk as demand for zinc and prices would significantly fall in the event of one. However as recessions usually last less than a year, it’s important to invest in miners that can survive such a shock. Now, let’s see how to invest in order to get triple digit returns.
Do Zinc Miners Offer The Potential For Another Triple Digit Return In The Next 12 Months?
The story with zinc is the same as with any other commodity or miner. The lower the mining costs per pound, the higher the safety the miner provides. The lower the debt burden, the longer a miner can survive in a recession.
On the upside, the higher the reserves, the higher the potential value of the miner, while the higher the mining costs, the higher the potential stock upside when zinc prices eventually increase.
There aren’t many pure zinc plays out there and every miner has some specific benefits and issues. Therefore, with some due diligence, you can easily find the best option for your portfolio and risk profile.
Interesting picks to look at are:
- Teck resources (NYSE: TECK) – However, just around 30% zinc EBITDA.
- Trevali (TSX: TV; OTC: TREVF) – Pure zinc play with two producing mines and lots of acquisitions; some mines have higher costs.
- Nevsun Resources (NYSE: NSU) – Has a zinc copper mine in Eritrea and one copper project in Serbia.
- Hudbay Minerals (NYSE: HBM) – Just 21% zinc revenue, 64% copper, and a significant debt load.
- Vedanta Resources (NYSE: VEDL) – About 50% of EBITDA comes from zinc at the moment.
- Vendetta Mining (TSX: VTT; OTC: VDTAF) – As I have Italian roots, I don’t like the name much, but it does have an interesting project. However, be aware of the warrants and the risks of developing a project.
Disclaimer: I am long NSU.