By Brandon Dempster
June 19, 2017 (Investorideas.com Newswire) The clear supply deficit in zinc has really opened up an opportunity for investors with the need for global diversification. There are very few pure play zinc companies in the world, however a few stocks have begun to take a direct correlation to zinc futures over the past couple of years, serving a vital need.
One of the key drivers behind zinc's price success over the past couple of quarters has been rapidly declining inventories. These inventories, currently under 350k mt, have been declining for the last five years. This has been due to demand exceeding supply by a few percentage points every year since 2012, but now, that gap has widened to approximately 7.7%.
The market for zinc is seeing supply shortages after Glencore (GLCNF, GLNCY, GLEN.L) closed two major mines during the downturn. Additionally, zinc mine closures in Australia have impacted supply, helping to push prices higher. On the demand side, like many other base metals, China is the key player, responsible for nearly half the world's zinc consumption. China's GDP for the first quarter came in at a strong 6.9%, a drastic improvement from one year ago when a low GDP sent the global equity markets into a rapid sell-off. The demand for zinc from china should only grow, too, as the One Belt, One Road initiative to create nearly $1 trillion in infrastructure over the long-term will help to drive passive support for zinc prices.
Even smaller fundamental factors like declining treatment charges, indicating relative competition for smelter usage, are supportive of higher zinc prices. We're also seeing US premiums for zinc spike to multi-year highs.
#1 Trevali (TV)
This small miner is the beneficiary of a transaction involving large, diversified metals company Glencore. Back in March, Trevali was able to take the title of the only “pure play intermediate zinc producer” in the world. This is due to a $400 million cash and stock deal were Tervali gained an 80% interest in the Rosh Pinah mine in Namibia and a 90% interest in the Perkoa zinc mine in Burkina Faso. The company also received a 39.24% interest in a zinc and lead deposit, Gergarub.
The catch with this deal (a divestment on behalf of Glencore) is that the $156 million worth of Trevali shares that Glencore is receiving has to be held by the company for 24 months. That means while there may be selling pressure in the future, diluting existing stakes, the window of opportunity begins as soon as this transaction closes. That's projected to be on or before July 31, 2017.
These mines are significant because it means Trevali can now produce up to 410 million lbs of zinc per year. The stock has traded down in 2017 on news of this for what's likely fear of dilution in the future by Glencore.
#2 Zinc One (Z.V, ZZZOF)
Listed on the Toronto Venture Exchange and the pink sheets in the United States, this high volume penny stock has really come up on my investing radar as of late. In reference to that high volume, it's quite rare for an OTC stock to trade with great liquidity, but Zinc One is the exception with nearly a 500k average daily volume. The stock is quite simple to understand in that it is one of the few stocks in the global markets that directly tracks the price of zinc, which allows investors an affordable exposure to zinc prices, rather than trade in the futures market.
Mid 2017, Zinc One completed the Forrester acquisition and this gave the company a unique catalyst: a past producing high-grade zinc mine and highly prospective adjacent concession with drill proven blue sky. While the potential for reactivation of the past producing Bongara Zinc Mine Project is still a few years away, the company has a lot of expected news flow that makes it worth investing in now. On top of this, further drilling on the adjacent Charlotte Bongara could yield further exceptionally high grade on surface drill results to further excite the market. . Located in Peru, the Bongara Zinc Mine Project and Charlotte Bongara are the two zinc-oxide projects , that were acquired in the deal with Forrester and their grades are some of the highest in the world. Right now, the company is planning a drill program to update and likely increase the historic resource estimate in place. An event like this is sure to excite the market in the near term.
Zinc One, too, is oversold right now, according to momentum indicators, creating an ideal entry point for investors seeking high-quality zinc exposure in their portfolio.
Perhaps one of the most interesting details about this mine is that the deposits sit at surface and easily accessible for open pit mining as shown by past production. The company's Bongara Mine Project is roughly 8,000 hectares and another 3,115 hectares on the Charlotte Bongara, which means the company holds a massive footprint.The Bongara Mine Project is subject of a historic resource estimate that the company strongly feels it can increase with a more thorough drilling program than what was done by the previous operator. The company can also continue to scale as there is exploration potential over 4 kilometers between these two projects.
lOne of the notable goals of this Company is a thirty six month timeline to put the Bongara Mine Project back into production.The first steps in doing this are the completion of the previously mentioned updated technical report followed by a preliminary economic assessment planned for the end of Q1 2018.. Initially, the company is waiting on permits for up to 300 drill platforms to begin this work. . A company with such aggressive goals, backed by an expert management team, is a high quality, calculated risk, in my opinion.
The 20% plus grades seen at the Bongara Mine Project are some of the highest in the world soon making the company one of the highest grade producers in the world. As Zinc One moves this project forward and closer to production, shareholders should expect a significant return of value. Below is Zinc One's past producing Bongara Mine Project with at surface high grade zinc mineralisation.
#3 Canadian Zinc Corp (CZN.TO, CZICF)Canadian Zinc Corp is a relatively young company that has several mines in the pipeline that are due to come online within the next couple of years, providing a diversified slate of catalysts. The first is the Prairie Creek Project where a definitive feasibility study (DFS) is being conducted and should be completed by the middle of the year. The company posted a Q1 2017 loss of $2.56 million, more than triple the loss last year of $777k; but, losses are to be expected as this company is a developmental stage miner and won't see production for a few more years.
The stock is well off of its 2017 highs, trading down over 40% since February, but the short-term has many catalysts that can take this company to new highs.
#4 Lundin Mining (LUN.TO, LUNMF)
Lundin mining is a diversified miner, with notable zinc, copper, and nickel. The company is beginning an expansion of its Neves-Corvo mine in Portugal, where after 2020, the company will produce on average 150 kilotons per year. That's more than double than what the company projects it'll do this year, at just 72-77 ktpa. The stock has started to make a comeback and buck its current downtrend. With globally diversified operations, this stock is one to consider, as it has almost doubled in value YOY, as seen below.
From this expansion, the company is expecting a post-tax IRR of 22%, which is high quality. The breakeven of $0.71/lb is well below the current spot zinc price and long-term projected zinc price. The proven and probable reserves of this mine total 34,090 kt. The zinc grade is much lower than say those of Bongara, at just 7.5%, thus why it's fourth on this list of top five. All items considered, this is still a sizable long-term catalyst.
#5 Nyrstar (NYR.EN)
Nyrstar is trading at incredibly low levels today relative to just five years ago, when the share price was near 50 EUR. At just 5.67 EUR today, the discount reflects significant weakness in the commodity space. This is also one of the larger small-cap companies focused on zinc mining, with a market cap of 530.32 million EUR.
Nyrstar is the second largest zinc producer in the world, just behind Korea Zinc, producing 1,015 kt in 2016. The large market share makes this name quite attractive, but the rapid depreciation of its stock over the past five years warrants this name being at the bottom of the top five. There are several catalysts in the near-term that can take this stock higher.
A lower euro relative to the dollar helps provide FX translation gains and should zinc fundamentals remain positive, this company is going to see a large pickup in EBITDA. They recently upgraded guidance from 80 million EUR to 130 million EUR for each year through 2020. Additionally, numerous divestments over the last couple of years have helped this company to lean out, high grade projects, and to take on a higher liquidity position to ensure longevity.
Others Worth Considering
Glencore: Despite divesting two massive zinc mines, the liquidity boost was much needed. A diversified approach to metals and mining reduces the risk on this relative to that of a pure play zinc miner. The stock is also trading at historical lows, but does not maintain a direct or even partial correlation to zinc prices.
Teck Resources (TECK): This diversified miner shifts its production prior to the start of a new calendar year in order to take advantage of commodity price fluctuations. However, despite being a major zinc producer, the stock has too heavy of a correlation to metallurgical coal prices, which prevents investors from taking on the needed zinc exposure. The company will perform well if zinc performs well, naturally, but coal is the key driver here.
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Disclosure - Zinc One (TSXV:Z) (OTC:ZZZOF) is a featured mining PR, news and social media client for June 2017