The zinc market’s supply-and-demand fundamentals are out of whack, but that hasn’t stopped investors from sinking money into the oft-ignored base metal.
Zinc, used primarily to make corrosion-resistant steel, has been the underdog of the commodities sector for the last few years, but a handful of deals in recent months has generated renewed interest in the sector.
“We’re benefiting a lot from the investor and market attitude toward zinc; it’s really changed a lot and a lot of that has focused on the takeovers in the sector in the last several months,” explained Steve Stakiw, a spokesman for Vancouver-based Trevali Mining (TSX:TV).
The junior company’s shares jumped 32% in the last month following news that Belgian zinc producer Nyrstar planned to take out Breakwater Resources (TSX:BWR) in a friendly $663 million acquisition.
That deal came just six months after Nyrstar bought Farallon Mining, a Vancouver-based zinc producer, for roughly $400 million.
There’s also news that Swiss commodities giant Glencore planned to pay US$3.2 billion to acquire additional shares in Kazzinc, a major producer of zinc in Kazakhstan.
With those companies off the market, few pure zinc players remain, allowing Vancouver’s junior miners to swoop in and garner renewed investor attention.
But all this movement in the zinc sector has surprised analysts and investors alike.
The price of the base metal has languished slightly above the US$1 per pound mark for the last several months as global metal production continued to outstrip consumption.
In fact, the London Metal Exchange’s zinc stockpiles have reached a 16-year high of 893,925 tonnes.
But some analysts are pointing to zinc as the next big story in the already booming commodities sector.
In a recent research note, investment bank Goldman Sachs pointed to “significant” annual zinc production deficits starting in 2013.
“We believe that global zinc consumption will move ahead of production from 2013, leading to growing pricing tension and justifying significantly higher prices,” Goldman wrote in a research note. “Building some exposure to zinc over the next 12 months should be rewarding on a two-to-three-year view.”
The reason for the production decline has more to do with mine shutdowns than a significant increase in demand.
At least four of the world’s largest zinc mines are expected to close in the next four years, slashing global production rates.
John Barry, president and CEO of zinc-focused Rathdowney Resources (TSX-V:RTH), said zinc has been such an undesirable metal in the last few years (plummeting as low as US$0.50 a pound in 2008) that there’s been little, if any, investment in the sector.
As a result, when mines shut their doors, there are few projects that can readily take their place.
“The other thing that’s happening, which obviously is incredibly important, is China,” said Barry.
Goldman Sachs said there is evidence that Chinese zinc mine production is levelling out.
The country also recently cut the import duty on refined zinc from 3% to 1%, signalling that a supply shortage could be on the way.
Said Goldman: “If that is correct … zinc could begin to feel a bit like the copper market in a couple years’ time.”