Categories: Base Metals
Topics: General Base Metals

Zinc Prices Rally on Falling LME Stocks

 By Eric Pratt
MidasLetter.com
Tuesday, April 28, 2009

Zinc prices have jumped 30% in the last few weeks – from 50 to 65 cents per pound - but zinc stocks have yet to reflect this move.

The rally came on the back of China’s state reserve bureau purchasing copper and zinc for strategic purposes. The prices of the base metals increase also coincided with global production cuts.

This is the first time Zinc inventories have been falling at the London Metals Exchange since they bottomed in late 2007. Copper inventories have also been declining for the first time in over a year, leading investors to wonder if the world economy is starting to rebound.

In a recent report by Barclays Capital in London England, their analysts say copper and zinc are the base metals most likely to react fastest with higher prices to an eventual upturn in demand.

Whether its lower supply or higher demand, inventories are dropping. Another media outlet reported that China’s zinc mines are back in production, with capacity moving from 20% in December 2008 to 85% in February 2009, so it doesn’t look like supply is dropping.

A separate survey by Macquarie Group of Sydney says that “commodity demand is in the eye of the storm and that there may not be too much further downside to global demand..”

GFMS Metal Consulting reports that the zinc market is forecast to return to a small deficit in the second half of the year.

The last time zinc inventories were at this level (April 2006) the zinc price was just over US$1/lb – 50% higher than today. And in October 2005, when the zinc price was at 65 cents, inventories were at 500,000 tonnes, 50% higher than they are today at 340,000 tonnes.

All this says is that historically, zinc is very cheap compared to its inventory level.

Of course, the important question is, how can investors profit from this? In this challenging investment market, investors looking for exposure to zinc should stick with producers, near term producers or companies with large compliant resources.

Breakwater (BWR-TSX) is the bellwether zinc stock and is now trading at 12 cents. It has great liquidity. Breakwater has two producing zinc mines, andtwo others now sitting in care and maintenance ready to come back online should zinc prices continue to rise.

Donner Metals (DON-TSXV) has discovered a new zinc deposit right beside Xstrata’s Perseverance mill in the Matagami camp of central Quebec. Xstrata is a 51% partner on the new orebody, called Bracemac-MacLeod. They have enough tonnes to get into production, the operating mill is right there and the current mine only has a 4 year mine life, so the new deposit needs to be fast-tracked. Near term production, low risk. Donner trades at 14 cents.

Canadian Zinc (CZN-TSX) is developing the Prairie Creek Mine in the Northwest Territories. It has a huge resource of some 3 billion pounds of zinc and it also has mill on the property (though it’s not operating) with several permits are still pending. Canadian Zinc has leverage to the zinc price, trading at 21 cents.

One of the largest zinc deposits in the world, albeit a bit more grassroots, is Selwyn Resources’ (SWN-TSXV) Selwyn deposit in Canada’s Yukon. It hosts a staggering 41.5 billion pounds of zinc. However, the project is remote and would have a huge capital cost, which in these credit-challenged days would be difficult. Selwyn trades at 9 cents.

All of these companies saw their share price spike when zinc roared to $2 per pound. With current zinc inventories as a historic low, any extra demand could take the zinc price higher. While not an exhaustive list, these four zinc stocks give investors some leveraged exposure to rising zinc prices.

BMO Nesbitt Burns forecasts zinc rising from 66 to 85 to $1 over next 3 years with long term price of $1.05.

SOURCE: http://www.midasletter.com/news/09042806_Zinc-prices-rise-on-falling-LME-stocks.php