Zinc's Time to Shine
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
The greyish metal primarily used in galvanizing steel is off to a hot start in 2017, up another 12.5% to $1.30/lb.
“For us zinc is still the most exciting story out there “ Don Lindsay, President and CEO, Teck (January 26, 2017)
The reason for the zinc price rise is one of the basic principles of economics - supply and demand.
Zinc inventories (supply) have been falling like a rock. Inventories last February on the LME were ~500,000 tonnes and are now down to ~380,000 tonnes.
Two of the largest zinc mines in the world have closed in the last few years (Century and Lisheen) due to ore depletion, removing ~4 % of world supply.
The world’s largest mining company, Glencore, significantly helped the zinc market as well cutting production by 500,000 tonnes in late 2015. The cuts were made because of the low price of zinc at the time. Glencore has yet to restart production at these mines and this will be a major factor for investors in zinc to keep an eye on.
Zinc demand has steadily increased throughout the last several years and and is expected to increase by 2.1% to 13.85 million tonnes in 2017.
The zinc price is now at a 5 year high of $1.30 per pound as inventories are also near a 5 year low at ~380,000 tonnes (LME). Shanghai Futures Exchange stocks have also declined substantially in the last 3 years.
How high can zinc go in 2017?
As inventories continue to decrease along with no new mine supply expected, a pinch point appears to be coming for the zinc price.
“The next two years, 2016 and 2017, represent the ‘pinch point’ of concentrate supply, with mine-closure related cuts expected to outweigh new output from projects.” Wood Mackenzie Analyst, Jonathan Leng.
Zinc price forecasts
- Scotiabank is forecasting zinc prices to average $1.35/lb in 2017 and $1.55/lb in 2018.
- Wood Mackenzie, a leading research firm has a peak price target of $4000 US/tonne ($1.80 per lb) in 2018.
- Bank of Montreal has forecasted an average price of $1.50 per lb from 2017-2019.
The best way for investors to play a zinc price move would be to invest in zinc equities.
“I definitely think it is the right time to do so [invest in the zinc market]. About the only way to do so is through zinc equities, whether you’re looking at the major producers or some of the junior explorers there are not a lot of options out there for zinc.” Brien Lundin, editor of the Gold Newsletter
Investors have three different ways to play an investment in zinc stocks - producers, developers, and explorers.
Here are 3 companies on my radar.
Investors looking for a large cap company in the zinc space would have to have Teck (TCK.B:TSX) on the top of their list. Teck is the world’s third largest zinc producer and receives approximately ? of its revenue from zinc.
Taking a step down and looking for a cheaper option in the mid-cap range would be Trevali Mining (TV:TSX). Trevali is a pure-play zinc producer with two operating mines. Trevali produced ~98 million pounds of zinc in 2016, along with lead and silver.
Analyst Joseph Gallucci of Dundee Capital Markets has TV rated as a top pick on leverage to zinc and “based on current production, as well as short-term organic growth.” Bank of Montreal has just initiated coverage with analyst Alex Terentiew putting a $2 target price on Trevali shares.
The team at Darnley Bay (DBL:TSX.V) realized that the zinc market was heading for a supply/demand deficit and started looking for development stage projects.
The team acquired two of the most advanced stage development projects in the world - Pine Point and Clear Lake. Kerry Knoll, Executive Chairman and director has had his eye on the Point Project for years and was excited to acquire a development stage project with resources in the ground.
“When Cominco left in the late 1980s, they left a number of deposits behind that they considered too low grade, and they had other projects to mine instead.” says Knoll.
“Leaving them behind gives us a really great head start towards building a mine.”
The acquisition of Pine Point was significant, as it is a past producing zinc district in Yellowknife.
President and CEO of Darnley Bay, Jamie Levy had this to say on the acquisition, “Pine Point has historic size, it’s got grade - which we think is economic at today’s prices - it’s got phenomenal infrastructure, a good jurisdiction in Canada, willing aboriginal partners and exploration upside.”
Pine Point was the most profitable lead-zinc mine in Canadian history and was shut down in 1987 due to low zinc ($0.35/lb) and lead ($0.27/lb) prices. Between 1965-1987, Cominco mined 64 million tonnes of 7% zinc and 3.1% lead from 52 ore deposits.
Current zinc resources at Pine Point are 4.2 billion pounds in 46 deposits left by Cominco.
Zinc primary deposits are formed in the three different deposit models.
1. Mississippi Valley Type (MVT)
2. Sedimentary Exhalative Deposits (SEDEX)
3. Carbonate Replacement Deposit (CRD)
The Pine Point property hosts Mississippi Valley Type (MVT) deposit(s) which is important for investors to note. MVT deposits are important sources of lead-zinc that account for ~24% of global lead-zinc resources. MVT deposits are valuable, typically high grade with non-complex metallurgy. The systems typically have less iron than SEDEX and CRD deposits. This is fetches a premium as when the ore goes to the smelter, it will be less penalized.
Darnley Bay Pine Point Project Map
(click to enlarge)
Darnley Bay’s zinc land package consists of 46 deposits that contain 48 million tonnes of historical resources. Excellent potential remains to increase these resources. Greenfield exploration is also exciting with 34 geophysical anomalies that require further work.
It is important for investors to note the size of the Darnley land package (~62 kilometers) as MVT type deposits tend to be smaller (sub 8 million tonnes), but they occur in districts where there can be hundreds of them. It is likely that more deposits are to be found on this land package.
The R-190 deposit is fully permitted with Cluster and N-204 expected to take 2 years to permit.
Darnley has raised over $10 million from investors in the last couple months. Recent shareholders include Rob McEwen, Lukas Lundin, Pat DiCapo, and Fabrice Taylor.
Fabrice Taylor of The President’s Club newsletter discusses Darnley Bay on BNN (Dec 1st,2016)
2017 is expected to be a busy year for Darnley Bay, with an updated technical report, near mine drilling, regional exploration drilling, and a updated PFS study all on the agenda. If all goes according to plan, production could commence in 2019.
The bottom line is that Pine Point is a brownfield opportunity for investors with excellent greenfield exploration potential.
By James Fraser