Doc’s Note: Today I’m sharing an essay from my friend and colleague Matt Badiali. Matt heads up the Stansberry Research Resource Report. As a writer and a geologist, Matt digs up the best recommendations for oil, gas, and metal companies.
Right now, Matt sees an excellent opportunity in an often-overlooked metal. It’s a great way to add this commodity to your portfolio and gain some exposure to the natural resource sector.
You probably don’t think much about zinc. I know I didn’t… other than putting it on my nose to keep the sun off… knowing vaguely that it keeps my boat motor from rusting… and that it is the shiny coating on galvanized metal…
I saw zinc often over the years, but mostly mingled in with more glamorous resources, like silver. For instance, on my desk is a beautiful chunk of silver-lead-and-zinc ore from an abandoned mine above Silverton, Colorado.
However, zinc is a critical component in everything from the nails holding your house together to the car you drive.
About half of the zinc produced each year gets used in galvanizing, a process that prevents rusting by coating iron or steel with a thin layer of zinc. Zinc is also a common alloy needed to make materials that go into things like cars and household electronics. (The average car uses 38 pounds of zinc. Almost half of that protects it from rust, while 20 pounds go into die-cast parts like door handles and locks.)
But the zinc market faces a big supply crunch… Zinc consumption has grown steadily over the past decade from about 11 million tons in 2005 to 13.8 million tons in 2015. That works out to about 2.8% per year. But supply is shrinking rapidly. That’s due both to low prices (which lead to mine closures) and the end of several large mines’ lifespans.
Zinc hit its last euphoric top in late-2006, when it sold for more than $2 a pound. The inevitable crash followed. Zinc bottomed out at $0.47 per pound in 2008. After that, zinc was caught in the natural resources bear market between 2008 and 2016. It has traded mostly sideways, fluctuating around $1 a pound…
Zinc recently bottomed at $0.66 per pound in December 2015… Since then it has rallied. Today, it’s back up to $1.10 per pound. That’s a 66% gain in less than a year… but still a long way from the euphoric top a decade ago. But it gives us a confirmed uptrend…
Low and stagnant prices lead miners to halt production and stop looking for new resources…
The problem is that mines are like loaves of bread. If you make a sandwich every day, you eventually run out of bread. An industry that isn’t exploring is like a sandwich shop that isn’t buying more bread. That’s where the zinc industry ended up today.
Big mines like Xstrata’s Brunswick mine in Canada, Vedanta Resources’ Lisheen mine in Ireland, MMG’s Century mine and Glencore’s Black Star mine in Australia have all shut down.
All told, 2016 mine closures represented more than 1 million tons, conservatively, in lost production compared with last year.
At the same time, exploration is virtually nonexistent. Only a handful of projects will come on line in the next few years. None of them will make a material difference.
The world produced about 13.4 million tons of zinc in 2015. This year, the global mining industry is expected to produce 12.3 million tons… about 500,000 tons less than we’ll consume. Next year, that gap will be larger.
This is a classic setup for a big jump in the price of a resource. The only reason we aren’t seeing zinc prices soar already is a giant backlog of inventory… But that’s dwindling now, too.
At the start of 2016, the world had about 2 million tons of zinc in inventory… picture warehouses filled with stacks of parking lot curb-sized ingots of metal.
However, inventory is already falling. Below is a chart of zinc stored by the London Metal Exchange (LME). The LME is the world’s center for industrial metal trading. It needs the physical metal to settle contracts.
You can see that in 2012, the LME held more than 1.2 million tons of zinc in its warehouses alone. Today, it has less than 500,000 tons. That’s a fall of about 63% of LME’s stored zinc. As you would expect, as the supply and inventory of stored zinc goes down, zinc prices will go up.
You can see what I mean in the chart below…
The last big decline in zinc happened in 2006-2008. Back then, the zinc price hit a peak over $2 per pound.
Zinc may not get that out of balance this time, but the expert I spoke with in Ireland believes we could see zinc prices hit $1.50 per pound. That’s a 36% increase from the current price.
There’s an opportunity in zinc building toward a new bull market. That’s why this company is now planning to roll out a new zinc exploration venture at precisely the right time… when prices are starting to rebound… but everyone else is still despondent. Almost no one else is bothering to look for zinc.
Depending on this company’s final plan, it could own around 25% of this new zinc venture. If the market soars, its new zinc assets could be worth hundreds of millions of dollars. That would put significant profits into this company’s pockets.
That’s one of the reasons I’m recommending this company.
And while we’re bullish on the opportunity in zinc… This recommendation has a proven track record of exploiting previous resource cycles as well. It has a history of hoarding assets when they’re cheap and profiting from the inevitable rebound… Its interest in zinc is just the latest example.
P.S. If you’re already a subscriber to Stansberry Research Resource Report, you can access Matt’s recommendation right here. If not, you can start your trial subscription today – each month you’ll receive Matt’s monthly issue, insider interviews, podcasts, updates, and everything you need to understand and profit from the cycles of the resource sector. Click here to get started.