A recent pull back has hit my current favorite sector, zinc.
Zinc prices reached a 5 year high in February. Just as analysts forecasted, the zinc concentrate market is unravelling but after a terrific run zinc equities have pulled back slightly as investors take profits.
Because nothing has fundamentally changed in the zinc space, this selloff has created a buying opportunity. In fact, the fundamentals of the industry just keep getting better.
Andrew Thomas senior analyst zinc markets, Wood Mackenzie said in an interview at PDAC with Investing News Network “I think it’s probably not until around the middle of this year that we’d expect to see stockpiles really become depleted. We’ve still got a few months yet.”
Smart resource investors are already placing bets in zinc names ahead of this pinch point.
Investors beginning to look at the zinc sector have limited options as after a decade of unexciting zinc price action left the sector unloved and underfunded.
The first way to play the sector would be to look at large producers. No surprise that commodity giants Glencore and Teck (5 bagger in last year) rank in the top 10 zinc producers worldwide.
Earlier this month Glencore tightened their grip further down the food chain by taking a 25% stake in the only zinc focused producer on the TSX, Trevali Mining. In exchange Trevali will take control of two zinc mines in Africa and move one step closer to becoming a mid-tier zinc producer. Trevali is a 4 bagger in the last year.
Next on investors radar are zinc development stocks (companies with a resource).
Development companies offer a fantastic risk/reward in bull markets as they benefit from the commodity price move, and news catalysts as they move their projects forward, and offer takeover potential.
As the zinc bull market continues, investors will be looking for companies with large proven deposits (increased leverage) in good political jurisdictions.
|Company||Project||Resource* (zinc lbs)||EV (per lb)||Location|
|Darnley Bay||Pine Point*||5.8 billion||$0.006669||Northwest Territories|
|Canada Zinc Metals||Akie||5.7 billion||$0.008302||British Columbia|
|Zazu||Lik South||4.2 billion (*50% interest)||$0.007867||Alaska|
|Canadian Zinc||Prairie Creek||3.5 billion||$0.041298||Northwest Territories|
|InZinc||West Desert||2.4 billion||$0.007360||Western Utah|
*Pine Point resource is historical and not 43-101 compliant
*Resources all published reserve/resource categories
When doing due diligence you also want to check key metrics such as current cash position and upcoming catalysts.
Joseph Gallucci, Managing Director Investment Banking at Eight Capital “A majority of zinc development plays will not be in production to catch the cycle, either due to permitting or funding obstacles (or both).”
|Darnley Bay||~$10,000,000||PEA in progress|
|Tinka Resources||~$10,000,000||Resource drilling|
|Canadian Zinc||~$9,800,000||PFS complete|
|Canada Zinc Metals||~$7,000,000||Resource drilling|
Cash position is critical for investors as it will allow the company to fund additional work that may create shareholder value before the dilution of another financing.
Here is a quick look at a few of the zinc development companies and what they have planned in 2017.
Tinka Resources – Tinka has been a popular zinc stock up 25% over the last month. An excellent step out drilling hole was the main reason for the run. At the Ayawilca project in Peru the company is targeting resource growth in 2017. A 10,000 metre drill program commenced in February and investors will be analyzing results as the come in. 2017 will be focused on drilling and metallurgy work with a new resource estimate later in the year followed by the possibility of a PEA.
InZinc – InZinc’s share price is up close to 50% to start the year, on leverage to the zinc price and a new model about the West Desert Project. InZinc will need to complete a financing and then start drill testing this new thesis.
Canada Zinc Metals – The team at Canada Zinc Metals plans to take full advantage of a potential move in the zinc price this year. The busiest work season in a couple years is planned with 7500 metres of drilling at Akie. Drilling will start when the weather gets better (June) and is expected to go through September. Canada Zinc is currently evaluating the possibility of completing a PEA in the fourth quarter.
Darnley Bay – Darnley Bay is the newcomer to the zinc development group but may be the first to production after acquiring the past producing Pine Point Project. The most profitable zinc-lead mine in Canadian history producing 64 million tonnes of 7% zinc and 3.1% lead from 52 deposits. Past production is a huge advantage with proven mining methods to rely on, infrastructure in place and should be a benefit when it comes to permitting. Investments by Pat DiCapo, Rob McEwen, and Lukas Lundin funded the company for a catalyst rich 2017 lying ahead. A drill permit has just been received and 3500m of drilling is expected to commence shortly. At least two more drilling campaigns are expected to follow. An IP survey is also planned on newly acquired claims. A major catalyst will be a Preliminary Economic Assessment (PEA) expected in April.
Zinc development stocks look ready to go in 2017 and this pullback presents a fantastic buying opportunity in what is likely to be a hot sector moving forward
*All data believed to be accurate as of March 27, 2017. Market data changes quickly so do your own due dilligence before making any investment decisions.