Investing in Zinc: A New Bull Market is Born
We’re on the verge of a new bull market.
It sure doesn’t feel like it. But the facts show we’re in the early stages of a massive supply-crunch commodity boom for a metal that’s so out of favor, companies mining it are shutting down.
The smartest and biggest money in the world is quietly getting behind it all. And for good reason: The last time this situation came together, early investors had the chance to walk away with 970% gains in just two years.
The best part is, any economic/market downturn will make this boom even bigger and more profitable. Here’s what I mean...
The New “Money” Metal
This boom has all the essential elements of fortune-making metals story.
It has all of my five indicators that a commodity is about to go on a major bull run:
1. Stockpiles are at multi-year highs.
2. Prices have been depressed for decades.
3. Supply is in decline.
4. Demand is steadily growing and is about to overwhelm supply.
5. Prices are so low, they must go up — way up.
Sound familiar? It should. We’ve seen it over the last few years in copper, gold, silver, oil, rare earths, and on and on.
Now it’s happening all over again in a metal that has largely missed out on the decade-long commodity rally altogether: zinc.
Zinc is on the verge of catching up to the rest of the metals — and deliver handsome gains to investors willing and able to look beyond the crisis du jour.
30-Year Bear into Mega-Bull
Now, I know what you’re thinking... “Come on, Andrew. Zinc? Really? That’s the best you got?”
And you’re right. Zinc’s in a tough spot.
Zinc — used primarily as a weather-resistant coating when galvanizing steel — is highly sensitive to general economic activity levels. Stockpiles are the highest they’ve been since 1995. Zinc prices are low and falling.
In the 2009 to 2011 "rally in everything," zinc actually was one of the worst-performing metals. The credit crunch was a disaster for the zinc industry, too. Zinc mines in Ireland, Portugal, Australia, and elsewhere were shut down awaiting better times...
But better times never came:
Zinc prices soared in 2006. They started collapsing long before the 2007-2008 recession even began.
Since then gold, silver, and copper were doubling, tripling, or more, and setting new all-time highs. At the same time, zinc prices rebounded to half of their 2007 highs.
Zinc has been out of favor for a long, long time. In the commodity world, however, that’s a good thing...
This is How Bull Markets are Born
The great John Templeton summed up bull market life cycles precisely when he said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
Right now, zinc is mired in pessimism.
The economy is falling apart... Metals prices across the spectrum are all falling... Gold, silver, and copper have fallen fast and hard.
But on the bright side, gold’s still $1,600 an ounce. Silver’s hanging around $30 an ounce. Copper’s still $3.20 a pound, about five times higher than its turn-of-the-century lows.
Zinc prices, meanwhile, have fallen back to levels last seen in March 2009 (in other words, rock-bottom).
There’s a lot to be pessimistic about when it comes to zinc. Fundamentally, though, there are a lot of reasons to expect a significant price increase in the near future.
The main reason is simple supply and demand. Frankly, the situation quickly coming together in zinc cannot last.
Credit Suisse says, “The [Zinc] demand story could be the strongest of any commodity.” And they back up their claim with this chart of zinc demand and its steady and rapid rise:
Demand growing steadily is good. But it’s only half the equation.
The supply side of the zinc market is what will make it a top performer in the months and years ahead.
Zinc supply isn’t just growing too slowly; it’s downright declining:
Next year zinc supplies are expected to peak, after which they’ll fall year after year.
We’re starting to see the first stages of this now. Global zinc consumption is on pace to rise 5.5% this year. Supply is on pace to rise a mere 2.2%. As time progresses, supply and demand should only fall more out of balance.
Something will have to give. That something will be price. And when the sharp price increases come, they will create exponential gains for zinc miners.
I'm not the only one who sees an imminent zinc boom. The smartest money in the metals industry have spent billions to ensure they control at least some zinc production.
Big Money Bet Big on Zinc
Major miners have aggressively (though quietly) expanded into or added to their zinc assets. In the past couple of years, we’ve watched major miners swallow smaller zinc companies whole, buy large development projects for cash, or take significant stakes in the very few emerging zinc producers.
They know what’s coming to the zinc market and want to get their big position early. And the deep pockets of China have led the way.
See if you can spot the trend:
- China Minmetals bought OZ Minerals, the world’s second largest zinc producer, for $1.4 billion in June 2009.
- Resources and China Minmetals were caught in a bidding war over the zinc assets of AngloAmerican PLC; Vedanta won out at the price of $1.3 billion.
- Qiao Xing Universal Resources paid $107 million for a zinc mine in Inner Mongolia. The project was not even mining yet, but Qiao Xing still cut a 9-figure check — and will have to spend a few hundred million more just to get it up and running.
- Shenzhen Zhongjin Lingnan Nonfemet bought a 50.1% stake in Perilya Limited, which operates a zinc mine the China Mining Federation calls “one of the world's largest and most renowned.”
- China Investor Corp, China’s sovereign wealth fund, recently attempted takeover of one of the world’s premier zinc mining companies.
- Zebra Holdings and Investments (an investment company tied to the natural resource-savvy Lundin family), bought a 19.9% stake in promising zinc development company Zazu Metals (TSX: ZAZ).
- Jinchuan Group, Equinox Minerals, and Inmet Mining have also attempted or successfully taken over zinc mining companies.
The list goes on, but you get the point: The smart money and the big money like zinc.
The reason: There’s a fortune to be made in this diamagnetic metal.
The Last Time this Happened, Investors Gained 970%
The best example of how troubled the zinc market is are the massive stockpiles of the metal sitting in the London Metals Exchange warehouse.
The chart below shows zinc stockpiles are the highest they’ve been in over a decade:
There is much zinc in storage; no one wants anything to do with it.
This is bad news for zinc miners — and great news for investors.
The chart below of Hudbay Minerals (TSX: HBM), a top zinc mining company, shows exactly why.
Hudbay’s share price has been highly correlated with the size of zinc stockpiles:
When stockpiles were high in 2004, Hudbay shares were hitting new lows. They reached a low of $2.50 per share at the time.
But as the zinc stockpiles started to be drawn down, supply fears crept into the market and zinc prices rose... and Hudbay shares soared. They hit a high of $26.75 at the exact same time zinc stockpiles were bottoming out.
If this trend holds true, zinc stockpiles will be drawn down significantly, zinc prices will have a good run, and zinc mining stocks will do exceptionally well.
Never a Better Time to Be a Contrarian
As you can see, there’s not much to like about zinc today.
Large stockpiles and falling prices have pushed zinc completely out of favor. Aside from the mining companies that see what’s really going on in the metals market — and what’s coming up in the future on the supply side — no one wants zinc.
The market downturn in general and commodity slide specifically have added to the bearishness surrounding the metal.
Commodities have fallen out of favor. Copper, silver, gold, and oil have all taken quick and painful hits. Zinc, which was never too popular to begin with, has been lumped together with the rest of them.
But for real contrarian investors willing to buy great assets at depressed prices, you’ve got to love zinc right now.
The name of the game is buy low, sell high.
Zinc is at a multi-year low right now... Will you buy?
* Andrew Mickey is a Wealth Wire contributor and an editor at Wealth Daily.+4
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