From December through late March, a shallow uptrend developed, and media skeptics came out of the woodwork suggesting that the trend change in zinc LME inventories indicated a permanent shift in the supply/demand situation, as China became a “net exporter” of zinc. The truth was that a couple of short-term factors, delayed shipments from the world’s biggest zinc mine and a change in Chinese export tax law, had helped to create a short-term surge in refined zinc supply, causing a temporary pause in the downtrend.
Despite the media claims, China remained a huge net importer of zinc, as they imported more and more zinc in the form of zinc concentrate, which they then processed in their smelters to create refined zinc. Because they had dramatically increased their refining capacity via rampant smelter construction, China had decreased their refined zinc imports relative to their zinc concentrate imports, using their low-cost advantages to process the zinc raw materials from other countries to the extent that they were exporting more refined zinc than they imported. However, the huge consumption of zinc in China’s growing economy, far exceeding the capacity of their own mines, compelled them to remain huge net importers of zinc overall, importing enormous amounts of zinc concentrate from overseas mines. Conveniently, the media zinc skeptics never mentioned the fact that China was relying on other countries for much of the zinc concentrate they used to produce refined zinc, instead focusing only on the “net exporter” status for the refined zinc finished product.
We said in December that “We expect the zinc crisis to become very evident after the effects of the Red Dog shipment spike have dissipated by the end of Q1.” After the peak in LME Zinc inventories in late Q1, they have steadily declined to hit a new low, at 83,725 tonnes, below the December low of 84,825 tonnes, so we can see that the pause in the downtrend was only temporary. Since the current level represents only about 2 ½ days of inventory, there’s not a lot of room to move lower. There’s a “frictional level” of LME inventories required to maintain an orderly market. It will be interesting to see how the zinc price responds to lower levels of inventories, as at some point the price will have to move high enough to curtail the demand so that the LME inventories don’t get completely depleted.
In addition to the previously mentioned factors for the earlier surge in zinc supply, another factor may decrease future world zinc supply. China has taken actions to decrease their zinc production capacity, requiring new zinc mines to have at least an annual capacity of more than 30,000 tons and an operation life of 15 years, capping the country’s refined zinc production capacity, and reportedly removing the 5% tax rebate on exports of refined zinc. With the enforcement of these new regulations, China will likely need to rely even more on foreign sources of zinc concentrate, and other countries will need to step up their production of refined zinc to make up for China’s supply reduction.
Moving forward, we really like the fundamentals for the zinc market, as we explained in December: “After the short term surge in supply from these 2 temporary events is absorbed by the market, we expect zinc to remain very strong because of the dearth of sizable projects in the pipeline for the next few years combined with growing demand and depletion of reserves at existing mines. We believe the fears in the market that the recent short-term trend change in zinc LME inventories could indicate a permanent shift in the supply/demand situation are misguided, and we expect that to become apparent in coming months. If the downtrend resumes as we expect, we believe the only way the LME Zinc inventories will avoid complete depletion is with zinc prices increasing enough to curtail demand.”
The timing for strength in zinc mining companies is excellent. A year ago, one of the sharpest and most respected institutional commentators, Don Coxe, explained on a conference call that “there are 3 major movements in this metals bull market, and we're nearing the end of the first one. The second one will be a slowdown, where I expect the prices of commodities to correct after the initial big runup. The third one will be a dramatic move that lasts at least 5-7 years.” He specified that “the next 12 months would be 'great fun' but a very different game, and would provide the ‘last great opportunity’ for the next 5-7 years. The next economic cycle after that will be a giant.”
Over the past year, we’ve seen the second movement play out, with sharp corrections in the prices of commodities. Most zinc junior miners remain well off their highs of a year ago, and are poised to bounce back during the strong third movement. In his latest conference call, Coxe reiterated that he feels “as strongly as ever that the best is yet to come.” He also emphasized that although “because of compliance problems and the kinds of clients that we serve, we have to comment on the big cap stocks, that more money is made in any boom like this by buying small caps,” meaning “you’re better off if you can find small cap mining companies who have got reserves in the ground than you are buying big caps – the leverage is terrific, and you can also assume that they’re going to get taken out, if the stock market obstinately refused to bid them high enough.”
After the recent rallies in uranium, nickel, molybdenum, and copper mining stocks, we believe that it is now the zinc miners’ turn to shine. With arguably the best supply/demand fundamentals for at least the next few years, zinc is the only base metal whose price is still down on the year. We believe that laggard status will soon change as the zinc crisis becomes more evident, drowning out the media skeptics’ misguided claims. Quality small cap zinc miners may be the next group to shine in this bull market.
Here’s the Sierra Mojada rail stop. It no longer is used for passenger traffic, but there’s a dolomite open pit mine next door operated by Penoles that uses the railroad, which has more than enough capacity for Metalline’s project.
A miner going down the San Salvador shaft, where we started the underground tour. Putting in a shaft like this would cost about $20-30 million today.
Underground drilling – this drilling was for the geotech analysis on the rock structure to determine pit wall steepness possibilities for potential open pit mining. The 3rd party geotech expert kept saying how solid the rock structure seemed.
The Sierra Mojada town church where they pray for success at the mine site each week.
There are many more photographs of the mineralization and underground on slides 45-63 in the Metalline Mining corporate presentation. Those photos also show the mineral content of a lot of the rock samples. We were literally surrounded by this very high-grade rock for what seemed like miles, but was less than a kilometer. Slide 23 gives a good diagram of the ore bodies – we walked from the San Salvador mine to the Encantada mine area, so you can see it was just a small portion of the enormous resource.
On the weekly chart, one can see the triangle we highlighted in March is approaching its apex, meaning the stock is likely to break out from this formation within the next couple of months. The recovery from the financing related selloff has shown strong accumulation and sets the stock up well for a future breakout:
With the company now fully funded through feasibility and for an expanded drill program for the silver, there should be no more financing-related selloffs during the feasibility stage. The March financing had a relatively small number of shares, and those shares are restricted for a year.
With over $10 billion of zinc proven out (far more than producers like HudBay Minerals with many times MMG's market cap) and undergoing a feasibility study, and an enormous amount of zinc, silver, copper, etc. that isn’t yet proven out but we know is there because we've seen and touched it ourselves, MMG’s fully diluted market cap of about $175 million discounts way too much risk into the stock. With that deposit, that team (feasibility study led by Green Team International, who also did the feasibility study for Skorpion), that infrastructure, that local support, and the extremely strong economic advantages coming from their very low-cost processing all the way through to produce SHG refined zinc (not just concentrates sent to smelters, who take a huge cut of profits), we have no doubt that Sierra Mojada will be a world class producing zinc mine and that MMG will be much higher over the long term, even if zinc prices collapse. We also believe their high-grade silver that they’ll be focusing on developing next will provide a huge amount of upside that the market is not yet factoring in. The only real risks we see are short-term volatility that might cost the impatient shareholders who bail out on a dip and possible delays to get to production if the sector-wide shortages continue to affect them (they're bringing a lot of processes in house to avoid delays from 3rd parties). Patient investors who stay with Metalline Mining for the long term should be very handsomely rewarded.
December 2005 January 2006 February 2006 March 2006 April 2006 May 2006 July 2006 August 2006 October 2006 November 2006 December 2006 January 2007 February 2007 March 2007 April 2007 May 2007 June 2007 August 2007 October 2007 November 2007 May 2008 September 2008 October 2008 January 2009 February 2009 March 2009 April 2009 May 2009 June 2009 July 2009 August 2009 September 2009 October 2009 November 2009 December 2009 March 2010 May 2010 June 2010Great Investments Blog   Great Investment Articles Blog
Disclaimer: Great Trades may have a position in all or some of the stocks discussed in this blog, but is not paid by any company to promote their stock. Great Trades contains opinions, none of which constitute a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. Great Trades does not provide personalized investment advice.