Acadian Gold, Blue Note, Breakwater Resources: A Trifecta of Zinc Producers

The hot base metals of today are copper, nickel and molybdenum. Those who entered positions months or years ago in producers of these metals have seen their holdings appreciate several fold. While miners who produce these metals should continue to enjoy strong earnings and cash flow, their equity’s most dynamic gains are largely behind them. One key to finding stocks with the highest appreciation potential is to identify a metal largely off investor’s radar screens on the verge of a major move up. The other key is to identify companies that are rapidly increasing production of that metal. We will first focus on the next base metal likely to move up and then review three miners that are significantly increasing production over the next 12 months.

The next base metal that is likely to move up strongly this year is Zinc. Fundamentals for zinc continue to be very strong. A major Zinc miner, Xstrata, has said they expect strong demand through 2013. The primary reason for strong demand is zinc’s use as a means to protect steel from corrosion. Galvanizing of steel (applying a zinc coating) is the largest use of zinc. Galvanized steel is critical for the development of infrastructure. India and China are rapidly growing, building infrastructure for their booming economies. With the combined GDP growth of both countries around 10% and with enormous populations, consumption of structural steel should go unabated for years to come. Insatiable demand for the metal has resulted in Zinc storage levels plummeting to historic lows. Consequently the price has responded dramatically.

The Dynamic Trio of Zinc Producers

Acadian Gold (ADGLF.PK)

Acadian Gold has been primarily a gold exploration company. They purchased the Scotia Zinc mine in Nova Scotia last summer. The mine was originally built by a major oil company and operated briefly in the early 80’s until it closed due to poor economics. Acadian received the mine in excellent shape with minor amounts of investment required to bring the mine to production.

The mine is expected to produce 40 million pounds of Zinc and 16 million pounds of Lead on an annual basis and has an estimated life of nine years. A feasibility study using a Zinc price of $1.10 and Lead price of $0.40 concluded annual cash flow to be approximately $11 million. Extrapolating these figures using present day prices, places cash flow to over $30 Million. Roughly every 10 cent increase in Zinc can result in an additional $4 million cash flow. Considering Acadian is trading for $1 (US) makes it a compelling stock to consider. Value is further enhanced by Acadian’s strong portfolio of gold properties with resources approaching 1.5 million ounces.

Blue Note (BNMFF.PK)

This Company has refurbished an old mine they bought from Breakwater Resources. They are anticipating production start up next month with a ramp up to a staggering 100 million pounds of Zinc and of 40 million pounds Lead per year. Earnings and cash flow should be huge relative to the capitalization of the company.

Breakwater Resources (BWLRF.OB)

Breakwater operates several mines in North and South America. According to their most recent presentation they are the highest leveraged company to the price of Zinc. The majority of their revenue does come from Zinc but they also have an impressive repertoire of production from Copper, Gold, Lead and Silver. Breakwater produces several hundred million pounds of zinc and they are bringing two more zinc producing mines online in the next few months. As zinc rapidly depletes and its price rises, Breakwater should do quite well.

Conclusion

Zinc is likely to be one of the most talked about base metals later this year. Inventory is hovering slightly above historic lows and is threatening to move even lower. Prices are now beginning to reflect the tightness in the market and depletion of known storage. The three companies discussed Acadian, Blue Note and Breakwater are well positioned to take full advantage of a price explosion in Zinc with their rapidly increasing production profiles over the next year.

Disclosure: The author has not been paid to write this article, nor received any other incentive to do so. The author holds a position in the company and will benefit from any increase in the company's share price.

Comments

[Great Trades_:]

We agree that after the recent runs in uranium, nickel, molybdenum, and copper, zinc is nearing its turn in the spotlight. It's the only base metal that's down in price on the year, yet it has arguably the best fundamentals going forward.

Acadian, Blue Note, and Breakwater are great producers/near-term producers. Read a lot more about the zinc market and what we believe is the best zinc investment that's a little further from production at our blog.

Despite its small market cap, Metalline Mining has more proven zinc than all 3 of these companies combined, will likely be the lowest-cost producer in the industry (along with Anglo American's Skorpion mine, as both will use a low-cost process on oxide zinc to produce refined zinc, bypassing smelters' huge take), is fully funded through feasibility and for an expanded drill program to prove out their silver deposits, has 100% of their properties, and is now the only zinc junior miner listed on a major U.S. exchange (MMG on Amex). With all their existing infrastructure, which we saw ourselves on our recent site visit (photos on our blog), incredible economics given their world class deposit size and low-cost process (Skorpion went to profitable production at .35/lb zinc), a team that recently did a very similar feasibility study and move to production (Green Team International, doing Metalline's feasibility study, did so at Skorpion), very strong support from the locals (who even pray for success at the mine site each week), and huge upside from their silver (they have 45+ former-producing mine shafts that direct shipped very high-grade silver up to several kg/tonne), Metalline has the lowest risk of having huge success of any miner we know.

Although pre-production juniors who haven't completed a feasibility study yet (Metalline's should be done next year) have more risks than producers and near-term producers, if they are successful moving to production, the upside is enormous, as they are heavily discounted for those risks. We like having some producers/near-term producers, like the ones in this article, for the more conservative part of our portfolio, and great pre-production juniors like Metalline for the more aggressive part of our portfolio. For sizable positions in base metals stocks, we prefer those who have significant precious metals as well, as Acadian Gold and Metalline Mining do. Short-term volatility in pre-production juniors can test an investor's patience, but the longer term upside in quality juniors should reward that patience handsomely.

Technically, MMG looks poised to break out of a triangle pattern that has contained the trading over the last 18 months. As their first zinc project moves toward production and the market begins to recognize their silver potential, MMG should move significantly higher.

2007 May 11 07:56 AM

[Chancer:]

Since I purchased ADGLF.PK, the TSE shares (ADA.V) increased 23%, but ADGLF.PK has not increased at all.

Shouldn't ADGLF.PK change in same proportion at ADA.V?

2007 Jul 07 01:56 PM

[Chancer:]

Excuse my last comment:

From digging around internet, I found out why (on Investorshub site). Name was changed to Acadian Mining effective 6/28 with no symbol change for ADA on TSE.

However, apparently also on 6/28 symbol ADGLF.PK was changed to ADAIF.PK.

No announcement (to my knowledge) and my broker has not made the change.

The price for ADGLF in frozen as of 6/27 at $.9624. On 6/28 ADAIF began and closed at $.98, and closed 7/6 at $1.18.

Seems like 6/28/07 to later than 7/8/07 is a bit long to make this change.

2007 Jul 07 07:07 PM

[neyo:]

h

2007 Jul 15 04:44 PM