Zinc Market Update

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Includes: AQARF, BDNNF, BDNNY, CLLXF, CNSNF, CZXMF, FMCXF, GDSKF, GLCNF, HRLDF, IPOAF, IVPAF, JXMND, LUNMF, NORZF, NWNNF, RATHF, SMMYY, SSUMF, SSUMY, SWNLF, TECK, TKRFF, TREVF, VCANF, VDTAF, VEDL, WLDVF
by: Joshua Hall

Summary

I provide an important update to my recent article on zinc fundamentals.

Three companies have since announced projects that are going to bring new supply to the market in 2018-219.

Glencore's guidance reveals they want a permanently higher zinc price.

The zinc bull will march higher in 2018.

A little over a month ago I reported a bullish outlook on zinc in the article titled A Glencore Restart Will Not Stop Zinc From Moving Higher. Since that time a number of important production announcements have come through so I decided to provide an update.

New Mines Coming Online

Ivanhoe Mines (OTCQX:IVPAF) announced a pre-feasibility study for its Kipushi mine in the Democratic Republic of Congo ("DRC"). The mine appears ready to add 135,000 tonnes of zinc to the market in 2019 before ramping to a 200,000+ tonnes per annum ("tpa") production level in 2020.

Titan Mining (Symbol: TI in Toronto) recently IPO'd in Canada with plans to revamp the historic Empire State mine in Northern New York State (U.S.A.). Empire is shaping up to add 36,000 tonnes to the market in 2019 before ramping to a 50,000+ tpa production level in 2020.

New Century Resources (OTC:NWNNF) is going to reprocess the tailings from MMG's old Century Mine in Northeastern Australia. This is set to add 66,000 tonnes to the market in 2018 before ramping to a considerable production rate of 264,000 tpa for six years thereafter.

Altogether, these three mines look poised to add 435,000 tonnes of zinc production to the market in 2019.

Glencore Taking it Slow

In my last article, I assumed Glencore (OTCPK:GLCNF; GLCNY), the world's largest zinc miner, would produce 1,540,000 tonnes in 2019. They provided production guidance in their Investor Update last week. Notably, only Lady Loretta in Australia is scheduled to come back online and this during the 1st half of 2018. Glencore's overall outlook has them poised to produce about 1,160,000 tonnes of zinc in their FY 2019, almost 400,000 tonnes less than my prior, very conservative estimate. Glencore is very much committed to doing their part to buoy the zinc price.

Zinc Poised to Accelerate Higher

Incorporating these new variables into supply and demand, the fundamental outlook for zinc remains exceptionally strong:

(Note: this chart assumes 2% annual demand growth.)

Glencore's announcement is clearly bullish for the price of zinc going into 2018. The following weekly chart of zinc shows how it has been correcting of late:

The trendline in this chart is the monthly trendline, which represents the long-term base of its upward movement. We could see the price of zinc continue to correct a bit, possibly to around the $3,000 per tonne level, however, the metal's upward push is far from over. Zinc sentiment remains weak with few believing the story and valuations surely reflecting this. Case in point is Trevali Mining (OTCQX:TREVF) which is trading for only 4.5 times my estimate of 2018 free cash flow (assuming $3,100 per tonne / $1.41 per lb. zinc). The valuations of correlated zinc equities demonstrate that we are nowhere near a top in this move.

I expect we will continue to see zinc surge higher in 2018, which will bring some accelerant to the junior sector as producers look to add new projects. The price of zinc is simply going to have to move higher to spur enough new mine production.

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