Gold bugs say the global economy could collapse any day now. But what about investors who see continued growth in emerging economies and a steady, if slow, U.S. recovery? Look to base metals, recommends Haywood Analyst Stefan Ioannou. He expects price runs for 2013–2015, especially for zinc, which is facing a serious supply squeeze. Do your homework now to get positioned as soon as the uptick begins. Ioannou shares his favorites in this Gold Report interview.
The Gold Report: Stefan, what is your 2013 outlook for copper?
Stefan Ioannou: Strong fundamentals underpin the copper price going into 2013. Despite a tough copper equity market in 2012, the metal price itself has been pretty solid, averaging around $3.60 per pound ($3.60/lb). Improving automobile numbers out of the U.S. and stronger manufacturing numbers out of China will both have a positive near-term impact on the copper price. We expect copper prices to move a bit higher in 2013.
TGR: How far off is a return to $4/lb copper?
SI: I think 2013 is too soon for a sustained $4/lb price, but it will likely test that mark a few times in the coming year. There is a stronger argument for a long-term $4/lb copper price.
TGR: Many of the copper companies you cover also have a zinc component. Zinc started 2012 near $2,200 per metric ton ($2,200/mt), dipped to $1,750/mt at midyear and now hovers around $2,000/mt. What is behind the volatility?
SI: Primarily negative sentiment. London Metal Exchange inventories remain near an all-time high of ~1.2 mt and there is continued concern that China could flood the market at any time. Hence, the near-term outlook on zinc has been weak. However, there is an interesting dynamic taking place: As we move toward 2014, the market will be faced with a potential longer-term supply deficit.
A number of large zinc mines, which combined account for ~10% of global zinc supply, are scheduled to shut down within the next two to three years when their reserves become depleted. There are very few large, advance-stage zinc projects available to fill in the supply gap. When the big mines close down, the squeeze on the supply side will move the zinc price higher.
The first big project slated to shut down is Xstrata Plc's (XTA:LSE) Brunswick mine, which alone accounts for almost 2% of global supply. The company has talked about shutting the mine down for the last several years, but every year Xstrata seemed to squeeze a little more zinc out. However, in March 2012, the company formally notified Brunswick's union of a planned shutdown, as per a legally required one-year notice period. Hence, the writing is on the wall.
The key is that there are very few ways to play the zinc space—arguably only five or six quality development projects. Even the majors are scrambling to find new zinc assets. Given the limited number of publicly traded zinc-focused companies, all are poised to do well in the event of a zinc price run.
TGR: In light of the impending supply squeeze, what is your predicted zinc price average for 2013?
SI: We expect 2013 to be a transitional year, so near-term pricing will likely remain in the $0.90–$1/lb range. As for stock prices, we anticipate people will start paying attention to the zinc space as the supply/demand dynamic becomes more apparent, probably in the latter half of 2013. Looking further down the road into 2014–2015, we could easily see prices jump up to $1.25/lb pretty quickly. From there, the sky is the limit.
TGR: What is the industry average in terms of cash costs of per payable pound of zinc?
SI: That is another important consideration. With a copper price at $3.50/lb, hypothetically almost every copper project on the planet could or should make money, even the very low-grade ones. Even high-cost copper producers have costs on the order of $2.00–2.50/lb, which generates a solid margin at today's prices.
Margins are a lot tighter in the zinc space. Most zinc projects carry total cash costs north of $0.50/lb net of byproduct credits, and a number are even higher at $0.70–0.80/lb. If zinc were to drop below $0.75–0.80/lb, we would likely see a number of higher-cost mines shut down because they would not be economic.
There is one wild card at play in the zinc space: China. The country is able to bring a lot of new supply into the market quickly. However, exact numbers are difficult to forecast. That said, a lot of the Chinese production comes from smaller, "mom-and-pop" mines, which carry higher costs. Thus, even though there is potential Chinese production out there, it will likely take a zinc price north of $1.00/lb to get it out of the ground profitably. At a $0.90/lb price, most of this Chinese production is arguably marginally economic at best.