Striking a balance with zinc investments: Matthew O’Keefe

Stock picking can be an exercise in compromise, and investors who wait for a perfect zinc mining project could be sitting on the sidelines — and missing out on profits. Advanced zinc projects close to infrastructure are limited, and with zinc supply contracting in 2013, new operations are emerging both within and outside of established districts. Matthew O'Keefe, mining analyst with Mackie Research, talks with The Metals Report about his criteria for choosing investments in the zinc small-cap space and explains why he's sometimes willing to make concessions.

The Metals Report: What's your forecast for the upper range of zinc prices in 2013 and the first half of 2014?

Matthew O'Keefe: I think we're going to start to see a reversal in the fundamentals that should start to drive the price of zinc up. Some major mine closures are coming in North America, so the supply side is going to be a little tighter. Xstrata Plc's (XTA:LSE) Brunswick #12 mine in New Brunswick, a fairly large operation producing around 275,000 tons per year, is closing this month and Perseverance, another Xstrata mine located in Quebec is also slated to close this year, removing another 228,000 tons from the supply. Zinc inventories have already begun to flatten and drop a little, a trend we expect will continue next year when two other large mines are expected to close, Lisheen in Ireland and Iscaycruz in Peru.

We have a 2013 zinc target of $1 per pound ($1/lb). In 2014, we're moving it up to $1.20/lb, citing this drop in inventories as a price increase catalyst. We're keeping our long-term price pretty low at $0.95/lb.

TMR: What are zinc's key uses?

MO: Zinc is primarily used to galvanize steel to prevent it from rusting and as an alloying metal in manufacturing, so it's related to the construction and automotive industries. In that respect, it is one of the key economic metals and strongly correlated to global economic growth.

TMR: Geologically speaking, why is lead often associated with zinc

MO: Lead and zinc commonly occur together as part of the ore-forming process. Most lead-zinc deposits occur in volcanogenic massive sulfide (VMS) deposits, a common type of deposit initially formed on the ocean floor. Chemically, the lead- and zinc-forming minerals behave quite similarly, so under the same conditions they generally precipitate out at the same time.

TMR: What are the essentials of your investment thesis for lead-zinc plays in the small-cap space?

MO: I like the small-cap space because in addition to commodity exposure, you see value creation as the company passes development milestones. I look for advanced projects that are close to infrastructure and that carry manageable risk. Does it also have a good resource with decent byproducts? A good management team? Reasonable access to capital? Those are the main criteria.

TMR: Let's get into your coverage universe. You recently traveled to Foran Mining Corp.'s (FOM:TSX.V)McIlvenna Bay zinc-copper-gold-silver project in Saskatchewan. What were two or three takeaways from your trip?

MO: The trip to McIlvenna Bay reinforced the reasons I liked the project in the first place ― its location and access to not just regular infrastructure like roads and power but to mining-specific infrastructure. McIlvenna Bay is just 60 kilometers from Flin Flon, a major mining center where HudBay Minerals Inc. (HBM:TSX; HBM:NYSE) has the bulk of its operations, including an operating zinc smelter. And the town has rail, allowing concentrate to be shipped globally. We traveled by road all the way to the site in just over an hour with no problems. With this abundance of infrastructure, Foran has the luxury of being able to focus on building a mine and a mill without having to deal with the permitting issues and capital cost escalations commonly associated with basic infrastructure development.

The McIlvenna Bay resource is attractive, with total resources of over 20 million tonnes (20 Mt) containing 1.8 billion pounds of zinc and over 500 million pounds of copper. It's actually two resources; one that is copper rich and another that is zinc rich. Multiple metals allow for some diversification, which is good for appealing to multiple groups for both funding and sales. The management has a good understanding of that and I was very impressed. I also like the exploration potential. That deposit is still quite open and the area is quite prospective. The company has a drill program on its neighboring Balsam property, so we should see some results from that in the next few weeks.

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