Base metals prices are feeling the undertow but Stefan Ioannou, mining analyst with Haywood Securities, says that this is temporary—and that investors may not have to wait long for the next wave of higher zinc and nickel prices. Ioannou says zinc prices could even reach "bonanza" prices over the medium term. Nickel prices, meanwhile, could rebound as quickly as late 2015.
In this interview with The Gold Report, Ioannou discusses some equities well positioned to ride the base metals waves as they come in cycles.
Stefan Ioannou: When the referendum was first announced in late June there was a big reaction. There is no doubt the issue is a political crisis. However, unless you live in Greece, the actual financial impact is questionable. That’s not to say that it hasn't justifiably sparked concern for the well being of the greater Eurozone.
Although there is now better clarity regarding the European Union's bailout package, the jury is still out on the ultimate implications of the situation. Nevertheless, we expect general market sentiment regarding the base metals will continue to be centered on Asian demand. Looking further ahead, we continue to anticipate a lack of timely new mine development will lead to a supply constrained market, which will drive market fundamentals.
TGR: The spot price for zinc flirted with $1.10/pound ($1.10/lb) in May, but now it's around $0.90/lb. Which zinc price is real and which one is the imposter?
SI: Relatively high zinc inventories are behind the current zinc price. The zinc price spiked to $1.10/lb in the spring, but our feeling at Haywood was that it was a bit too much too soon. Nevertheless, higher prices appeared to be driven by steady inventory drawdowns on the order of 2,000 tonnes per day. This relatively persistent trend saw LME inventories drop by half over the last year. \
However, more recently we have seen sporadic inventory spikes, on the order of 5,000 tonnes per day, occur more regularly, which in turn has prompted the LME inventory levels to stagnate around the 450,000-tonne to 460,000-tonne level, which hasn't helped near-term zinc pricing or sentiment.
TGR: What is your near- and medium-term forecast?
SI: Looking a little further out, there's a strong argument that zinc prices will rally as we go into 2016. We've seen a number of large zinc mines shut down over the last couple of years. The Brunswick mine in New Brunswick, which provided roughly 2% of the world's supply, shut down in 2013. Later this year, the Century mine, Australia's largest open-pit zinc mine, and Ireland's Lisheen mine will cease zinc production.
The production from those two mines alone is roughly equivalent to the zinc that's on the LME today. We're losing mines and there aren't any new large-scale projects being developed to fill that gap.
The market continues to face an undersupplied medium-term outlook, which will drive prices higher. The one black box consideration is China. It has always been able to fill zinc supply gaps. However, the consensus is that a lot of the Chinese production is higher cost and that's why we haven't seen much of it to date. Haywood's zinc price forecast includes US$0.95/lb this year and a long-term price of $1.15/lb.
However, in the medium term, say the 2016–2018 timeframe, there is potential to see spectacular prices on the order of $1.50/lb to $2/lb. That said, one thing to remain cognizant of is that higher medium-term pricing will prompt additional production over the longer term, which will eventually balance the market and regulate zinc pricing.
TGR: Is it fair to say that you are more bullish on zinc than any of the other base metals?
SI: Yes, at least from a timeline perspective. All commodities are cyclical, but we're the closest to seeing higher zinc prices versus copper or arguably even nickel.
TGR: Please give us an update on some of the zinc-focused equities that you cover.
SI: One interesting thing about the zinc space is that there are not many zinc-focused equities to invest in if you are seeking zinc exposure. If you're looking for zinc producers versus zinc development names, the list is even shorter. It's really only one name: Trevali Mining Corp. The company is in production in Peru at the Santander mine and it is ramping up production at a second mine in New Brunswick called Caribou. Trevali stands to reap the rewards of higher medium-term zinc pricing with production that's already underway, as opposed to trying to establish production in time to catch the zinc wave.
TGR: Nonetheless, Trevali's stock price is demonstrating some weakness. Are there near-term catalysts that could change that?
SI: We've seen the zinc price reach the low-$0.90/lb range and that's reflected in Trevali's share price. One catalyst should occur once Caribou reaches commercial production, likely sometime in early 2016. Once that happens there is definitely potential for a rerating. Caribou was run by other operators before and had some metallurgical challenges related to grind size.
The previous operator put in something called ISA mills, which effectively solved those problems but they only ran for about two months before the global credit crisis in 2008 forced the mine to shut down. Trevali has restarted production using those ISA mills. So far so good, but it remains a little bit of a "show-me" story.