Zinc Comeback Drives Canadian Miners

Zinc prices have come back from the dead, and revived zinc producers like Breakwater Resources (BWR-T, BWLRF-O).

While spot zinc prices were in the low US50¢-per-lb. range at the beginning of February, concerns over supply shortfalls, coupled with signs of growth in the global economy brought the metal’s price as high as US72¢ per lb. on May 7.

The supply-side push came from the decision of some 20 smelter operators to curtail production in an effort to match falling demand.

“It was an unusual step because usually it’s the mines that shut down first and eventually, as concentrate supply tightens, smelters shut down,” says Scotiabank economist Patricia Mohr. “This time, the smelters have shut down without really waiting for the concentrate supply to tighten.”

The shutdowns look to have been well played, as they’ve coincided with improving economic data out of China that point to a rosier demand outlook. For March, economic activity in the country was up 8.3% year over year, compared to what many are saying was the bottom of the business cycle in January and February — a period that saw growth of just 3.8%.

“It would appear the big infrastructure program is beginning to kick in,” Mohr says of the Chinese government’s US$600-billion injection, announced late last year. “Also, while there had been an inventory correction in the manufacturing industry linked to lower exports to the G7 and a domestic housing correction in China, that is now ending.”

A final contributor to zinc’s rally, Mohr says, has been stockpiling by China’s State Reserve Bureau.

Riding the wave that such conditions have created has been the once-maligned Breakwater.

Its shares were trading at 11¢ in early February, but on May 11 they closed at 30¢ on a massive volume of 26 million shares — making it the second most actively traded stock on the day. At presstime, the stock had retreated somewhat to 25¢.

Toronto-based Breakwater, with its three producing zinc mines in Canada, Honduras, and Chile, was hit hard last year by falling zinc prices that hurt its bottom line and raised questions as to whether the company could continue as a going concern.

But an equity issue announced in March brought in the funds it needed to get its books back in order. In all, Breakwater raised $23 million by issuing 230 million units made up of a share and half a warrant. Each full warrant has a five-year term and a strike price of 12¢.

“The fact that they have survived and that they did a balance sheet repair with the equity finance, people are more confident,” says Orest Wowkodaw of Canaccord Adams. “(Market participants) are playing this as an option on zinc and there are so few plays on the market.”

Lacking the glamour of platinum or gold, or the high profile of ura- nium, there isn’t much talk of a zinc exchange-traded fund coming any time soon. That leaves investors with little choice but to partake in any gains in the metal’s price through the few companies that are considered to be zinc pure-plays.

“Companies with zinc exposure will have the best bang for the buck,” says David Charles of GMP Securities. “HudBay Minerals, Lundin Mining and Breakwater all have good zinc exposure. But Breakwater is viewed as a more levered play on the zinc price.”

While the metal’s bullish run has been welcome news to Canadianbased zinc miners, the move could be “a little ahead of what the fundamentals would otherwise indicate,” Mohr cautions.

“Prices could move down in summer,” she says. “Usually demand is quite weak in summer, but they will likely move up again in the fourth quarter.”

In other zinc-related news, Hud-Bay Minerals (HBM-T, HBMFF-O) announced in May that it was cashing in on the recent run on zinc and corresponding strength in Lundin Mining’s (LUN-T, LUNMF-O) stock price.

The company — which only a short time ago was trying to acquire Lundin in a deal shunned by its shareholders — said it was selling all of its 16.7% stake in Lundin to GMP Securities. GMP will pay $236 million in cash representing a $100-million pretax gain for Hud- Bay.

The news ended Lundin’s steady upward climb as it finished the day off 12% at $2.57 on 120 million shares traded. Its shares were trading for as low as 80¢ in early February.

HudBay shares finished 2¢ higher at $8.09 on 1.8 million shares traded.