It's a common tale in the commodities world. Every time it happens, investors who position themselves on the right side of the trend walk away with rich triple-digit gains, sometimes even more. And the plot unfolding around a certain base metal is playing out perfectly according to the script.
It always starts with a downtrodden commodity that has lost its luster. In this case, producers could hardly give the stuff away just a few years ago. In January 2016, prices bottomed out near $0.70 per pound -- 66% below their previous peak. At that level, mines that were once marginally profitable became money pits. Naturally, producers abandoned them, taking a large bite out of global output.
When you turn down the production spigot, supply eventually starts to come back in balance with demand. Sure enough, what was once a million-ton surplus has all but disappeared, shrinking to a decade-low of less than 200,000 tons in recent months.
And that's when it happens... Almost overnight, the social outcast becomes the class favorite -- and early investors make out like bandits in the process.
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Buyers that didn't want the metal at $0.70 per pound in early 2016 are now willing to pay more than twice as much. Prices recently pierced through the $1.40 per pound ($3,000 per ton) level, a 10-year high. Not since October 2007 has the commodity been this popular.
After languishing for years, the metal is making a powerful comeback. And that rally is starting to have a tremendous impact on the bottom lines of certain suppliers. That means the time for investors to strike is now...
More Than Just Pennies
Most of us know zinc as the primary metal that replaced copper in the production of the penny. But zinc has a multitude of uses outside of currency. It is alloyed with copper to make brass and oxidized to make a common ingredient in sunscreen. But the metal is most appreciated for its galvanizing properties, particularly for serving as a corrosion-resistant coating on iron and steel.
All in all, zinc is the fourth most widely-used metal in the world, trailing only iron, aluminum and copper. Global consumption has reached 14 million tons annually, about half of which goes toward galvanization. Galvanized coatings are widely used in marine equipment, water heater tanks, offshore oil pipelines, etc. But the two biggest end markets are automotive and construction.
And you can't build without steel.
China accounts for about half of the world's steel production. And this construction boom is a big reason why output from Chinese steel mills rose another 5% last quarter to 201 million tons. In turn, that is triggering increased demand for refined zinc concentrates.
300% Growth Is Just The Beginning
Zinc is most commonly produced as a by-product. It is typically found alongside other mineral deposits such as lead and copper, and to a lesser extent silver. So there aren't really any zinc "pure plays." In fact, the ten largest producers combined account for just one-third of production, according to Bloomberg.
As I mentioned above, many unprofitable sources were shuttered in 2015 amid weak prices. Key mines in Australia and South Africa were mothballed, and a consortium of ten major Chinese smelters agreed to slash their annual output by 500,000 tons.
Those production cuts were the primary catalyst for the metals' explosive rally last year: Zinc prices soared 86% on the Shanghai Futures Exchange and 90% in London. And they have continued to gain ground in 2017.
Remember, the sector is just awakening from an eight-year bear market hibernation.
At $3,000 per ton, the economics favor some of this lost production coming back online. But there are a couple of things to consider. First, there is always a lag (sometimes years) before old mines can be reopened and new projects get developed. Second, any increase in capacity will be quickly absorbed by rising global consumption.
A full 2 million tons of additional annual production wouldn’t even cover half of what will be needed to meet rising consumption, so expect prices to remain elevated. In fact, consultancy group Wood McKenzie sees zinc advancing all the way to $3,500 per ton by next year and staying there until 2020.
So that 300% growth in profits I alluded to earlier might be just the start of a sustained earnings boom. Fortunately, the company experiencing this growth also happens to be the most recent recommendation in my premium commodities newsletter Scarcity & Real Wealth.
The World's No.1 Zinc Producer
This Anglo-Swiss conglomerate digs up over 1 million tons of zinc each year. Its supply comes from holdings spread around the world, including mines in northern Australia, Namibia, Kazakhstan and Peru, and smelting/processing facilities in Spain, Italy and Canada.
This giant sells more zinc in a month than many smaller players do in a year. Not only that, but it operates at the very low end of the industry cost curve, which means wider profit margins even when prices are down. And when I say low end of the cost curve, I mean low.
Zinc is currently trading for about $1.40 a pound. If cash operating costs averaged $0.40 per pound, profits would be $1.00 per pound. But expenses aren't $0.40, or $0.30, or even $0.10. Believe it or not, the company is currently producing zinc at an effective gain of $0.09 per pound.
That's right, a negative production cost.
How is that possible? In short, the company recovers other metals (like gold, silver, and in this case, lead) in the process of mining the copper. The proceeds from the sale of these byproducts are then deducted from the cost of mining the original metal. When the proceeds more than offset the entire cost, net expenses are negative. And with lead prices climbing to a nine-year high, management is expecting zinc costs to fall to minus 14 cents per pound this year.
All told, this has led to a jaw-dropping 334% surge in EBIT (earnings before interest and taxes) so far this year -- enough to pay off $1.6 billion in debt and distribute $1.0 billion in profits as dividends.
Not bad for a metal that few people even bother to pick up when they see it lying on the ground.
2018’s Other Big-Time Commodity Story
Unfortunately, I can't share the name of this pick with you today. It simply wouldn't be fair to my premium Scarcity & Real Wealth subscribers. But mark my words... zinc's powerful run is just getting started -- and this pick is going to benefit in a big way.
On a separate note, I should add that this isn't the only major story in the commodities space. You see, for only the third time in 41 years, a shortage of uranium has electricity producers racing to snap up this rare commodity.
The last two times this happened, a small group of stocks soared -- exploded, really -- by 9,000%, 17,000%, and one an unthinkable 125,000%. When it happens again, companies sitting on stockpiles of the stuff will see similarly astonishing returns.
As both of these trends develop, I’ll be keeping my Scarcity & Real Wealth readers abreast of the best opportunities in nickel and uranium, as well as a slew of other commodities benefitting from market shifts and emerging technologies.
For instant access to the picks mentioned above, along with my entire portfolio of the absolute top values in the natural resources market, click here.