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10/6/08

Where to start? Zinc will do

The Dow has just broken 10,000 to the downside. Big deal. Meanwhile this chart....

....is very bad news for the zinc sector. While 85c held previously there were plenty of higher cost miners who'd be able to rough it out, but once 75c/lb was established the news of mine closures started coming thick and fazt (note OzMin in Australia and this news yesterday adding to the throng).

But the break from 75/c bottom to under 70c now puts a whole new swathe of miners in jeopardy, and that includes zinc projects with relatively low cash cost projections. This is rapidly turning into a a hard landing scenario for miners. The fittest will survive.

Zinc mining is split into two main types of mine; there are those with Zn as its main product, and these are the ones under the most pressure right now. Take Blue Note (BN.to) which produces mainly Zinc, then some Lead and a bit of Silver. It's running a cash cost of over 90c/lb net by-products, and it doesn't need a genius with a calculator to work out that the company is hurting. Then there are other polymetallic mines that have Zn as a major income source but are by no means reliant on the metal. For example I was investigating the Fortuna Silver numbers last week, and noted that Net Smelter Revenue (which is basically what the miner gets for its wares), came in at double its cash cost per tonne of ore. This means there's plenty of breathing room for FVI.v and other miners in the same position right now. Zinc production won't grind to a halt at such mines.

The upshot here is that a hard landing will crush both demand AND supply. Once the dust settles, any demand pickup will get scant response from the supply side and prices are likely to spike back up. When this happens is the big question, and if you knew the timeline it would be your ticket to riches.