Resource Maven Gwen Preston talks about zinc investing and some junior resource stocks to watch
SmallCapPower | April 18, 2017: Resource Maven Gwen Preston, in a speech at the newsletter writers’ presentations at the PDAC 2017 convention, talked about her outlook for zinc as well as some junior resource stocks worth keeping an eye on. Here’s a summary of what she discussed that day.
Stocks to watch:
Leagold Mining Corporation (TSXV: LMC), which is a Frank Giustra deal. It’s being incubated by pretty smart money. The Company is setting up as a new mid-tier mining company, starting with a producing asset.
Yes, you can have your opinions about the Los Filos Gold Mine in Mexico (which it purchased from Goldcorp for US$350 million) and why it was being sold, and what challenges there might be, but, the point is, that they’re tailor-making these vehicles for the generalist money. And the generalist money is what really fuels the bold bull market. The reason that the big move happens is because generalist money rotates into the sector. So Leagold Mining ended up with about 50% more money than the Company expected to raise because so many funds wanted to get in.
As well, Bluestone Resources Inc. (TSXV: BSR) announced a $40 million raise and it went to $80 million because a specific high net worth mining investor came in. And Trek Mining Inc. (TSXV: TREK), which is the JDL-Luna merger, announced a $27 million raise that ended up closing at $85 million.
Stocks in her Maven portfolio that she thinks are good buys right now:
Darnley Bay Resources Limited (TSXV: DBL): A zinc play in Canada’s Northwest Territories
Red Eagle Mining Corporation (TSX: R): It has a gold mine in Colombia with some good news flow pending
Bonterra Resources Inc. (TSXV: BTR): A high-grade gold exploration play in Quebec with really ramped up news flows. They just raised a bunch of money
Nighthawk Gold Corp. (TSXV: NHK): Its Colomac Gold Project in Canada’s Northwest Territories has an Inferred resource of 2.1 million gold ounces averaging 1.64 grams per tonne
Gwen Preston’s thoughts on zinc:
Lots to talk about zinc these days. I describe it as sort of the metal that’s guaranteed to perform this year. Sure, we’ve had a big price move already, but it’s really a classic case of fundamentals. There’s declining supply. There’s rising demand. There’s basically no new concentrates entering the market. So, the market is going to be in deficit for a few years, and the stockpiles are getting drawn down.
What’s interesting about…the reason that you watch stockpiles is that zinc responds…the zinc price moves along sideways, until stockpiles get to near a critical level. And so, critical level is usually, like, six or seven weeks of global consumption. And as soon as it gets down towards that level, the price takes off. We saw that happen in 2005.
Guess what? That’s exactly what’s setting up right now. The price move has clearly already started. The fundamental supply-demand situation is more extreme this time than it was in 2005, which is why most analysts are still forecasting some fairly good upside in the price of zinc alone. I mentioned there’s a real lack of concentrate. Treatment charges are what smelters charge to process a zinc concentrate.
When there’s a lot of zinc concentrate available, treatment charges are, like, $200 a ton. In the last year, they’ve fallen, like, dramatically. They’re at $50 a ton. It is the key signal that there just is not enough zinc concentrate out there. Smelters in China are shutting down and suspending operations left and right, right now, because they just can’t get concentrate to process. So, that’s very bullish. I do want to mention, however, that zinc bull markets don’t last very long.
So, the price has already made a big move. I think the price will continue rising this year. But the zinc price itself probably does not have a long run ahead of it. That said, there is still opportunity right now in zinc equities. Equities don’t move until the price has already established itself on an upward trend. And I think there’s sort of two main reasons for that. One is that, that sideways move that zinc like to do does include, sort of, 20% to 30% moves.
So, when zinc moves 20% or 30%, people just don’t pay attention. They’re like, “Ah, it’s just waving along again.” So, it has to go to about 40% before people are like, “Oh, wait. There is actually something happening here.” Especially because zinc is, for a metal, like, crying wolf. People have literally been calling for a zinc price move for seven years. So, it’s no surprise that we ignored it when it happened this time around.
Now, it’s accepted that this move is real, the supply-demand situation is very real. Investment momentum in zinc also takes a little while to develop, just because there aren’t very many options. There’s very few pure play zinc options out there. Trevali Mining Corporation (TSX: TV) is kind of the only pure play junior zinc miner. There’s a few others that are zinc dominant, but you’re exposing yourself to other commodities as well.
The established stocks have already moved, but there are new deals that are coming out. Be careful. We are almost in sort of a euphoria state in the zinc market already, so there’s going to be people who are jumping, companies that are jumping on that bandwagon that don’t have particularly robust assets. So, I would just ask some good questions. Make sure you’re talking about real projects that already have resources.
Make sure that management understands what I think is a bit of a time crunch right now. You need good news flow and you need consistent news flow, and you need it in short order because this isn’t going to last a long time. The opportunity has to be happening now, happening quickly. And they do exist, for sure. But it’s not going to be forever.
Disclosure: Neither any of the principals at Small Cap Power, nor their family members, own shares in any of the companies mentioned above.
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