Since mid-January an explosive rebound in the mining sector, led by gold and silver stocks, has driven the TSX Global Mining Index up over 50%. With gold and silver surging, several analysts, including veteran Stefan Ioannou, have suggested that zinc could be the next commodity to follow suit – in a big way. The zinc investment thesis is underpinned by a current supply deficit as well as a global production rate that has dropped over 10% due to recent mine closures. The reason global producers haven’t been quick to fill the supply gap rests on simple economics. Leading research group, Wood Mackenzie, has estimated that zinc needs to hit $1.60 per pound to encourage new production. So it’s not surprising that with zinc prices at a mere $0.85 per pound, there’s not much incentive to break new ground.
That said; zinc inventories have dropped over 50% since 2013. Combine this with the fact current mine supply fails to meet ongoing demand and you have a perfect storm which could very well drive the market to a critical point that can only solved with higher prices. Haywood Securities analyst Stefan Ioannou anticipates this critically low point to occur in late-2016, noting the last time inventory levels reached this point, zinc prices spiked above $2.00 per pound.
With so very few pure-play zinc companies and a scarcity of resources, investor’s options are limited. One interesting small cap in the space is Callinex Mines (
TSX-V: CNX,
Forum), now backed by major private equity fund, Resource Capital Funds who has over CAD $4.0 billion under management. Callinex has just announced the acquisition of a large near-surface zinc-gold deposit in Newfoundland that has over 500 million pounds of zinc and a gold ‘kicker’, totaling nearly a half million ounces at 1 g/t.
With zinc at just $0.85 per pound, Callinex has provided its investor base with exposure to the metal’s potential near-term price increase. In the event zinc approaches anywhere near Wood Mackenzie’s estimated $1.60 incentive price, nearly a 100% gain for the underlying commodity, CEO Max Porterfield is betting his investors will well rewarded. Alternatively, Mr. Porterfield has also increased the Company’s exposure to gold and silver’s continuing rally northward.
Callinex’ new acquisition, the Point Leamington deposit, estimated to contain 14.1 Mt of rock grading 6.2% Zn Eq starting at surface, represents an intriguing addition of zinc assets to the company’s portfolio. Investors may recall this project as it was the flagship asset for Newmarket Gold (TSX: NMI) before it merged with an Australian miner. It was also previously targeted as a potential acquisition by BHP Billiton.
Perhaps most interestingly, Callinex plans to evaluate additional zinc-rich deposits within established Canadian mining jurisdictions. With a technical team that includes industry stars, Mike Muzylowski, James Pickell and Alan Vowles, all former PDAC award winners, and a big private equity firm providing support, Callinex is positioning itself to take advantage of a diverse set of mining opportunities as the junior exploration and development market begins the road to recovery.