TD report on zinc and TV (top pick)Zinc price deck increased — We have increased our zinc price deck for the next several years. Although zinc mine supply is expected to improve in 2018, it will be mostly H2/18 weighted and unlikely to affect refined metal supply until H1/19. We expect that total zinc stocks will remain very low at ~32-33 days of consumption through 2020 (lowest since 1985), lending support to prices. Low stocks and limited mine supply in 2018 could result in a sharp upward spike in prices. We have increased our 2018 zinc price forecast to US$1.76/lb (from US$1.65/lb); our 2019 and 2020 price forecasts increase to US$1.75/lb and US$1.50/lb, respectively (from US$1.45/lb and US$1.30/lb).
Zinc inventories low and getting lower — Zinc fundamentals remain supportive, with global exchange stocks at 10-year lows (equivalent to just six days of consumption) and the forward price curve now in backwardation through mid-2019, suggesting that the market expects supply to remain tight. We also note that LME zinc cancelled warrants now total ~42% of all zinc in LME warehouses, indicating that the draw-down of zinc inventory should continue.
Treatment charges near record-lows — Spot Chinese zinc concentrate treatment charges for January have been quoted at US$22.50/t, up from US$15.00/t in December, but very low by historical standards (in 2015, the average spot treatment charge was US$201/t). The 2017 benchmark TC was US$172/t (with zero price participation); negotiations on 2018 TCs are just starting, with the miners expecting to retain zero price participation and a lower TC, possibly in the US$150-US$160/ t range (-10% year-over-year).
Chinese mine supply weak; refined imports at record levels — Wood Mackenzie forecasts that Chinese zinc mine supply rose 3.6% in 2017; during previous periods of elevated zinc prices (2010/2011, 2006/2007, 1996/1997), Chinese zinc mine production has climbed upwards of 12-15% on a year-over-year basis. Lower availability of both domestic and imported concentrate is constricting Chinese refined zinc production; 2017 refined zinc production was down 0.7% year-over-year, despite a sharp spike in production in Q4/17. Weaker domestic zinc production is leading to higher imports of refined zinc which totalled 676,000t in 2017 (+59% year-overyear), a record-high (previous high: 670,000t in 2009).
Trevali is our Top Pick for zinc exposure — We have raised our TV target price to $2.50 (from $2.25). TV has the top sensitivity to zinc price in our coverage list — a US$0.10/lb change in zinc price affects TV's 2018 EBITDA by ~9.5%. We have also raised our target price for Teck Resources to $46.00 (from $44.00), for HudBay Minerals to $17.00 (from $16.00), and for Lundin Mining to $10.00 (from $9.00) based on our increased zinc price forecasts. Our recommendations are unchanged