Junior mining stock analyst Mike Kachanovsky reveals a zinc mining stock that he says combines able management, a prudent acquisition strategy and competent operating strength at a strategic moment in world-wide zinc markets.
I am a mining guy, and feel very comfortable holding a large chunk of my portfolio in resource stocks. That typically involves a large weight towards precious metals, but sometimes the setup is just right to get on board a base metals stock.
The rule of thumb for me is that in order to invest in a base metals mining stock, I must get it right twice. One must be able to pick the right stock, but also pick the right timing in terms of worldwide economic fundamentals. Get either of those wrong and you will probably not make any money.
Right now I think the world economy is puttering along dangerously close to stall speed. Despite the frantic efforts of central bankers in Japan, the US and Europe to disperse enormous amounts of money into the system, overall economic growth has been tepid and industrial output is unimpressive. So why look at base metals mining now? Read on.
This may be a unique time to consider targeting leverage to zinc production. Two of the largest zinc-producing mines in the world are set to be taken offline shortly and both are winding down production.
While there are a number of other primary zinc mines, along with significant producers of other metals that will continue to generate a zinc concentrate as a byproduct, it is very likely that worldwide mine output will decline, contributing to a zinc deficit.
Even if economic naysayers are correct, and industrial demand sputters, this may be a very good time to have leverage to zinc production for investment gains.
Picking the right company at the right time
As discussed above, one must also pick the right company. I present to you a candidate worthy of consideration: Trevali Mining Corp. (TSX—TV; OTCMKTS—TREVF). There is a lot to like about Trevali but this company has endured a consolidation for the first half of 2017 after posting very strong gains last year. The stock has now recovered nicely off its lows and I think the best is still ahead.
One of the reasons for the lengthy correction earlier this year was the announcement in March of a significant transaction to acquire several mine projects from Glencore PLC (LON—GLEN). The deal included two producing zinc mines in Africa and was valued at US$400 million.
On the one hand, these acquisitions opened the door to a rapid expansion of zinc production during a time when the market price has been buoyant indeed. However, the deal required issuing a lot of shares in an equity offering to raise the cash, plus taking on additional debt.
Trevali established itself on the basis of a prudent acquisition strategy and competent operating strength. Management has demonstrated its ability to operate mines on two continents, and achieve improved efficiency while also delivering exploration success.
The addition of two producing mines promises to more than double the annual zinc output for the company and catapult it among the ranks of the larger worldwide zinc miners.
Challenge is joining new ops with old
The question then becomes whether this management team will be able to seamlessly integrate the new projects and achieve similar results in operating performance, without taking its eye off the ball on maintaining growth and efficiency objectives among the rest of its mine portfolio.
Perhaps this new degree of uncertainty was part of the reason the stock fell by more than a third in the weeks after the deal was reported. However, there are several reasons to be optimistic.
First off, the zinc market itself remains very tight. Even as the spot zinc price came off its five-year highs last quarter, the warehouse inventory at the London Metal Exchange kept falling to new lows. That kind of divergence represents opportunity.
Sure, there are concerns that world economic activity is slowing—particularly in China. This prompts fears of a pending collapse in demand. Again, investors often move to the sidelines when faced with uncertainty and risk.
My view is that the low inventory situation will be key to the market and therefore prices are headed higher. With mine output for zinc projected to continue declining, the threat of a supply squeeze is probably more real than the risk of a glut.
I believe Trevali made the move to expand its production profile at exactly the right time and will be the beneficiary of high realized zinc prices for several quarters into the future as the company embarks on its plan to optimize the output from the new mine acquisitions.
Meanwhile, Trevali continues to find success with its ongoing exploration. Last month, the company announced new high-grade zinc intervals encountered during drilling work at its Halfmile deposit in New Brunswick. The project is currently in the midst of a preliminary economic assessment revision.
This follows up on significant new discovery zones to depth reported in October from its Santander mine in Peru. Ongoing discovery success has enabled the company to replace the mined inventory at its core projects and actually raise its estimated resources in the most recent report.
After a stellar run last year, Trevali shares needed a pause to consolidate. I prefer to buy into a strong story in the aftermath of a correction, when some of the speculative froth has been removed. There have been opportunities to take profits along the way, then sit back and wait for a predictable retracement to reload. I think this stock is there right now.
The company is counting on continuing its successful business model to optimize output in order to drive the next phase of growth as the new mines are brought online. If Trevali Mining is able to achieve this level of performance at the new African mine acquisitions, then this deal will be seen in hindsight as the growth catalyst that moved it forward to a serious mid-tier producer.
I expect the stock to surge to new highs later this year as it begins to demonstrate it is on track for this objective.
Mike Kachanovsky is a freelance writer who specializes in junior mining stocks and also covers technology companies.
This is an edited version of an article that was originally published for subscribers in the July 21, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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