Magic Metal Riches: How You Could Make Ӡ,OOO% Gains on the Commodity Trade of a Lifetime

Transcription

1 Magic Metal Riches: How You Could Make Ӡ,OOO% Gains on the Commodity Trade of a Lifetime

2 Magic Metal Riches: How You Could Make Ӡ,OOO% Gains on the Commodity of a Lifetime THIS is the most incredible rock you will ever see. It s not silver, platinum or any other precious metal. It s not aluminum, nickel, iron ore or lithium, either. In short, it s a magical metal with unheard-of superpowers that other metals simply don t have. For example, it doesn t rust. It s not flammable. It s 100% recyclable. And it can be transformed from a rock into a powder. Or into liquid. No matter what form this metal takes, one thing is for certain: It is truly magical. It s in everything from airplanes to automobiles batteries to boats cosmetics to computers surgical tools to smartphones tractors to turbines It even has miraculous medicinal powers. Scientists are using it to fight diabetes, depression, low blood pressure, hair loss and fatigue. It aids in weight loss, improves vision and can even protect you against many kinds of cancer. Hence, this magical metal is worth billions, maybe even trillions, to pharmaceutical companies such as Pfizer, Merck, Johnson & Johnson and Bristol-Myers Squibb, to name a few. Recent World Health Organization statistics show that 800,000 people with access to this resource will get a second chance at life every year. However, there s one giant, ugly problem. It s disappearing. Why This Magic Metal Is So Vital Our magic metal is zinc. While demand is soaring, supply is actually falling right now. We ll go into the fundamentals shortly. First, I d like to dig into what zinc is and why we need it so much. 1

3 Other than putting it on my nose to protect from the sun, I didn t know much about zinc prior to I vaguely knew it stopped my boat motor from rusting and that the shiny coating on galvanized metal is zinc... I also ran into zinc minerals while looking for other, more precious metals over the years. It s common to find zinc in silver ore. I have a beautiful chunk of shiny silver, lead and zinc ore from an abandoned mine above Silverton, Colorado. Since then, I ve learned that zinc is a secret, critical metal. It s in everything from the nails holding your house together to the car you drive to the plants you eat. Statistically, zinc is the fourth most abundant element in the earth, after hydrogen, nickel and copper. The 27 th most abundant material on the planet, it makes up about 0.004% of the earth s crust. It is also the second most plentiful trace metal in the body, after iron. Zinc is actually critical for us. An average adult has between 1.4 grams and 2.3 grams in his body. Kids need zinc for growth. Adults need zinc for reproduction and health. It s incredibly useful. It s the third most used nonferrous metal after aluminum and copper. Mix it with copper, and you get brass. The average car contains about 38 pounds of zinc. Almost half of that protects it from rust, while 20 pounds go into die-cast parts like door handles and locks. We even use it in our money: The U.S. penny is about 98% zinc. We also use zinc in our $1 coins. That s appropriate, because zinc is about to make us a ton of money. Here s what s going on with the magic metal Why Is Zinc s Price About to Soar? Over the past 16-plus years, zinc supply and demand grew steadily. From 2000 to 2016, the supply of zinc increased by nearly 50% from 9.1 million metric tons to 13.7 million metric tons. Demand grew at an even higher clip. It saw a 57% increase in the same period, from 8.9 million metric tons to 13.9 million metric tons. What s important to note is that the zinc market frequently had more supply than demand. There have been only six years since 2000 when demand outstripped supply, including a stretch from 2004 to In 2003, the average price of zinc was $828 Zinc Price per metric ton, about $5,000 $0.38 per pound. However, in 2004, the market supply was short $4,000 by about 122,672 metric tons. Then in 2005, $3,000 demand exceeded supply again, this time by 277,395 metric tons. It $2,000 happened again in 2006 and in Not surprisingly, the $1,000 zinc market exploded, as you can see in the chart at right: $ From 2003 to 2006, $/Metric Ton 2

4 the price of zinc soared 456%. The Zinc Price Collapse $5,000 By 2008, however, the zinc market had returned to surplus. You can guess $4,000 what happened From its 2006 high, the zinc price $3,000 plummeted 77% to a five-year low in The market remained $2,000 oversupplied until 2014, followed by a modest surplus in $1,000 However, in 2016, we saw a real deficit of zinc. Demand exceeded $- supply by nearly ,000 metric tons, resulting in a rebound in the price of zinc. The lack of supply occurred because several large mines used up all the ore, resulting in the permanent closure of those mines. Low prices also contributed to the reduction in supply, because they led to the closure of more expensive mines it cost the mine operator more to pull the mineral out of the earth than could be made selling it on the market. Those mines could one day open again, but only when it is profitable for the miner. Mined zinc production fell by 1 million metric tons from 2015 to Giant zinc mines such as Xstrata s Brunswick mine in Canada, Vedanta Resources Lisheen mine in Ireland and MMG s Century mine in Australia all shut down. In addition to the closures, mining giant Glencore temporarily halted 500,000 tons per year to wait for higher prices. And another giant is fading: Teck Resources Red Dog mine in Alaska has about only 10 years of ore left to mine. In 2016, the world consumed about 13.9 million metric tons of zinc. Since 2000, demand for zinc grew by 3% per year. That means by 2020, we ll need 15.7 million metric tons of zinc. Right now, we don t have nearly that much. Prices are going to go up. If 2004 to 2007 is any indication, they could go up by triple digits. The only thing that s kept a lid on prices so far is extra zinc supply. Back in the mid-2000s, I visited a zinc smelter in Tennessee. It produced pure zinc ingots from ore. As you can see below, they look like giant, shiny parking stops. And they don t go bad no matter how long they sit. From 2012 to 2014, we stored about 1.5 million metric tons of zinc. In other words, the mines produced too much. At the beginning of 2016, there were $/Metric Ton 3

5 approximately 2 million tons of zinc parking stops in warehouses around the world. By the end of 2016, they were almost gone. In 2016 alone, we consumed over 1.4 million more tons of zinc than the world s zinc mines produced. Prices are going up. Rising zinc prices turn ordinary mining companies into huge wins for investors. Here s what I mean The best-known zinc miner on the U.S. stock market is Teck Resources. It s the one mining stock that most resource investors would know produces zinc. Both the zinc price and the share price of Teck Resources bottomed in early As the zinc price rallied, Teck Resources stock exploded. The chart below shows what happens to a beaten-down stock in a bull market: An 875% Gain in Under a Year Teck Resources stock bottomed at $2.65 on January 13, Then it hit $25.84 per share on November 23, That s an 875% gain in less than a year. The stock went from $1.6 billion in market value to $13.7 billion today, as the price of the magic metal moved from $0.72 per pound to $1.25 per pound. Teck Resources is the best example of a stock that went up nearly 3,000% in the past. As recently as 2011, the stock gained 2,300% in just two years, when it rose from $2.70 in 2009 all the way to $65 per share. However, the price of zinc went up only 140% in that period. Teck s surge, back then, got an assist from the general recovery of the stock market. However, we are coming off a similar bear market in mining. Remember, all these mining stocks only just reached their bottoms in early While the gains look good so far, the price of zinc has just started to move higher. And the shortage in zinc is only beginning. Imagine how high Teck Resources could go if zinc runs to $3, $4 or more per pound That s why we need to position ourselves right now. While Teck Resources shares are already soaring, there s another company whose shares haven t yet begun their meteoric rise. Here s how we re going to speculate on the coming boom in the magic metal. How We ll Make a Fortune We are going to buy shares of Hudbay Minerals (NYSE: HBM). Hudbay is a $1.7 billion mining company with assets in Arizona, Manitoba (Canada) and Peru. We like it because it produces zinc at two 4

6 mines: Lalor in Snow Lake, Manitoba, and the 777 mine in Flin Flon, Manitoba. At $1.7 billion, this is a relatively small mining company. Our earlier example of Teck Resources is nearly 10 times the size of Hudbay. At its peak in 2007, Hudbay was four times its current share price, as you can see in the chart below. Hudbay s Share Price: 2006 to Present In 2016, Hudbay produced million pounds of zinc. That volume will grow by 25% this year. The 777 and Lalor Mines in Manitoba, Canada: The Keys to Our Investment in Hudbay Hudbay became a company thanks to a zinc mine in Flin Flon, Manitoba, about 85 years ago. The 777 mine is in the town of Flin Flon, along with much of the processing plants and equipment. Hudbay is the sole owner of the 777, which produces zinc and copper. The mine produces about 25,000 metric tons of copper and 51,000 metric tons of zinc per year. The mine is extremely low-cost, thanks to the rich ore and simple operation. The 777 holds about 230 million pounds of copper and 670 million pounds of zinc. It has a small amount of gold (379,000 ounces) and silver (5.4 million ounces), which help offset mining costs. Hudbay discovered the 777-ore body in It went into production in 1999 and has about five years of production remaining. Located about 130 miles east of Flin Flon, the Lalor mine is Hudbay s mother lode of zinc. Hudbay is the sole owner of Lalor, which went into production in The company upgraded the main shaft in 2014 to accommodate more ore. The mine s reserves hold about 1.9 billion pounds of zinc, 214 million pounds of copper, 11.8 million ounces of silver and 1.2 million ounces of gold. The rocks contain the metal in two zones. The upper zone is base metal-rich, and the lower zone is gold-rich. The mine has the capacity to move 6,000 metric tons per day (MTPD), but in 2016, it only processed about 3,000. The Stall mill used to process the ore can only handle about 3,000 MTPD. However, the addition of another mill (the New Britannia mill) should increase the volume of processed ore 5

7 to 4,500 MTPD. That will increase zinc production from 71,000 metric tons (MT) in 2016 to 90,000 MT in In addition, the company is examining the feasibility of running an additional 1,500 metric tons per day through a new (as of 2015) mill, New Britannia, to further increase production. As Alan Hair, Hudbay s president and CEO, said in a recent press release: Our enhancements to the Lalor mine plan offer low-cost, near term zinc production growth with potential future gold production upside, and positions our Manitoba business unit to be a strong contributor to Hudbay s results for many years to come That s the big attraction of Hudbay as a speculation: The company can grow its zinc production quickly and cheaply right now. That is critical in a market where there is little new zinc production available. If the market gobbles up all the extra zinc it can find, that extra production will send Hudbay s revenue and earnings soaring. Here are Hudbay s financials, including estimates: * Revenue $460 million $886 million $1.1 billion $1.3 billion EBITDA** $72.3 million $286 million $469 million $563 million Long-Term Debt $837 million $1.2 billion $1.2 billion $1.1 billion Cash $153 million $54 million $147 million $152 million Data from Bloomberg; *Estimated Value; **Earnings before interest, taxes, depreciation and amortization So according to Bloomberg s estimate, 2017 s revenue will be $94 million more than Zinc accounted for 19% of Hudbay s revenue in 2016, generating $237 million in sales. That was at roughly $1 per pound of zinc. As zinc prices rise, that revenue should go up quickly even before the expansion. That s why I think the expansion will bump Hudbay s revenue and earnings even higher this year. Hudbay s exposure to zinc and its production growth this year are extremely promising. However, 2018 looks like the really big year. Current estimates put Hudbay s 2018 revenue at $1.4 billion, with EBITDA at $645 million. That s impressive growth: $116 million (22%) in just two years. Even with that growth, Hudbay won t be a stock we hold forever. See, the company has some downsides that translate to risks for our investment namely, its enormous debt. But anything with such huge growth potential comes with risk. For that reason, we will use Hudbay to ride the bull market in zinc. I believe Hudbay could be a $10 billion, $20 billion, even $30 billion-plus company if the zinc price takes off like we expect it to. But as you can see in the table above, the company has $1.2 billion in long-term debt nearly as much as its market value. It used that money to upgrade Lalor, which is the reason it can bump production by 25% this year. That s great, but it needs to pay off that debt soon. You see, the 777 mine has only five more years of life. Once it s done, it becomes a liability. Instead of creating revenue, it sucks earnings because retiring a mine costs money: tens even hundreds of millions of dollars. This speculation will likely last two to three years, depending on the zinc bull market. That s perfect. My plan is to buy now, ride out the bull market and sell for a big gain. Now here s what to do: Action to take: Buy Hudbay Minerals (NYSE: HBM) up to $9 per share. Use a 30% trailing stop-loss, but please don t put your stops in at the market. (That means if you buy at $9 per share, sell it if shares fall below $6.30.) From there, use the highest closing price to determine the stop price, calculating 70% of that price as the stock rises. 6

8 Hudbay shares rose double digits since we originally bought it in May However, the zinc price rose, too. That's why I feel comfortable increasing the buy guidance from $8 per share to $9 per share. Please do not chase shares above $9. Our Secret Stock: Cashing in on Zinc s Coming Bull Market There is another stock that could produce 1,000% gains in the coming bull market: Lundin Mining (Toronto: LUN). Lundin Mining is a $4.1 billion global base-metal mining company based in Canada. Founded in 1994, it merged with EuroZinc Mining Corporation in Lundin is a tremendous company that did far better than its peers during the downturn in metal prices. As you will see, it is in a perfect position to profit from rising copper and zinc prices. Like Hudbay, Lundin Mining s shares peaked at more than twice its current share price back in You can see what I mean in the chart below: Lundin: Heading for Its 2007 Highs? It owns several operating mines: Neves-Corvo (Portugal), Tenke Fungurume (DRC, Africa), Candalaria (Chile), Eagle (U.S.) and Zinkgruvan (Sweden). Each of these mines is unique and deserves discussion, which you can read below. In addition, Lundin owns 24% of Freeport Cobalt, one of the world s largest cobalt refineries. Located in Finland, it supplies cobalt powders and chemicals for use in batteries, pigments and ceramics. Before we get to its zinc mines, we need to discuss its extensive copper production. Copper generated 66% of Lundin s revenue in Zinc accounted for 13%. Nickel, gold, lead and other byproducts accounted for the rest. The company estimates that it will produce between 202,000 and 216,000 metric tons of copper and 17,000 to 20,000 metric tons of nickel in The Candalaria mine is a giant open pit in Chile, with some underground workings as well. The mine accounted for 55% of Lundin s revenue in It holds over 482 million tons of ore. That contains over 5.7 billion pounds of copper. In addition, it holds 1.9 million ounces of gold and 29 million ounces of silver. Lundin owns 80% of the mine. 7

9 Lundin s other major copper mine is Tenke Fungurume. This giant holds million metric tons of ore with an incredible 2.6% copper. That means 1 ton of ore holds about 57 pounds of copper. The mine holds about 8.3 billion pounds of copper in total. In 2016, the mine produced 475 million pounds of copper and 35 million pounds of cobalt. Lundin owns 24% of Tenke Fungurume. Two of Lundin s operating mines are primarily zinc. The company estimates that it will produce between 152,000 and 162,000 metric tons of zinc in Neves-Corvo is a copper and zinc mine. In 2016, the mine produced million pounds of copper and million pounds of zinc. In 2017, the company expects the mine to produce slightly less copper and up to 10% more zinc. The company submitted expansion plans for permitting. The plans will double Neves-Corvo s zinc production within 28 months. Lundin owns 100% of the mine. It holds 1.5 billion pounds of copper and 3.7 billion pounds of zinc. Zinkgruvan is also 100% owned by Lundin. It is a silver/lead/zinc/copper mine. In 2016, the mine produced 173 million pounds of zinc and 4.2 million pounds of copper. In 2017, the company expects the mine production to grow to between 176 million and 187 million pounds of zinc. The company is upgrading the plant right now, which will increase zinc production by 10% by mid Zinkgruvan holds about 25 million ounces of silver, 778 million pounds of lead, 1.9 billion pounds of zinc and 173 million pounds of copper. Lundin targeted two new deposits in the area that aren t included in the current mine plan. In total, the company estimates 2017 metal production as follows: 444 million to 475 million pounds of copper, 37 million to 44 million pounds of nickel and 334 million to 356 million pounds of zinc in If copper and zinc prices climb as we expect, Lundin Mining will be a huge winner over the next few years. Here is a summary of Lundin s financials: * Revenue $951 million $1.7 billion $1.5 billion $1.9 billion EBITDA** $230 million $653 million $598 million $878 million Long-Term Debt $980 million $978 million $982 million - Cash $193 million $570 million $727 million - Data from Bloomberg; *Estimated Value; **Earnings before interest, taxes, depreciation and amortization As you can see, the company has a modest amount of debt, compared to its cash position. However, there is a deal in the works that will eliminate its debt and add more cash to Lundin s bank account. In November 2016, the company announced plans to sell its share of Tenke Fungurume for $1.136 billion. If the copper and cobalt prices exceed $3.50 per pound and $20 per pound, respectively, for two years (starting in January 2018), then Lundin will get another $51.4 million. The sale represents a large influx of capital that would wipe out all of its outstanding debt. Paul Conibear, president and CEO of Lundin, had this to say: The decision to sell our minority interest in Tenke has been arrived at following a careful and lengthy consideration of all options open to us. It was a difficult decision, respecting the 20 years of Lundin involvement in Tenke, and the special nature of this world class asset. The sale will enable Lundin Mining to advance its strategy to incrementally grow the company with projects and operations we control, while maintaining a strong balance sheet. The deal will close around June

10 Lundin Mining is one of the best companies in the world at turning cash into assets. This company, more than any other that I can think of, acquires assets at the right times and just as importantly sells them at the right times, too. What we have today is a company that, in a short time, will have no debt, close to $1 billion in cash and a world-class zinc portfolio. That s a fantastic combination on the brink of a massive bull market in zinc. Action to take: Buy Lundin Mining (Toronto: LUN) on the Toronto Stock Exchange (TSX) up to C$9.50 per share, and use a 30% trailing stop-loss. As with Hudbay, Lundin shares rose with the bull market in zinc. I increased my buy guidance from C$8.50 per share to C$9.50 per share to reflect the higher zinc prices. If you can't access the TSX, you can buy this stock over the counter. But I don't recommend that. There are limited supplies of these stocks on that market. That can cost you more to buy and limit your ability to sell. I'll track the Canadian stock in the portfolio, not the over-the-counter version. The coming bull market in zinc has all the hallmarks of a classic. Investors who got in early in the uranium market in the late 1990s, in the lithium market of the mid-2000s and in the gold bull market from 2005 to 2011 all had a chance to make triple- and quadruple-digit gains. We can do the same. If the zinc price moves the way we expect it to, we could easily see Hudbay and Lundin Mining shares explode higher. It isn t a stretch to think that these stocks could reach and exceed 2007 highs. We are buying the right stocks at the right time. Now we simply need to sit back and watch as the zinc crisis unfolds. Good investing, Matt Badiali Editor, Real Wealth Strategist 9

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