SVH Tracker - January 17, 2017: Recommendation Strategy for InZinc Mining Ltd
InZinc Mining Ltd did not do anything during 2016 other than acquire an early stage exploration project from insider Kerry Curtis who replaced Chris Staargaard as CEO. Nevertheless, InZinc returned an impressive 185% at $0.185 on December 30, 2016 from the $0.065 price at which the Good Relative Spec Value Buy recommendation of the SVH 2015 Edition was rolled over into the SVH 2016 Edition. I have rolled InZinc over into the SVH 2017 Edition as a Good Absolute Value Buy at $0.185 because at the year end zinc price the West Desert project was back in the money as worth developing. SVH Tracker Mar 2, 2016 is still valid except that with iron ore back to $80 per tonne InZinc would get better than $80 per tonne for its magnetite by-product. The price of zinc started 2016 in the dumpster but managed to touch $1.30 during the Trump "infrastructure" rally. During the summer Curtis initiated a detailed review of the West Desert project with the goal of mounting a major exploration program in 2017 that seeks to expand the underground zinc sulphide resource as well as create a better geological context for this skarn deposit which the geological consensus, in the absence of any near surface geophysical targets not already killed as phritic sulphides, believes is peripheral to a deeper major mineralizing system. A couple years ago Bay Street did not want to hear former CEO Staargaard's plea for $3 million, but in the wake of the major success Arizona Mining Inc has had with its Hermosa-Taylor zinc-lead-silver discovery there is a growing appetite for hybrid plays that offer zinc optionality at the current price and exploration discovery potential that would make the deposit worth developing without further price rises. The West Desert deposit's location in Utah is also a plus from a development perspective; neither the state nor the deposit location offer anywhere near the biodiversity surrounding the Hermosa-Taylor deposit in southern Arizona in the broadest sense imaginable. The market is also warming up to the idea that zinc's decade is finally arriving. New non-Chinese zinc supply has not replaced the depletion of major deposits; most major undeveloped zinc deposits have remote locations with serious infrastructure challenges that would require the expectation of higher long term zinc prices to overcome. The entrenched perception of zinc as a metal forever in the sink is due to China's rise from modest zinc supply in 1980 to the world's biggest supplier today. The belief exists that any zinc price rise will soon enough be crushed by new supply from China, which is why new large, long term zinc mines have not been developed. The problem with this attitude is that Chinese zinc supply comes from many small mines, many of them big polluters outright and often shipping dirty concentrates to very polluting smelters. These inefficient small scale mines are likely approaching the end of their lives, which could be accelerated if China's central government gets serious about its water pollution problem. In a post-Trump election climate where mining executives are drooling about Trump's promise to make America great again by gutting the EPA, it is understandable that there is a lack of appreciation for the path that China is forging in its quest to slip past America's retreat from greatness..
Robert Friedland has a powerful quote: "The combination of corruption and pollution is toxic to the future of the Communist Party". Beijing has lost control of the local government level responsible for environmental protection but it stands to receive the brunt of the Chinese public's wrath. Air pollution is the culprit that democratically afflicts everybody directly, but water pollution affects everybody indirectly by working its way into the food supply courtesy of river water irrigation. Beijing is installing water quality monitoring stations around 350 cities whose results will be published in an effort to shame local officials into tracking down and shutting down local polluters. Heavy metals such as cadmium are a byproduct of zinc-lead mining and smelting. There will be plenty of small scale actions local officials can mount to demonstrate that they are doing something about the water pollution problem. It will not happen overnight, but China's zinc supply is set to decline. Even as Donald Trump threatens to shut down America's Environmental Protection Agency, China's own environmental awakening is underway. Russia, which has less than half the population of the United States and already has in place a police state to enforce the will from upstairs, does not have to worry about an environmental awakening. In fact, it is in Russia's interest to support America's anti-mining lobby in order to foster continued American dependence on raw material imports, especially if Trump pursues the collapse of globalized trade in downstream products. But this is where the location of the West Desert deposit in the state of Utah is important; all the rest of America may end up bogged down in ideological confusion, but this Mormom stronghold has a certain immunity to external manipulations.
The potential for higher long term zinc prices is supported by natural zinc supply depletion, supply reduction through pollution controls, and aggregate demand growth if an infrastructure boom does materialize. On top of that, a protectionist trade policy by the United States against China could backfire as China curtails the export of raw materials in order to preserve its availability for domestic manufacturers (in the case of zinc where China is a net importer of concentrates this applies only to downstream fabricated components which America's manufacturing sector currently imports for assembly of finished goods). The biggest wild card is North Korea's Kim Jong Un about whose intercontinental ballistic missile plans China is unwilling to do anything about; once Californians have reason to fear a nuclear bomb lobbed from North Korea there will be a push for drastic action that could stop the shipment of all goods from China. This would affect prices for many metals that have a dominant supply from Asia, but zinc is a better metal bet because its upside does not hinge alone on a catastrophic failure of the relationship between the United States and China. It has been tough keeping InZinc a Spec Value Hunter buy year after year without any reward, but 2017 is shaping up to be the year that InZinc definitively rises from the sink. I expect InZinc to unveil plans for a major exploration program that makes or breaks the potential at West Desert for a substantially bigger resource, and in a worst case scenario sets the stage for a prefeasibility study aimed at fast-tracking development of West Desert in the context of a zinc bull market and a mine-firendly state.
*JK owns shares in InZinc Mining Ltd