Looking back:Turnabout coming, Zinc producer says

Breakwater suffers 'vagaries of the marketplace'
Turnabout coming, Zinc producer says

Peter Koven, Financial Post
Published: Friday, November 23, 2007

George Pirie can only watch as investors push his stock lower and lower amid a crumbling zinc market. But he is confident the selling won't last.

He is chief executive of Breakwater Resources Ltd., a Toronto-based metal producer that has been hit as hard as almost anyone by the sinking zinc price which has plunged more than 20% in the past 30 days, and 50% this year. Breakwater shares closed at $1.65 yesterday, and are down by more than half since mid-October because of falling prices and operational problems.

"Because zinc is ubiquitous and used everywhere, it's a bit of the 'canary in the gold mine' type of vehicle," Mr. Pirie said in an interview. "It'll be the first to suffer the consequences of a nervous market."

Zinc prices are falling because the global supply picture is improving, with lots of projects coming online or ramping up production. While there are no consistent numbers available, institutions have forecast surpluses of hundreds of thousands of tons of refined zinc in the next three years. Increasing supply, along with general market turbulence, has pushed the zinc price down to US$1 a pound, after it hit highs above US$2 early this year.

Zinc industry executives see this as a temporary setback.

"We're going through a bit of a weak period here because there are overlays on oncoming production over the next year or two. But at the end of the day I think zinc prices will strengthen over the next three to four months," said Colin Benner, vice-chairman of Lundin Mining Corp. and former CEO of Breakwater.

The tricky thing about the zinc market, experts said, is it is extremely difficult to follow. While nickel and copper are produced by large companies that provide a lot of information, the zinc market has more smaller players like Breakwater. For largest players, zinc is essentially a byproduct. And the biggest producing country is China, which does not always provide the most reliable numbers.

With less public information available, zinc can be more susceptible to what Mr. Pirie calls "the vagaries of the marketplace. It lends itself to huge speculation with hedge funds. And they can take massive short positions and drive the price down where the fundamentals don't support it."

One reason he feels the market could quickly turn around is China. The government is talking about eliminating a 5% export rebate on certain kinds of refined zinc and slapping on an export tax in its place, a move that would slow growth in a polluting industry. The Chinese have made a similar intervention in the lead industry, and prices soared afterwards.

The other thing that encourages industry players is the demand picture is still looking strong. Canaccord Adams is forecasting consumption growth of 4.1%, 4.2%, and 5.4% in the next three years.

pkoven@nationalpost.com

And This

Analyst says this may be ideal time to buy copper and zinc stocks

Peter Koven, Financial Post
Published: Saturday, December 01, 2007

With copper and zinc prices under pressure and the equities selling off dramatically, this could be an ideal time to increase exposure to those stocks, according to UBS analyst Tony Lesiak.

He points out that the intermediate copper and zinc producers in the UBS coverage universe are down about 19% in the past month. The primarily zinc equities like Hud-Bay Minerals Inc. and Breakwater Resources Ltd. have been particularly hard hit.

"We find the current valuation metrics for the highly zinc levered names (Breakwater) and (HudBay) to be particularly attractive at current levels," he wrote in a note to clients. "These equities appear oversold relative to the move in the commodity and appear to be discounting zinc prices significantly below current spot levels."

He also points out that takeover activity in this space remains a strong possibility as the base metal companies stockpile cash. Mr. Lesiak estimates that the base-metal firms UBS covers will hold an estimated 22% of their current market cap in cash at the end of next year. HudBay is the standout with a whopping 42%, according to his calculations.

Mr. Lesiak also revised his estimates on a number of stocks to reflect changes in the forward curve pricing for zinc, copper, nickel and gold.

He cut his target on Hud-Bay (HBM/TSX) from $30.50 to $28 a share, and Breakwater (BWR/TSX) was lowered from $3.25 to $2.50 a share.

On Friday, HudBay shares closed at $21.50, while Breakwater shares ended the week trading at $1.79.

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