It seems to be an accelerating pattern these days. Mines closing around the world due to uneconomic conditions.
We got news of another high-profile shutdown last week. The Perkoa zinc open pit in Burkina Faso--run by base metal major GlencoreXstrata, and Australian junior developer Blackthorn Resources.
The producers are apparently shutting down open cut operations here due to low prices. Just months after the project shipped its first zinc concentrate.
Blackthorn noted that higher-grade underground operations at Perkoa will continue. But nonetheless, this represents a significant impairment of production here. The company said that current zinc prices are creating "unacceptable" financial results from the open pit operations.
And it's not just production that's being affected by low prices. News of the shutdown comes after GlencoreXstrata downgraded Perkoa's in-ground ore reserves--reducing the size of the potential mining operation here.
All of this news illustrates a central challenge for mining investors today. Finding ways to position in emerging metals stories without getting burned in the short-term.
Zinc is definitely one of those sectors. The outlook for the metal is almost unanimously bullish. With global closures of several key mines expected to make the market increasingly tight.
And yet despite positive sentiment, zinc prices continue to be flatlined around $0.90/lb. Apparently creating great difficulty for many of the world's existing mining operations. Not helped by equally lower prices for by-products like lead and silver from mines like Perkoa.
It's a chicken-and-egg problem. Do you wait until metals prices head higher, creating a better environment for miners? But risk stock prices having already moved by the time you step in?
Or do you position now, at the risk that your chosen producer may go downward before it heads higher?
This might just be the perfect environment for another strategy: buy exploration and development projects. They don't suffer from debt and operational issues. And they may well come into demand as forward-looking producers and consumers push for the future--planning their supply logistics for the years to come.
The exploration sector is still depressed enough that such projects can be bought at good valuations. It might be time to take a look at the best ones.
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Here's to plotting the future,
Dave Forest
