Worldwide Zinc Crisis: How to Play it

The world is out of zinc...

I’m not joking. All industrial metals are scarce right now, but none are as scarce as zinc. There simply isn’t any available.

I learned this yesterday on the golf course. Chris Hancock specializes in Asia. He is the author of a publication called the Asia Strategy Report. We were paired together in a corporate golf outing. While contemplating my approach shot to the sixteenth green, Chris started talking about zinc...

Kohler Inc. is a huge manufacturing conglomerate, best known for making bathroom fittings like sinks, latrines and faucets. They coat their products with zinc to stop corrosion.

“I was just in Hong Kong,” Chris told me, “and while I was there, I met up with a friend of mine who’s the manager of several Kohler plants in China. He told me they’re having trouble with zinc... they can’t find it anywhere.”

Chris continued: “At first I didn’t pay much attention. But then at dinner that night, I sat next to a guy from my MBA class. He’s an investment banker with UBS Warburg. He says all the traders at Warburg are buying zinc like crazy and that the zinc price is about to run. But get this...

On the plane back from Shanghai, we start chatting to the lady in the seat next to us. It turns out she manages a plant in Chicago for one of the large office supply retailers. She said she’d been in China visiting factories. We told her we had been doing the same thing. We asked her how her trip went - if she’d had any problems sourcing materials for her plant – and she told us she did. She couldn’t get hold of any zinc!”

Last week I was at Merrill Lynch’s annual mining and metal conference, listening to CEOs pitch their companies to a room full of big money investors. I saw presentations by more than fifty companies. One company stood way out above the competition: Teck Cominco [Toronto: TEK.MVA]

Teck Cominco just happens to be the largest producer of zinc in the world!

Every cent the zinc price rises, Teck earns an extra ten million dollars in after-tax annual earnings. Right now zinc sells for $1.50/lb. So if zinc reaches $2.00/lb, that’s an extra $500 million for Teck’s shareholders each year.

There’s another reason to own Teck Cominco. They also mine coal, gold, lead, molybdenum and copper. They produce crude oil from their operation in the Alberta tar sands and hydroelectric power from a dam in British Columbia. They may soon be a major producer of nickel too if their bid for Inco is successful. Said another way:

Teck Cominco is a great way to play the bull market in general commodities.

Of course, Teck Cominco isn’t the only diversified resource stock you can choose from. The thing is - as the CEO showed in his presentation - Teck Cominco trades at roughly a 40% discount to the other giant diversified mining companies like BHP Billiton, Rio Tinto, and Anglo American when you compare EBITDA against enterprise value.

So not only is Teck Cominco a cheap way to buy a basket of commodities, there’s a worldwide zinc crisis and Teck Cominco is the largest producer on the planet.

DailyWealth advice: Buy Teck Cominco now. Hold it for 10 years. We’ll talk then...

Good Investing,

Tom Dyson