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Regal Petroleum shares tick up after Ukrainian success
Regal Petroleum shares tick up after Ukrainian success
- Shares in oil and gas explorer Regal Petroleum received a boost after the company announced that production at its SV-58 Ukrainian well had doubled since January.
- The well now has an output of 800 barrels of oil equivalent per day (boepd). Regal’s total output from the Ukraine is 2,537 boepd.
Within the next five or six years, I expect us to see a huge upsurge in demand for the metal. Today I’m going to explain why that is.
Talk about zinc and its sister metal, lead, and the eyes of the average fund manager will begin to glaze over. But I think these fund managers are missing a big story – one that the shrewd investor can turn to his advantage.
You see, year by year, the level of supply from the world’s zinc mines is dropping. According to analysts at Credit Suisse, this year, supply and demand for zinc will be pretty well balanced. But cast forward to 2016 and this balance is going to disappear. Credit Suisse forecasts that global demand will be 16.6kts. But the world’s mines will be able to produce only 10.2kts.
This is clearly neither a comfortable nor a sustainable position for the industry. Something is going to have to give. So what’s going to happen?
The hidden hand of the free market is going to adjust the price upwards, choking off demand and encouraging supply. But Credit Suisse doubts whether this can be achieved without a rapid hike in the price of zinc.
Although the climate for mining ventures is recovering from the dark days of the credit crunch, mining executives are still reluctant to commit to new projects. As a result, says Credit Suisse, “CEOs will probably need to see a significant price spike to agree to fund them”.
The consumers that will turn the zinc industry upside-down
The supply story is easy to understand. Existing mines are gradually working out their resources and few new ones are planned. But the real cause of the future mismatch between supply and demand is the demand side. Not for the first time, the prime mover is going to be China.
The demand story for zinc, says Credit Suisse “could be the strongest of any commodity given its later-cycle nature of being driven by consumer, not infrastructure, demand. The developing world should see an exponential increase in galvanised steel capacity in the coming years as development moves from infrastructure to consumer”.
What this financial jargon amounts to is that the Chinese are buying cars and washing machines.
Today, although China uses a huge amount of steel – to the benefit of Australian iron ore and coal exporters – it does not use nearly as much zinc.
In fact, relative to the developed world, it uses about half as much zinc per ton of steel. This is because steel is typically used in construction projects. Zinc, on the other hand, is used for those essential consumer goods that only become commonplace when a society reaches a certain level of affluence.
For this reason, zinc is known as a ‘late-cycle’ metal, coming behind the steel used for the buildings and the copper used for the pipes.
China's demand for zinc
China has now reached a point where it has to have this late-cycle metal. Its population wants what the western world has had for years – fashion, education, decent homes, cars and washing machines. At whatever cost to the environment, zinc is set to be torn from the ground and used to give the world’s new middle classes the things they crave. This should be a powerful investment case.
The wild card is China’s domestic zinc industry. Can it increase its own supply?
While admitting that the extent of China’s own production capacity is “relatively opaque”, Credit Suisse doubts that it can. It describes the Chinese zinc industry as “small-scale and inefficient”, adding that “even if the total zinc production is substantial, this does not lend itself to an exponential increase in low-cost output”.
So the chances are that China’s appetite for zinc will be largely met by supplies from elsewhere.
The world, Credit Suisse believes, needs new zinc mines. By 2016 its analysis suggests that the world could need 6mt greater zinc mine capacity – that is a 60% increase in new mines. But this is unlikely to happen unless a big increase in the price of zinc encourages miners to believe that new projects are worthwhile.
As ways of playing this trend Credit Suisse names London-listed Xstrata (XTA) and two Toronto-listed plays – Lundin Mining (LUN) and HudBay Minerals (HBM).
But I have come across another company that is also poised to benefit. It is not an exploration play. It already has the zinc – and lead as well. As metal industry plays go, this one is about as straightforward as they come.
As you’ll find out if you pick up the latest issue of Red Hot Penny Shares, there are plenty of good reasons for thinking that shares in this company could fly.
Simply click here to find out how you can receive the latest issue today.
Good investing,
Tom Bulford
For The Penny Sleuth
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