Matt Badiali didn’t disappear from the newsletter firmament for very long –for many years he was the name behind Stansberry’s Resource Report (which was also called the Oil Report for a while), but he disappeared from that masthead a little while back… only to reappear in essentially the same role at Banyan Hill Publishing (which, like Stansberry, is part of the Agora family of publishers), helming an entry-level natural resources investment advisory.
This time around it’s called Real Wealth Strategist, and they’ve launched quickly — Badiali’s hiring was announced in early March, and here they are already with a superheated hype-fest of an ad campaign to recruit his first wave of subscribers.
This “Magic Metal” pitch that readers are asking about today is my favorite kind of ad, because they keep the poker face throughout — they don’t give in and say that, “OK, the ‘magic metal’ is actually magnesium” (or whatever it is), they keep the “secret” all the way to the end, so you get to double up on your voyage of discovery: First we have to figure out what the “magic metal” is, then we’ll move on to naming the one company they hint at as being the best investment for the “magic.” In their words, “This one deposit is so big it could solve the shortage crisis.”
So… step one. What’s the “magic metal?” Ready?
“It’s not silver, platinum or any other precious metal.
“It’s not aluminum, nickel, iron ore or lithium, either.
“In short, it’s a ‘magical’ metal with unheard of superpowers that other metals simply don’t have.
“For example, it doesn’t rust … it’s not flammable … it’s 100% recyclable.”
And it apparently has lots of uses:
“It’s in everything from airplanes to automobiles … batteries to boats … cosmetics to computers … surgical tools to smartphones … tractors to turbines…
It even has miraculous medicinal powers.
“Scientists are using it to fight diabetes, depression, low blood pressure, hair loss and fatigue. It aids in weight loss, improves vision and it can even protect you against many kinds of cancer.
“Hence, this “magical” metal is worth billions, maybe even trillions, to pharmaceutical companies like Pfizer, Merck, Johnson & Johnson and Bristol-Myers Squibb, to name a few.
“Recent World Health Organization statistics show that 800,000 innocent victims will get a second chance at life every year with access to this resource.”
And, of course, there’s a BIG SCARY SHORTAGE COMING!
“… there’s one giant, ugly problem.
“… demand is surging as America’s biggest companies scramble to secure more of this ‘magic’ metal.
“… no new major deposits of this metal have been discovered since 1990.
That’s why there is a massive supply and demand gap.”
We also get a few specifics on that gap, which should help to narrow it down a bit more:
“In 2016, demand exceeded the mined supply by 1.4 million metric tons.
“In 4 years, that shortage will surge to 4 million tons.
“The United States Geological Survey recently concluded that there’s only enough reserves of this metal left to last 15 more years. That’s especially frightening when you consider demand could outpace supply by as much as 900%.
“That’s why experts are warning that we are about to see the largest shortage in decades … and that the ‘world is running out.'”
And then, the patently ridiculous:
“Mark my words, this metal will become the most fought-over, and sought-after, commodity on the planet. More than land, more than water, more than gold and more than oil.
“Wars will be fought over it. Lives will be lost.”
Really? We can’t just stick with, “prices will go up?” We have to go to wars and bloodshed? OK, fine, I guess humans will fight over everything… but if I ever finish that time machine and get to jump forward to 2050, I’m guessing I won’t be seeing an entry in the history books about the Great Zinc Wars of the 2020s.
Yes, the “Magic Metal” is zinc. Good for that extra sunscreen you put on your nose, good for galvanizing steel to fight rust, and, yes, an important mineral in the body — though those 800,000 “innocent victims” in the teaser pitch are not folks who are cured of some disease by zinc… they’re people who have zinc deficiencies, almost exclusively because they don’t eat zinc-rich foods like meat, fish, dairy or whole grains. That’s not a problem that really impacts the mining of zinc, zinc supplements are not a major part of the tonnage demand for the mineral, though it is, of course, certainly serious — especially for those who live with food insecurity. Pharmaceutical demand is maybe a one or two percent slice of the pie when it comes to zinc demand, the primary uses are galvanizing, which accounts for about half the zinc demand, brass (and bronze, to a lesser degree) and die casting, which together make up about a third of demand, and then chemicals and paint and miscellaneous industrial demand make up perhaps 15% of the pie, spread among lots of small markets (there are some primary zinc products, too, so there’s even a small amount of demand for sheets and rods of zinc, etc.)
So the shorthand way of saying that is, “zinc demand is overwhelmingly an industrial story.” If we have big infrastructure investments and lots of construction and economic activity, there’s more zinc demand… mostly because of galvanizing.
And yes, those shortfalls in the warehouses of the London Metals Exchange are real — as are the pricing increases seen recently. Zinc is still well short of where it was in the 2005-2007 peak, when China was exploding with steel demand and getting everyone excited, but it has certainly been rising… this chart is from Infomine:
And Badiali says that the shortage is going to get worse:
“And I can tell you with absolute certainty that this shortage is getting worse; there’s no way to turn the supply spigot on. It’s gone from 1.2 million tons to less than 480,000 tons. That’s a 50% drop in the last 4 years.
“The price of this “magic” metal is up over 60% in the last year. But with its supply gap surging to over 4 million tons in the next 4 years as demand continues to increase … this ‘magic’ metal’s bull market has a long way to go.”
I have no idea whether the LME warehouses accurately reflect global stockpiles of zinc, but those warehouses are getting to have a bit of an echo in them at this point — here’s the five year chart from Kitco of the warehouse stocks:
And, in Badiali’s words (in case you want some more confirmation that this is zinc):
“50% of ALL the ‘magic’ metal mined each year is used in galvanizing … the process used to coat iron and steel to prevent it from rusting.
“So, this ‘magic’ metal is in every bolt, nail, hammer, bridge, pipe, train and piece of industrial machinery needed for this $1 trillion infrastructure plan to move forward.”
So… part one down, what is the actual investment being hinted at? Let’s move on to those clues…
“… a small group of exploration geologists have struck the mother lode. It’s the first major deposit of this scarce metal discovered in the decades, and perhaps the last. This one deposit is so big it could solve the shortage crisis.
“This discovery could be worth hundreds of billions…
“Right now, there is a limited time to invest in the company that discovered this deposit for as little as $50 … and give your money the chance to grow as much as 30-fold.”
OK… what other clues do we get about this company?
Well, we’re told that it’s a “$2 billion North American company.” So that should ring a few alarm bells… if you’re going to grow your money 30-fold from this one, that means you think this company — presumably because of some zinc mine — is going to grow to be worth $60 billion. That’s not impossible, but it would make this one of the largest miners in the world (only BHP Billiton and Rio Tinto are larger than that among the corps of publicly traded miners). So we should probably cool our jets a little bit at this point and downgrade our expectations — it’s a lot easier for a little $20 million junior explorer with a surprisingly fantastic discovery to grow in value by 30X (which would bring the market cap just up to $600 million, which isn’t so huge), than it is for a real operating miner that already has a $2 billion valuation to show that kind of explosive growth.
What else do we learn about this company?
“… at the forefront of the battle to secure supplies is this innovative $2 billion mining firm that’s about to leapfrog its way onto the scene in a big way.
“This firm has aggressive plans to increase excavation of this “magic” metal at its mine located next to the lake beyond these trees … and it’s already begun ramping up production.”
OK, so if they’re “ramping up production” this is not a brand new discovery — that means someone probably identified the zinc (or whatever other metal they’re also finding in the mine) at least several years ago… building a mine isn’t quick or easy.
Other clues? We get some hints about the major owners:
“In the last few months alone, the Vanguard Group, TD Asset Management, Templeton and GMT Capital have invested hundreds of millions of dollars in this company.”
“… this company may be the ONLY company in the world with access to a deposit of this magnitude.”
And, finally, one last little burst of clues for us:
“While most of the world’s largest deposits of this ‘magic’ metal are in Australia, India, Mexico, Peru and Sweden … this mining outfit is in an unlikely place … just north of the U.S. border.
“This Canadian-based mining firm was formed over 90 years ago. Its new CEO is a 30-year mining pioneer, and he’s using his industry contacts to bring in the world’s best geologists and the best mechanical, metallurgical, and mining engineers in the world … and I am confident this firm will give investors the opportunity to turn every $1,000 into $31,130 … likely more.”
But wait! There’s also a little throwaway clue on the actual order form:
“The surest way to ‘magic’ metal riches is to invest in the mining pioneer sitting on 22 million tons of recoverable reserves of gold, silver, and, of course, this “magic” metal in its mine.
“As this shortage continues to spiral out of control like experts forecast it will, the profits for early investors will be through the roof.”
And we get some photos of the mine operations that will help to confirm the Thinkolator’s answers… so I can tell you, dearest readers, that this “Magic” Metal miner is… Hudbay Minerals (HBM in both Toronto and NY).
Hudbay has operations in both Peru and Canada, but the mine being teased here is their operation in Manitoba — the zinc “discovery” is presumably a reference to what is now the Lalor mine, a zinc deposit found in 2007, though their long-producing 777 mine is also a big zinc producer (777 is closing in on the end of its mine life in 2020, though they might find more reserves to extend that… Lalor, which is a couple hundred kilometers away, just got to commercial production a couple years ago and is expanding zinc production). The photos that Badiali borrows for his presentation are, at least in one case I can confirm, of the 777 mine.
You can see Hudbay’s “key facts” on the Lalor mine here — they treat it as a primary zinc mine, with the copper and gold “byproduct credits” meaning that the cash cost per pound of zinc is negative seven cents. If they produce 59,000 tonnes of zinc per year, as planned, then that means it’s essentially all profit on a cash basis (meaning they’re not accounting for the capital expenses, probably). Zinc is at about $1.20/pound now, and a metric tonne is about 2,200 pounds, so that means the cash flow potential from Lalor might be a bit over $155 million. Assuming I did my math properly.
What will that mean for Hudbay? Well, maybe not all that much — their revenue is coming in at about $1.5 billion/year on an annualized basis right now. $150 million is still a lot, since margins are generally not so great for mining — operating cash flow for the past three months for the whole copmany, including Lalor and 777 but also their Peruvian mines, was only about $80 million. That’s with 26,000 tonnes of zinc sold in the quarter, which is close to their plan for 777 and Lalor (together those would be, according to the basic facts on the website, producing about 114,000 tonnes/year), so there’s not some magical exponential increase in zinc production coming — they are trying to ramp up zinc production by a meaningful amount.
Hudbay does have some analyst coverage, and they predict about 90 cents in earnings this year, followed by $1.05 in 2018 and $1.54 in 2019. Presumably that’s based on zinc to some degree, though I don’t know what prices the analysts use. It’s a solid company, with the primary weight on their shoulders being the aging of the 777 mine… if that mine really shuts down in 2020 and they don’t find more local reserves, their revenues will take a big hit in the early part of the next decade.
And yes, Hudbay has been around and producing for a very long time. If you’re checking on those other clues, they did just get a new CEO, internally promoted, in 2016, and he is a 30-year mining veteran — that’s Alan Hair… and Lalor (in Snow Lake) and 777 (in Flin Flon) are both “just north of the U.S. border,” as long as you use the term “just north” like the folks who are used to rural Western living and might drive for a couple hours to get groceries… they’re roughly in the middle of Manitoba if you’re going from South to North, about 500 miles from the North Dakota border.
Will Hudbay soar on a rise in zinc prices? Well, it would probably help a lot. Copper and gold and silver are all important as well, with copper probably providing at least as much leverage as zinc when it comes to Hudbay’s revenues… so really, it’s a pretty solid exposure to basic metals, and that means it’s pretty solid exposure to global infrastructure spending, particularly in China. If that picks up, zinc and copper prices will rise and Hudbay’s earnings should rise quickly, which should boost the share price. If China sinks into recession and copper falls a dollar and zinc stays steady, things will be much less pretty.
And no, I don’t see any meaningful way for them to grow by 3,000% — unless you’re talking about a 20-year period that includes them making a bunch more discoveries along the way. Mining is not scalable, you’ve got to have the deposits and you’ve got to produce them, which means moving tonnes and tonnes of rock, and it takes a long time to develop and improve mines. If copper rises nicely and zinc goes to $3 a pound, though, their earnings could easily double or triple, and as long as people don’t start to panic about 777 closing down that ought to boost the share price considerably.
I’m no expert on Hudbay, that’s just what I can garner from an hour or two with their presentations this afternoon. If you’ve got some perspective on Hudbay, or on zinc, or on whatever else, feel free to unleash it upon us with a comment below. Thanks!