With a number of substantial headwinds impacting the commodities sector as a whole in recent months, it can be difficult for many investors to make a bull case for a recovery, given the relative lack of drivers for many sectors like metals, mining, agriculture, oil and gas, etc.
In this article, I’m going to discuss metals in particular, with zinc producers such as Lundin Mining (TSX:LUN) as an example to discuss where I see the long-term outlook for this sector.
Zinc is an interesting metal, as its use is widely considered to be similar to that of copper- primarily an industrial metal. This unique characteristic means that the price of zinc tends to ebb and flow alongside global growth expectations, making zinc prices one of the statistics used to determine market sentiment for growth, as financial markets tend to price in expectations for growth much more accurately in base metals and commodities than in other sectors of equity markets or bond markets.
On that note, it may not be surprising for many investors to hear zinc prices remain depressed, and continue to be pushed down as expectations around global growth wane following recent shocks like the coronavirus and other indicators such as yield curves which remain severely inverted in Canada and many countries around the world.
I expect these macro issues to continue to provide downward pressure on commodity prices and therefore the stock prices and valuations of companies like Lundin until markets correct. That being said, post-correction companies like Lundin could outperform as sentiment turns bullish on commodities, a trend which typically takes place in part due to decreased investor risk tolerance, increasing the value of low-correlation sectors such as commodities.
Timing the markets is a difficult (or impossible) thing to do, so buying a company like Lundin today may turn out to be more risky than other available hedges.
Invest wisely, my friends.