Zinc the winner in Glencore deal

The major has agreed to buy 27% of the voting A shares for US$1.21 per share for a total of $531 million in cash and representing a premium of more than 40%. The deal would increase Glencore's stake in the A shares to 44.8%, though the ‘economic stake' is just 19%. Another offer for further voting shares at around the same price looks likely to go through and would give Glencore control of two-thirds of the company (economic interest: 28%).The attraction for Glencore is clear: Volcan's mix of openpit and underground mines last year churned out 273,000 tonnes of zinc and 22 million ounces of silver at operating costs of around $0.55 per pound. Just as important is the miner's eight-year reserve base or 19 years if resources across all categories are included. There is also an opportunity to bring costs down further and expand the exploration effort when the two companies' holdings in Peru are merged.It is a modest outlay for Glencore - investment bank RBC puts the purchase price at just 7% of projected 2018 cash flows and reckons the deal "hardly changes Glencore's financial position" - but it sends a strong message to the market around the future of the zinc price.Up more than 30% already this year to $3,323.50 per tonne, zinc has been a star performer in 2017. This has, of course, not been before time.If the major's zinc exposure continues to grow, one could argue the likelihood of the price sliding will recede proportionallyAnalysts had been predicting a significant move in zinc prices for half-a-decade before the bronzing agent even thought about shifting northward. This was based in the abundantly sound logic that a handful of the industry's major mines were winding down - namely Century in Australia and Lisheen in Ireland - and there was precious little coming through to fill the void.The problem was these old mines, Century in particular, simply refused to die, continuing operations well past their expected expiry dates (a smaller, low-grade operation is still being considered at Century, though its days as a market moving beast are past). Combined with zinc demand slowing in line with other commodities as China put the brakes on, and zinc's predicted bull run remained in a holding pattern.Aging supply did finally fall out of the market, though not fast enough to have an impact on a sluggish market, which prompted zinc producers, chiefly Glencore and Nyrstar, to show some supply-side discipline and switch off a big chunk of production. During that period, Glencore actually bought a handful of assets of its less healthy contemporary.Then, last year, as demand picked up slightly, the lack of supply finally produced the stimulus for the zinc price, which is up 88% since the first trading day in 2016.However, despite the strength of this basic supply-demand argument, several experts are predicting zinc's run will be short-lived, peaking over the next couple of years then falling away.Glencore's aggression in the zinc space suggests those views might be overly bearish for two reasons.First, as RBC points out, Glencore has more of a ready arsenal for major acquisitions than just about any other miner. That it is choosing to buy a dedicated zinc producer with material future reserves provides a window to its thinking.Second, Glencore investing into any commodity is a good sign for the ‘price sustainability' of that commodity. The major is, of course, in part a commodities trader and behaves as such with a far greater awareness of market sensitivities than its contemporaries.Glencore has already shown its willingness to protect zinc prices by shutting down supply and chief executive Ivan Glasenberg has been a vocal critic of other market-moving producers that continued to pump metal onto already-oversupplied stockpiles - think Rio Tinto, BHP, Vale and the iron ore market.Glencore's internal view on the zinc market and its own projections on where the price should be will therefore have a significant bearing on whether or not the price will come off as much as some are predicting. If the major's exposure continues to grow, one could argue the likelihood of the price sliding will recede proportionally.In addition to the growing influence of a market conscious supplier is the fact there still remains a lack of significant pipeline projects. MMG is looking to produce concentrate from Dugald River in Australia in the near term and Arizona Mining has its Hermosa development in the US that is slightly longer dated. But, while both these are sizeable developments the market would welcome, they will not fill the hole left by much larger operations, even if the supporting crew of junior developers are successful.Of course, Glencore might choose to fire up latent output and opt for volumes while prices are strong - the Volcan acquisition, after all, gives it access to lower-cost tonnes so provides further insulation against a lower price. Still, Glencore's track record for supply-side prudence and its inferred long-term plans in the zinc space provide a strong argument it, equally, might not. One major bank with impressive research power predicted late last year zinc would peak in 2019 at $2,800/t. It has gone higher and faster than that team of analysts expected by some margin. A major research group considered bullish on zinc predicted in May the price could hit $3,000/t by the December quarter. It hit that mark in the middle of the September quarter and has carried on.With a little supply-side help, there is every chance zinc could continue to defy expectations.

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