Zinc Again

The collapse in zinc prices last year lead to some mining companies closing their zinc mines. Yesterday, Reuters reported that Hudbay Minerals (TSX: HBM.TO) was considering reopening a zinc mine, "HudBay eyeing restart of Chisel mine-CEO":

TORONTO, June 9 (Reuters) - HudBay Minerals (HBM.TO) could restart its Chisel North zinc mine in Manitoba if the metal's price increase another 10 or 15 percent from its current level, the company's chief executive said on Tuesday.

HudBay shut Chisel North and its Balmat zinc mine in New York last year after zinc prices fell below 50 cents a pound late last year, after topping $2 a pound in 2006.

Cash zinc MZN0 was around 71 cents a pound on Tuesday.

"We think a 10 to 15 percent increase from that price and we will be looking seriously of reopening Chisel, which can be done very quickly indeed," Jones said at a mining conference in Toronto.

That suggests a zinc price of 78 cents to 82 cents a pound would be needed to consider reopening the mine.

Hudbay was prudent enough to have accumulated large war chest of net cash (equal to about a third of its market cap at the time) by the time commodity prices collapsed last year, so it has been able to weather the downturn.

The (modest, so far) rebound in zinc prices this year may be another data point in support of James Kynge's "China Continental" thesis.

Applying the Altman Z-Score Model to Mining Companies

Tools and ideas for short sellers, including an automated calculator and screener based on the Altman models.

In a couple of recent posts ("Using the Altman Z-Score Model to Calculate the Risk of a Company Going Bankrupt" and "Applying the Altman Z-Score Model to a Non-Manufacturing Company") we discussed the use of the original, five variable model for manufacturers and the modified model for non-manufacturers. Recall that the modified Altman Z-score model for non-manufacturers excludes the fifth variable in the original model (sales/total assets), to account for different levels of capital intensiveness among non-manufacturers.

Since mining companies, like manufacturers, are also capital intensive, I asked Dr. Altman via e-mail which of his models would be best for miners. His response:

Try both, but probably the 4 variable model is more appropriate.

The photo above, of a copper smelter, is from the website of the Canadian mining company Hudbay Minerals.

When Stocks Decline After You Buy Them

Sometimes when stocks drop after you've bought them it's because you've made a mistake: you bought stock in a troubled company (e.g., OPMR), or you bought stock in a good company at the wrong time after ignoring the relevant macro trend (e.g., BBSI), or you bought stock in a good company but at the wrong price (e.g., at a too-high multiple).

Stocks can also decline after you buy them even if you've made none of those mistakes. A recent example for me is Exxon Mobil (NYSE: XOM). When I bought Exxon, it was benefiting from the relevant macro trend (the secular bull market in energy), and it was trading at an enterprise value/forward earnings multiple of about 9x. I tend to view an EV/forward earnings multiple in the single digits as a conservative price for stock, considering that market average P/Es declined to 10 at the end of the last secular range-bound market in stocks (see graph above, via Vitaliy Katsenelson; for more info on his thesis, see this post, A Secular Range-Bound Market? Vitaliy Katsenelson's Thesis). I purchased XOM at $86.69, and today it is trading at $78.33, partly due to the recent correction in oil prices, which has put downward pressure on a lot of oil stocks (e.g., the oil royalty trust I mentioned that had hit a 52-week high of $107 per share in June, BP Prudhoe Bay, closed at $81.89 today. Fortunately, my average cost on this one is under $60 per share).

It's never fun to watch stocks drop after you buy them, but when those stocks belong to well-run, profitable companies such as Exxon¹, that have good prospects, are trading at cheap valuations, and have virtually bulletproof balance sheets, I'm not fazed. I'm content to hold these sorts of stocks, and in some cases would consider adding to them. I'm a little less sanguine when more speculative stocks I own decline.

¹Note that Exxon's mega cap size isn't what gives me confidence in the company. I have similar confidence in other, much smaller, companies thats stocks have declined since I bought them, e.g., Hudbay Minerals (TSX: HBM.TO), and Heidrick & Struggles² (Nasdaq: HSII) that are also profitable, trade at cheap valuations, have virtually bulletproof balance sheets, etc.

²Heidrick & Struggles, incidentally, reported a solid second quarter today, beating consensus earnings estimates by 6 cents.