Breakwater suffers 'vagaries of the marketplace' Turnabout coming, Zinc producer says Peter Koven, Financial Post Published: Friday, November 23, 2007 George Pirie can only watch as investors push his stock lower and lower amid a crumbling zinc market. But he is confident the selling won't last. He is chief executive of Breakwater Resources Ltd., a Toronto-based metal producer that has been hit as hard as almost anyone by the sinking zinc price which has plunged more than 20% in the past 30 days, and 50% this year. Breakwater shares closed at $1.65 yesterday, and are down by more than half since mid-October because of falling prices and operational problems. "Because zinc is ubiquitous and used everywhere, it's a bit of the 'canary in the gold mine' type of vehicle," Mr. Pirie said in an interview. "It'll be the first to suffer the consequences of a nervous market." Zinc prices are falling because the global supply picture is improving, with lots of projects coming online or ramping up production. While there are no consistent numbers available, institutions have forecast surpluses of hundreds of thousands of tons of refined zinc in the next three years. Increasing supply, along with general market turbulence, has pushed the zinc price down to US$1 a pound, after it hit highs above US$2 early this year. Zinc industry executives see this as a temporary setback. "We're going through a bit of a weak period here because there are overlays on oncoming production over the next year or two. But at the end of the day I think zinc prices will strengthen over the next three to four months," said Colin Benner, vice-chairman of Lundin Mining Corp. and former CEO of Breakwater. The tricky thing about the zinc market, experts said, is it is extremely difficult to follow. While nickel and copper are produced by large companies that provide a lot of information, the zinc market has more smaller players like Breakwater. For largest players, zinc is essentially a byproduct. And the biggest producing country is China, which does not always provide the most reliable numbers. With less public information available, zinc can be more susceptible to what Mr. Pirie calls "the vagaries of the marketplace. It lends itself to huge speculation with hedge funds. And they can take massive short positions and drive the price down where the fundamentals don't support it." One reason he feels the market could quickly turn around is China. The government is talking about eliminating a 5% export rebate on certain kinds of refined zinc and slapping on an export tax in its place, a move that would slow growth in a polluting industry. The Chinese have made a similar intervention in the lead industry, and prices soared afterwards. The other thing that encourages industry players is the demand picture is still looking strong. Canaccord Adams is forecasting consumption growth of 4.1%, 4.2%, and 5.4% in the next three years. pkoven@nationalpost.com