Will Potential Nyrstar Zinc Cuts Stoke Price Optimism?

On Monday, debt-laden Nyrstar (EBR:NYR) announced that Trafigura will purchase up to half of the shares it’s selling in a rights offering for 250 to 275 million euros. The news has raised red flags for those concerned that Trafigura is seeking to gain control of Nyrstar. 

As the Financial Times explains, Trafigura, a multinational commodities trading company, amassed a 20-percent stake in Nyrstar last year and “pushed successfully to get two directors appointed to its board.” The rights offering could raise Trafigura’s interest in Nyrstar to 30 percent, and will likely attract further scrutiny from the European Commission, which is already looking at whether Trafigura “has taken de facto control of the zinc company.”

However, Bill Scotting, CEO of Nyrstar, has denied that is happening, commenting, “[t]his is not a takeover by stealth. Trafigura is a supportive shareholder.”

Market watchers too seem unconcerned about the growing relationship between Nyrstar and Trafigura, and have instead latched onto other aspects of Nyrstar’s Monday release. In particular, the following statement from the company has raised eyebrows:

Following a detailed review of the performance, near term cash needs, medium term capital requirements and exploration potential of the Mining segment, Nyrstar management is now pursuing strategic alternatives for its mining assets, individually and as a portfolio, which may include additional suspensions, asset disposals and a full exit from mining and has appointed financial advisors to assist with that process. Where appropriate, offtake agreements will be put in place to maintain Nyrstar’s access to concentrates.

Nyrstar will consider further suspensions of its mines if the current depressed commodity price environment continues; such suspensions would potentially reduce global supply by up to a further 400,000 tonnes of zinc concentrate (in addition to the 100,000 tonnes removed by the Myra Falls and Campo Morado suspensions).

Many have honed in on the fact that Nyrstar is considering “a full exit from mining,” while those in the zinc space are taking heart from the news that the company is looking at suspensions that could take 400,000 tonnes of zinc concentrate off the market.

Hopes about production cuts in the zinc space have been high since Glencore’s (LSE:GLEN) October announcement that it will be reducing its annual production of contained zinc metal by 500,000 tonnes across its operations in Australia, South American and Kazakhstan — that’s a third of the company’s output and about 4 percent of global supply.

That news was welcome given recent concerns about high LME zinc stocks, and it prompted a dramatic zinc price jump — the metal saw a 12.5-percent rise and achieved its largest one-day rise in over a decade. However, as the chart below shows, in the month since Glencore announced its cuts, the base metal has given up those gains:

Image courtesy of Kitco.

Market participants have been quick to blame the fall on the fact that other miners did not follow Glencore’s lead in cutting zinc output. As analyst INTL FCStone analyst Edward Meir told Reuters recently, “[i]nvestors soured so quickly on the Glencore zinc announcement. It was … feared that other producers could now step in to fill the Glencore void.”

As yet it’s too soon to tell whether Nyrstar’s announcement will alleviate those concerns, and there’s been no uptick in the zinc price since Nyrstar’s Monday announcement — likely because the miner has not actually made any cuts at this point. Nevertheless, investors will no doubt be watching the space for further news from Nyrstar and other zinc producers.

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.