Glencore A Buy At This Wall Street Firm Because Of...Zinc?

• Glencore PLC GLEN shares have surged by 41.67 percent over the last five trading days, from a low of $100.55 on October 5.
• Liam Fitzpatrick of Credit Suisse has maintained an Outperform rating on the company, with a price target of £1.75.
• Glencore has announced a huge reduction in zinc production, which Fitzpatrick believes would lead to a reduction in global exchange stockpiles, which usually leads to a significant rise in zinc prices.

According to the Credit Suisse report, “Glencore has announced a 500 ktpa reduction to mine zinc production,” which equates to 3.5 percent of the global demand.

“As the world's largest producer of zinc this is a major statement and far more material to the global zinc market than the recent copper suspensions” Fitzpatrick explained, adding that these cuts could lead to large deficit in the market.

This in turn could bring the global exchange stockpiles to less than two weeks, “a level that typically leads to materially higher zinc prices.” In fact, Fitzpatrick believes that prices would rally back to over $2,000/t before Glencore resumes production.

Zinc is the company’s third largest segment, after copper and coal. While guidance is at present limited, Fitzpatrick expects that at the current prices, the 2016 spot EBITDA would decline by c$350 million “but with a much smaller cash flow reduction.”

“The suspension includes both profitable and loss making mines – a bold move that will require a price reaction to be successful; to offset the fall in EBITDA, zinc prices will need to rise to c$1,900/oz,” Fitzpatrick added.