I liquidated ZINC today at $6.99, less than a week after I bought it for $7.90, for an excruciating 12% loss. I bought this position because of its compelling valuation, despite deteriorating technical indicators. This is what I deserve for disregarding the old adage about not catching a falling knife. Still, I had to follow my new money management rules, which means I sell a position if it falls more than 10%.
I will continue to watch this stock closely. Already, the smaller marginal zinc mines are closing, and the zinc inventory overhang may work itself off in the near future. Horsehead has one of the lowest cost structure among zinc producers, because it is paid to process EAF dust, whereas traditional zinc miners spend money on mining operations (this is partially offset by the fact that processing EAF dust is more energy-intensive than traditional zinc mining). I think management’s strategy of using hedges to ride through the troughs of the commodity cycle is brilliant. Chances are that I will re-establish my position in this stock at a higher price than where I liquidated it, but when the technical indicators are better. Selling the stock now is just insurance against the possibility that it could fall even lower, since it will take time to work off the zinc inventory even with lower zinc production, and it is unclear how zinc demand will adjust to the current US recession. Certainly, if ZINC falls below $6, I will back up the truck on the stock.
