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With copper and oil breaking down from recent support levels, investors have been fleeing the commodities sector recently. A pause in the downtrend in LME zinc inventories has some investors fearing that zinc supply has permanently increased to meet demand, though we explained in a recent update why we believe two short-term supply surges have caused this pause . The biggest zinc miner in the world, Teck Cominco (TCK) is down over 20% from its December 15 high, and many other zinc miners are also down significantly, including our favorite, Metalline Mining (MMG), down over 29% in the same 3-week period.

Canadian investment banking firm CIBC World Markets published a report yesterday titled "Base Metal Equities Correct -- Correction Setting up Buying Opportunity." CIBC views the current selloff in base metals mining stocks as a buying opportunity for the long term, particularly for zinc stocks. A table from this report shows why we’re so bullish on zinc miners longer term and why CIBC says, "our preferred equity exposure remains focused on zinc related names":

Exhibit 7. Base Case Supply/demand Summary

(000's tonnes)    2005  2006E   2007E  2008E 2009E  2010E
Aluminium         197    (76)     36    947  1,377  1,642
Copper           (330)    (4)     69    104    714    478
Nickel             17    (60)    (3)    (14)    24     86
Zinc             (538)  (355)   (275)   (96)    47   (380)

With LME Zinc inventories at just 90,000 tonnes at the start of 2007, we don't see how the zinc market can handle a supply deficit of over 700,000 tonnes over the next 4 years. We believe zinc prices will have to move up significantly in order to curb demand so above ground zinc doesn't run out completely. Since zinc is such a minor part of end products and thus is very price insensitive, zinc prices will likely have to go far higher than any analysts project to curb demand enough.

From the action in MMG yesterday it looks like institutions are buying what they can at around 3 and under. After being down about 9% on the day, MMG recovered those losses and closed up 4 cents at 3.07, an over 11% move up from the low and the second day in a row that buyers came in when the stock dipped under 3. Often a big reversal like that after weeks of sharp correction marks a bottom. 3 is a logical support area, as the 200-day moving average is around there and it’s the 50% retrace of the fall rally.

One gold site, http://www.goldstockbull.com/, lists MMG as one of their top stock picks on their current lead story and says they’re buying any dips below $3. It looks like they’re not the only ones.

Another gold site calls zinc "The Most Undervalued Metal on the Market Today" in a detailed report: http://www.goldworld.com/reports/zinc_report_gw.pdf.

We’re not sure whether the correction is over for MMG yet, but it remains our favorite stock for the long term and our top pick for 2007.