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Zinc set to go sky high as supplies deplete in medium term

Zinc's price is expected to rocket in the medium term, with several mining analysts going bullish on the metal as the market is expected to switch from surplus to deficit sometime in 2014.


Zinc's price is expected to rocket in the medium term, with several mining analysts going bullish on the metal as the market is expected to switch from surplus to deficit sometime in 2014.

The main factor that comes into play here is mine supply, with some of the biggest zinc mines in the world set to close over the coming years - the Century mine in Australia owned by China's Minmetals, which produces 500,000 tonnes a year, is due to close in early 2016, while Xstrata's (LON:XTA) Brunswick mine in Canada, which provides 220,000 tonnes a year, is due to shut in early 2013.

The loss from these plus other closures and contractions in Kazakhstan, Canada and Ireland, among others, will be almost 1.5 million tonnes.

Zinc's uses range from coatings to protect iron and steel through galvanization, to sheets for building and a range of chemical applications. The metal is used in the automotive and building and construction industries, with galvanized steel growth being the main driver of zinc demand.  The total world zinc consumption was estimated to be 12.45 million tonnes in 2011.

Despite recent lowered demand forecasts from Europe, the US, and even China on the back of the country's efforts to rein in inflation and deflate its property market bubble last year, Graham Deller from CRU International still believes that the zinc market will switch from surplus to deficit at some point in 2014 as overall global demand is still expected to be on an accelerating track in the next few years with China anticipated to show healthy growth to 2016. 

At some point in 2012 or 2013, Japan is also expected to get a boost in zinc demand from reconstruction in the area, after the country was hit by last year’s Tsunami.

"The price of zinc will get bid up, but no one knows by how much. It will either go up very quickly to a level that cannot be sustained, or more steadily," said Deller, the head of research for zinc, lead and precious metals at CRU International.

Since 2007, the zinc market has been in surplus, with stocks building year-on-year at a rate no one would have thought possible prior to 2007. After peaking at almost 900,000 tonnes in 2010, CRU estimates that the global zinc metal surplus fell to 350,000 tonnes last year. But Deller anticipates rapidly growing shortages after the market switches to deficit in 2014.

In a quarterly zinc January 2012 report from CRU, the research firm said: "Although we have reduced our forecast of consumption to 2016, we have trimmed our outlook for production by almost as much, with lower prices of late having already delayed the development of the new mines that are needed to replace those nearing exhaustion."

The firm forecasts a record global metal deficit of almost 800,000 tonnes in 2016, leading to an expected surge in prices as consumers will be forced to bid metal away from Chinese speculators.

Though the addition of projects such as the expected 2015 start-up of Ozernoye in Russia is expected to help moderate the fall in supply, more mines and financing for development will be needed to prevent the zinc market from developing a shortfall, which will be large enough to "rapidly deplete the stocks built in 2008-13”, the report stated. Junior miners face restricted access to capital to develop their mines, as well as rapidly increasing capital and operating costs, leading to potential further consolidation in the industry.

In August 2011, Wood Mackenzie forecast a loss of 1.7 million tonnes by 2015. In addition to short supply, falling zinc and lead mine grades are also expected to add to the problem of meeting zinc demand.

These forecasts have led to increased interest in zinc for traders. Open interest in London Metal Exchange zinc futures gained by 12,193 contracts to 417,146 lots in the week that ended February 23, according to exchange figures. Each contract represents 25 metric tons of the metal used to rustproof steel.

Zinc for three-month delivery, the benchmark, climbed 3.5 per cent during the period.

This could mean big benefit for zinc producers like Xstrata, which plans to merge with Glencore (LON:GLEN) in a US$90 billion deal, along with Teck Resources (NYSE:TCK, TSE:TCK.B) and Nyrstar (EBR:NYR), which has made a string of acquisitions in recent years, and is now the largest zinc producer in the world.

Meanwhile, zinc-focused exploration plays are also set to be in focus, with their stock bound to be considered cheap when compared to a few years from now.


Connemara Mining

Among the London-listed plays in the sector is Connemara Mining (LON:CON), which is developing the Stonepark zinc and lead property in County Limerick, Ireland, in a Teck Resources led joint venture. 

The property lies right next to Pallas Green, a world-class zinc and lead deposit developed by industry giant XstrataXstrata bought out the project’s minority shareholder Minco (LON:MIO) last year – a group previously led by industry veteran John Teeling, who is now chairman of Connemara.

Connemara holds 25 per cent of Stonepark, where the partners have so far identified 3 mineralised zones.   Analysts following the story believe that Stonepark may be geologically linked to its neighbour Pallas Green, which has a resource of around 26 million tonnes at 9 per cent zinc.

The company also holds more than 30 zinc prospecting licences in central and south-west Ireland.


Alba Mineral Resources

Another partner of Teck Resources in Limerick is micro-cap explorer Alba Mineral Resources (LON:ALBA)

The two sealed an exploration joint venture in December last year which gives Teck an option to acquire a 75 per cent stake in Alba’s zinc and lead exploration assets in the Limerick basin.

Ireland already hosts Europe’s largest zinc mine, the Tara mine which is operated by Swedish firm Boliden.  Approximately 2.6 million tonnes of zinc and lead concentrate is produced at the Tara mine each year.


Anglesey Mining 

Leaving Ireland, Anglesey Mining (LON:AYM) has 100 per cent of the Parys Mountain zinc-copper-lead deposit in North Wales, with a total historical resource in excess of 7 million tonnes at over 9 per cent combined copper, lead and zinc as well as excellent exploration potential.

The project has planning permission and the group estimates two years to production from arranging financing.

The firm’s 33 per cent stake in Toronto listed Labrador Iron Mines (TSE:LIM) has taken precedence of late for investors as the Schefferville mines project in Canada moved into the staged production phase.

However, drilling at Parys Mountain has been underway since January this year, and the results are planned to help Anglesey reassess the project. The findings will contribute to a review of the mining and production options available for the White Rock and Engine Zone parts of the project. 

Anglesey is aiming to complete this review in the second quarter of this year.


Rathdowney Resources

Rathdowney Resources (TSE:RTH), with just under C$23 million of cash in the bank, is a Canadian exploration and development company that has a focus on developing zinc and lead deposits in Poland and Ireland, within mining districts ranked among the world’s richest Mississippi Valley Type resources. 

In Poland, the company's interest is the Upper Silesian Mining District, in which it has been granted two prospecting concessions, and applied for a third, encompassing an area of 150 square kilometres.

A multi-phase campaign of resource verification and exploration drilling began in June 2011 at the concessions with six drill rigs, with 25,000 metres planned in first phase drilling at Zawiercie, and 16,000 metres planned at Rokitno.  Second phase drilling is anticipated to total roughly 28,000 metres, or around 200 holes. 

The Polish assets, which are linked by rail to a nearby state-owned mine and zinc smelter, contain substantial historical resources, including 34.5 million tonnes at Zawiercie 1 at an average grade of 7% zinc and lead in the C2 category.

In December, Rathdowney reported positive drill results from its Olza zinc-lead project northwest of Krakow, confirming mineralization over 650 metres in one area of the property. Significant results from the program included four metres grading 9.74 percent zinc, 0.19 percent lead, and 49.0 grams per tonne (g/t) silver, in hole OLZ-025. This project is also supported by 180,000 metres of Polish State drilling. 

In Ireland, Rathdowney has assembled a land portfolio comprising some 1,600 square kilometres in six project areas. Early stage exploration over the past two years established a number of drill-ready zinc-lead targets, with initial drill testing starting last April.


Selywn Resources

Turning to Canada, Selwyn Resources (CVE:SWN) is a prominent zinc and lead-focused company, with its main project in the Yukon. The company is advancing this project together with its 50 percent joint venture partner, Yunnan Chihong Zinc & Germanium Co, a mining and smelting company based in southern China that is spending $100 million on exploration and development.

The Selwyn project is believed to host the largest undeveloped zinc-lead deposit in the world, with initial mine development to focus on 16.06 million tonnes of indicated mineral resources grading 10.06% zinc and 4.23% lead, and 26.7 million tonnes grading 8.81% zinc and 2.81% lead. 

Initial mine production is forecast at 255,000 tonnes per year of zinc and 65,000 tonnes per year of lead in concentrate, starting early 2015, coinciding with forecast shortfalls in mine supply.

Last November, Selwyn said that the initial proposed work for the feasibility study is nearing completion, but the joint venture decided to expand the scope of the study, with a range of additional programs now being considered, including the confirmation of potentially significant new mineral resources at the Don deposit.

Refinements to the feasibility study will focus on the reduction of operating costs in the mill, impacts on the mine plan and optimization of the mining sequence, with the finalization of the feasibility study now expected late 2012.

Selwyn also purchased the former-producing ScoZinc Mine in Nova Scotia last year, which it plans to re-start to attain cash flow and fund development at its project in the Yukon. ScoZinc has a measured and indicated resource of 2.8 million tonnes grading 4.2 percent zinc and 1.9 percent lead.

The latest drilling results were from the Gays River deposit on the property, and included hole MNZ-009, which intersected 7.60 metres grading 8.22 percent lead and 0.79 percent zinc, including 2.60 metres grading 20.32 percent lead and 1.94 percent zinc.


Silver Bull Resources

Silver Bull Resources (TSE:SVB)(AMEX:SVBL), meanwhile, is a silver and zinc-focused explorer, whose flagship project is Sierra Mojada in Mexico. The property is located 150 kilometres north of the city of Torreon in Coahuila, Mexico and is highly prospective for silver and zinc. The explorer said that the third in a series of NI 43-101 resource updates is anticipated in the second quarter of 2012.

Given the drilling results to date for Silver Bull, it is anticipated that the next report for the property will show a substantial increase in the silver resource at Sierra Mojada, as well as including a resource for the significant zinc mineralization seen on the project. 

Overall, Silver Bull has acquired or has options to acquire mineral concessions totaling 15,833 hectares in the Sierra Mojada Mining District. The company has been working on the Sierra Mojada property since 1997 and has completed over 80,000 metres of drilling.

The Vancouver-headquartered miner also owns three mineral exploration licences in Gabon, Africa, two of which are currently under joint venture with AngloGold Ashanti (NYSE:AU).


Solitario Exploration & Royalty

Solitario Exploration & Royalty Corp. (TSE:SLR) is a company that holds mineral properties in Peru, Brazil, Mexico and Nevada, with advanced projects in platinum, palladium, zinc and lead. 

In early January, the company reported what it called "outstanding" zinc and lead drill results from its 2011 drill program on the Bongara joint venture in Peru. 

Significant drill results included underground drill hole V-240, recovering zinc plus lead grading 13.45 percent over 26.85 metres, and 11.4 percent zinc plus lead over 32.1 metres in hole V-244.

Votorantim Metais can earn a 70 percent stake in the Bongara project by committing to place the property into production based on a positive feasibility study.


ZincOx Resources

ZincOx Resources (LON:ZOX) is a rather unique play among London listed zinc companies as it doesn’t mine the metal but produces it through recycling.

ZincOx takes waste dust from steel furnaces and treats it using what's called a rotary hearth furnace (RHF) to produce a fine white zinc powder, which is much higher quality than powder from conventional recycling, and an iron bearing product that can be sold back to the mills that give ZincOx their feed dust in the first place.

The group is on the brink of first production from its Korean recycling plant KRP1, the first plant of the two phase project aimed at producing 92,000 tonnes of zinc powder per year.  KRP1 is currently in the commissioning phase, and ZincOx believes it may be producing at the end of March.

Financing for the second part of the project, to cost US$100 million, will involve a combination of offtake agreements and bank debt and the company has already held negotiations with banks.

The firm already has a 10 year offtake agreement with Korea Zinc - the second biggest zinc producer in the world - for the product from KRP1.


Trevali Mining 

Lastly, Trevali Mining Corp (TSE:TV) is also a company of which to take note, with global commodities trader Glencore International (LON:GLEN) taking a near eight percent stake in the miner earlier this week through an $18 million private placement financing.

Trevali has two advanced-stage polymetallic (zinc-lead-silver-copper) deposits in Canada and Peru -- the Halfmile and Santander mine projects. respectively. In Canada, Trevali owns the Halfmile Mine and Stratmat polymetallic deposit in the Bathurst Mining Camp of northern New Brunswick, and the past-producing Ruttan copper-zinc mine in northern Manitoba.

Production from the Halfmile Mine started in early 2012 and will ramp up to a planned production rate of 2,000-tonnes-per-day.

In Peru, the company has the Santander zinc-lead-silver mine project and the former-producing Huampar silver mine, both located in the Central Peruvian Polymetallic Belt. Mine commissioning is anticipated to start at the Santander operation in the middle of this year, with ramp up to a full 2,000-tonne-per-day production to follow.

Other zinc juniors that investors may want to consider include Overland Resources (ASX:OVR), Donner Metals (CVE:DON), Zincore Metals (TSE:ZNC), Zazu Metals (TSE:ZAZ), Meridian Minerals (ASX:MII), Canadian Zinc (TSE:CZN) and Ironbark Zinc (ASX:IBG).


Zinc Price Forecast

Indeed, these junior companies are bound to be in focus over the medium term, with zinc prices expected to take off in 2016. CRU International forecasts that the real three-month price of zinc, defined as the nominal price/US consumer price index, will go from US$2,125 in 2012, to US$2,455 in 2015, and US$3,305 in 2016.

The nominal three-month price per pound is expected to go up to 161 cents in 2016 from 96.4 cents per pound in 2012.


Quick facts: Arkle Resources PLC

Price: 1.3 GBX

Market: AIM
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