Time to think zinc

Materials World magazine
1 Mar 2014

With worldwide demand for zinc set to soar in the next few years, just as many zinc mines reach the end of their life, miners are being spurred on to find and exploit new deposits. Guy Richards reports.

It’s fair to say that for some years now, looking for new zinc deposits has not been at the top of the industry’s agenda. The investment climate has not been kind – in the 20 years or so before 2006, market prices of around US$1,000/t meant the metal delivered poor returns. Despite a spike in 2005–2006 to about US$4,500/t, its price soon fell back to previous levels and it is now fetching an average of about US$2,000/t. Compare that with prices over the same period for, say, copper (US$3,000–7,000/t) and tin (US$5,000–22,000/t), and you can see why there has been such a lack of interest.

However, zinc looks set for a comeback over the next few years, just as some of the world’s biggest deposits become worked out. Rising demand (especially from China, already the world’s largest consumer) is depleting stockpiles and some industry experts are even predicting a deficit. And although new mines are coming on-stream, their contributions are not expected to be enough to make up for this shortfall. Taken together, this will push up prices for the metal. Over the next couple of years, mega-projects such as MMG’s Century mine in Australia, Vedanta Resources’ Lisheen mine in Ireland, Anglo American’s Skorpion mine in South Africa and Rathdowney Resources’ Pomorzany-Olkusz mine in Poland are all set to close, with the loss of about 1.7Mt of production, about 11% of current world zinc consumption. And although trade body the International Lead and Zinc Study Group (ILZSG) forecasts an oversupply of zinc of 115,000t in 2014, many industry analysts disagree with this figure. In any event, it’s unclear whether this takes into account the forecast growth in global demand.

Estimating surplus
For example, Daniel Briesemann, base metal analyst at Commerzbank, says, ‘We believe that the ILZSG may have pitched this surplus too high, given that a number of large-scale zinc mines are nearing or have indeed reached their end of life’. That chimes with a poll of analysts by Reuters in late 2013 that points to a surplus of only 52,000t in 2014.

Some analysts go further. Industry watchers at BNP Paribas, for example, believe zinc is already in short supply and are forecasting a 15,000t deficit in 2014. And in the view of zinc market expert Andrew Thomas at Wood Mackenzie, ‘We believe there has been a market deficit of about 300,000t of zinc since 2012, and we forecast it to stay at that level for the next few years’.

Growing demand also has to be factored in. As Briesemann says, ‘The ILZSG expects global zinc demand to grow by 5% in 2014, particularly because of China, where demand is set to expand by 5–7%. Demand for galvanised steel, largely for automotive and construction industries, remains the key driver here – average monthly production of galvanised steel in China in 2013 was 3.5Mt, a jump of 12% on 2012.’

China’s automotive industry is already the largest in the world, and with continued urbanisation and major new infrastructure projects such as highspeed rail on the cards, the country is expected to add more than 2Mt of zinc demand over the next five years, according to the International Zinc Association.

Some of China’s zinc demand is covered by imports that, according to the country’s state-run research firm Antaike, are set to total around 500,000t in 2014. China does have its own stockpiles, but in the past few years, poor profits prompted domestic zinc smelters to cut production, which created a shortage that has had to be met by a drawdown of domestic stocks as well as higher imports. Granted, China has supply capacity of its own, but it is not fully developed and recent figures from the country’s General Administration of Customs show it imported around 1.99Mt of zinc concentrate in 2013, up 2.8% year-on-year. Against this backdrop, zinc prices look set to remain at about US$2,000/t for 2014, according to Briesemann, while Wood Mackenzie forecasts it to fetch US$3,500/t come 2016 – ‘That’s money in 2013 dollars’, it says. Good news for zinc miners and prospectors, you might think, but the overall picture is more complicated.

Starting small, thinking big
First, the zinc market is different from, for example, the copper market, in that about 40% of its production comes from junior miners (in copper this figure is about 7%). And while many new zinc mines are being developed by them – albeit sometimes with support or in collaboration with the big players – the mines tend to be on a smaller scale and therefore have smaller deposits.

Then there is the cost of production. Briesemann puts this at just under US$1,700/t, admittedly below the current zinc price, but he says a much higher price – about US$2,200/t – will be needed for new mining projects to be commissioned. So prices will have to rise as the market tightens before investors come on board. As Jonathan Leng, Manager of Zinc, Lead and Gold Mine Supply at Wood Mackenzie, points out, ‘The issue junior miners face is raising finance, and we don’t think much will happen in that respect until prices really start moving up’. Also, while there is a case for saying that the cost-revenue margin is higher for a zinc mine – owing to the polymetallic nature of zinc orebodies and, therefore, the gain in extra revenue from the other metals – in Leng’s view this margin is not a simple one to calculate. ‘For a typical zinc mine, on average only about 30% of the revenue comes from the zinc itself. The bulk comes from the other metals in the orebody – typically about 26% for copper, 22% for silver, 13% for lead and 7% for gold – so you need a composite method, such as the one we use, to provide a more representative view of the cost structure.’

That said, some juniors have found finance and will be coming on-stream in the next year or so. For example, Trevali Mining Corp’s Santander (capital cost about US$18–20m) and Caribou (US$46m) mines, in Peru and New Brunswick respectively, look like being two early starters. ‘At Santander we anticipate declaring commercial production soon,’ says Trevali’s Vice-President of Investor Relations, Steve Stakiw. ‘And at Caribou we expect to begin commissioning around year-end to early 2015. Formal guidance on production forecasts are expected in the next few months, but from the two mines they are likely to be about 95,000t a year by 2017.’

At about the same time, Herencia Resources aims to start production at its Paguanta project in northern Chile, which is set to produce a total of about 120,000t of zinc over the eight-year life of the mine. The total capital cost is US$60m.

Slightly further off is Canadian Zinc’s Prairie Creek project in the Northwest Territories, Canada, formerly owned by Texan brothers Nelson and William Hunt, who went bust when the silver market crashed in 1980. As such, and similar to Santander and Caribou, this is a rehabilitation scheme. Even though most of the infrastructure is still in place, it had been reported that this would take an investment of US$185m, but Head of Investor Relations Earl Hope says this figure is likely to be lower, putting it at closer to US$160m. This is the first of the company’s zinc projects scheduled for production and is due to start in late 2015 at a rate of about 34,500t a year. 

On a larger scale, but with production even further off, is Ironbark Zinc’s Citronen greenfield project in Greenland, billed as one of the few world-class deposits wholly owned by a junior. At a capital cost of about US$430m and with commissioning of concentrate production scheduled for 2016, the project is expected to yield 140,000– 220,000t of zinc a year for at least 14 years. Further behind still, other juniors such as Donner Metals and Foran Mining are at exploration stage – Donner at its flagship Matagami project in Quebec, and Foran at McIlvenna Bay in Saskatchewan, both Canada.

The majors are, of course, doing their bit to maintain the other 60% of global production. For example, Glencore Xstrata has expanded its Mount Isa and McArthur River projects in northern Australia, and reported zinc production of 458,400t to the end of the third quarter of 2013 – a rise of 6% – while MMG is set to start shipping 200,000–220,000t of concentrate a year from its Dugald River mine in Queensland in late 2015.

The key, though, is how the juniors will maintain their 40%, and that unfortunately will probably only become apparent when zinc prices rise enough for investors to feel able to commit to projects. But contained in that is something of a time bomb, because even when the market is such that a project can be given the go-ahead, there will still be a time lag between that and actual production.

As Thomas at Wood Mackenzie says, ‘Even a small to medium-sized mine takes at least three or four years to develop – longer for larger mines – so the industry needs to start investing now in new zinc mine capacity’.