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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.

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.

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 Xstrata.  Xstrata 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.

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.

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.

A further interesting play is dual-listed MetMinco (LON:MNC, ASX:MNC).  The Australian-incorporated group is advancing a strong portfolio of exploration projects located in Chile and Peru, mainly focused on copper, but with significant exposure to gold, molybdenum and zinc.

Of these, Vallecillo would be the project to benefit most from an upturn of the zinc market.

The polymetallic discovery contains gold, silver, zinc, copper and lead.   According to an SRK resource estimate, the La Colorada deposit contains 10.1 million tonnes with an indicated resource of 7.9 million tonnes at 1.14 grams per tonne of gold , 11.4 g/t of silver, 1.32 per cent zinc and 0.29 per cent lead.

The company is currently drilling the deposit, and an updated resource estimate is planned for the early part of 2012. A pre-feasibility study for the project will get underway in the second half.

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.

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.