Are Zinc Mining Companies Too Bullish?

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Zinc has enjoyed one of the most positive fundamental pictures of all the base metals. The looming closure due to exhaustion of major mines such as Century in Australia and Lisheen in Ireland next year has most analysts predicting the deficit of this year only getting worse in the years to come.

According to the Financial Times, the International Lead and Zinc Study Group has forecast a deficit of 117,000 tons in 2014, although the World Bureau of Metal Statistics reported just this week that January to February this year the market was running a 25-kiloton surplus, not much changed from last year’s running average. Reported stocks fell, however, by nearly 111,000 tons over the first two months of the year, mostly at LME warehouses where some 56% of visible global stocks are held.

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Demand Up, Consumption Down

Meanwhile, Chinese demand is reported to have risen 10.6% compared to the same first two months of 2013 and refined production rose by 5.3% for the same period, contributing to increased imports. But not all imported Zinc is being consumed in China. Like copper and iron ore, a proportion is being held in financing deals and true consumption is likely lower than it seems.

Miners, however, are feeling pretty bullish, according to the FT. Teck Resources, a Canadian company, said this week it would resume operations at its shelved Pend Oreille underground mine in the US, which has been idle since 2009. At 44,000 tons, the mine is not a large one but the willingness to commit millions of dollars to reopen the mine when prices are still only a fraction over $2000/ton suggests miners see prices as going much higher over the next two to three years. Likewise Trevali, another Canadian miner, is preparing to reopen its Caribou mine, which was closed five years ago due to weak prices.

Why Reopen Mines?

If old mines are being reopened, money will be committed to new mines in the planning stage. With above-ground stocks estimated at some 2 million tons it could be that miners are getting a little ahead of themselves. Certainly, mines take a long time to restart and even longer to build from scratch. By their very nature, mining companies have to think long-term, but it would be interesting to know what the break-even cost for these mines truly is. Teck CEO Don Lindsay is quoted as saying over a three year period, starting from last year, some 1.3 million tons of production will be closed due to mine depletion in a market of just 13 million tons a year and one that was estimated to be in surplus by only 114k tons last year that’s a sizeable loss of supply. What is not so clear is how many other Pend Oreille’s and Caribou’s are being built. New mine supply, although more fragmented in terms of size and location than those closing may make up a sizeable contribution to filling that shortfall. Positive future yes, but not the market squeeze that would see prices hit 2006 peaks again.

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