By Keith Norbury
Alphabetically, zinc might come last among the base metals. But there are reasons to believe it will be among the first to rebound from the funk of oversupply and low prices of the last couple of years. In early February, the zinc price started to pop up a bit to around 75 cents US a pound after having dropped to 65 cents in early January. Stefan Ioannou, a metals analyst with Haywood Securities, said that was good to see although he was still cautious about reading too much into the trend — just yet. However, he also observed that zinc inventories on the London Metal Exchange had been falling in recent months, by 1,000 to 3,000 tonnes a day — another good sign. “So, overall, a steady decline,” said Mr. Ioannou, who is based in Toronto. “And that bodes well for the price going forward.”
Still, the zinc market has been spooked of late by sudden spikes in zinc inventories, seemingly out of nowhere. “And that’s usually coming from some of the non-bonded warehouses, mainly over in Asia,” Mr. Ioannou said.
Another metals analyst, who wasn’t authorized to speak to the media and therefore asked not to be identified, attributed those spikes to invisible inventories that aren’t counted as part of the London Metal Exchange inventories. For example, half the contents of warehouse might be LME-grade zinc but the rest could be the inventories of a mining company. “And the concern is that there’s a lot of this hidden inventory and that it’s just sitting there ready to be added back to the market whenever the price goes up,” the unidentified analyst said.
The spooky question is nobody knows how much of this “invisible” zinc is out there, according to Mr. Ioannou. “Is it enough to actually flood the market? The bulls will argue that we’ve gone through a lot of that material now; there’s not much more of it left,” Mr. Ioannou said. “Whereas the bears are saying there’s still upwards of 800,000 plus tonnes out there, which is double what’s on the LME right now.”
Galvanizing is zinc’s big thing
Atomic number 30 on the Periodic Table, zinc is a silver-grey metal that is the 24th most common element in the earth’s crust, notes the International Zinc Association. Zinc is also essential to life, which explains why one of its commercial uses is in health products such as skin cream.
By far zinc’s leading commercial use is in galvanizing steel, a process that employs about half of the zinc produced, according to Natural Resources Canada’s Minerals and Metals Fact Book — 2015. Die-cast zinc products, such as home and office hardware and other small parts, account for around 17 per cent. Other uses of zinc are in tire manufacturing and fertilizer production.
Zinc deposits are typically found with other base metals, such as lead, copper, and iron, but also with precious metals like silver and platinum. Most zinc that’s mined, about 95 per cent of it, is from a mineral called sphalerite, or zinc blende, which has a high sulphur content. The ore is typically five to 10 per cent zinc and is processed into a concentrate of around 55 percent zinc at the mine site before being sent to refineries. “Centuries before zinc was discovered in its metallic form, its ores were used for making brass and zinc compounds for medicinal purposes,” begins a history of zinc on the website of the International Zinc Association. “Zinc compounds were in ores smelted as early as 200 B.C. to obtain copper, to produce alloys of copper and zinc – the brass family. The Romans certainly were major users of brass. The Greeks also appeared to know zinc, even if not by name.”
Fast forward to the 21st century, world mine production of zinc was 13.4 million tonnes in 2015, a slight drop from the 13.5 million tonnes in 2014, but higher than annual production from 2011 to 2013, according to the International Lead and Zinc Study Group. Production of the metal itself, though, as well as the metal’s usage, was slightly higher in 2015 than the year before.
In 2014, the world actually produced more refined zinc (13.3 million tonnes) than it mined (13.2 million tonnes) because the refined zinc included recovered secondary material, according to NRCan’s 2015 Fact Book. Recycled materials, such as batteries and scrap galvanized steel, supply about 25 per cent of the world’s zinc demand.
The world’s zinc largest producer, China, accounted for 41 per cent of global output in 2014. Not surprisingly, China is also the world’s largest importer of zinc ores and concentrates — $US$1.5 billion worth in 2014 — although South Korea is a close second — US$1.4 billion in 2014. Canada was the fourth largest producer of refined zinc in 2014. As recently as 2001, it was the first, according to the Canadian Encyclopedia.
Zinc exports and imports on the rise
The global value of both imports and exports of zinc and zinc articles (HS product code 79) increased in 2014, as they have more or less steadily since 2009. But while the US$15.3 billion of imports in 2014, for example, was 57 per cent more than in 2009, it was still significantly less than the US$20.9 billion figure for pre-financial crisis 2007.
The global value of exports and imports of zinc ores and concentrates has followed a similar pattern. World exports were worth US$8.4 billion in 2014, compared with US$5.05 billion in 2009, and US$10.4 billion in 2007. Over that period, the price of zinc has been on a similar track. In December 2006, zinc was US$2 a pound, but by March 2009 had dropped to around 50 cents a pound. Since then, it has crept up to around US$1.10 a pound on occasion, most recently last May.
The consensus is that zinc needs to fetch about US$1 a pound just for potential new zinc producers to be profitable. That’s because of the higher costs of exploiting new reserves that are increasingly remote and have lower zinc content. Mr. Ioannou said the market is bracing for a run on the zinc price this year because of shrinking inventories, which have coincided with the recent shutdowns of the Century mine in Australia, the Lisheen mine in Ireland, and the Brunswick mine in New Brunswick.
Those closures and reduced output from mines that are being mined to exhaustion without investing in new exploration activities will eliminate about 10 per cent of global production. Add that to anticipated cutbacks in production because of the slumping market, and the global supply reduction could drop 15 per cent in the next couple of years. “And the market usually tends to overreact on the upside and the downside. So we could easily see zinc spike up to northward of $1.50 for a year or two,” Mr. Ioannou said.
Junior mining companies waiting for higher price
It’s that sort of rebound that Alan Taylor, Chief Operating Officer and Vice-President of Exploration at Canadian Zinc Corporation, is hoping for. His company has a zinc mine at Prairie Creek in the Northwest Territories that is under development and another potential mine at the exploratory stage in Newfoundland. “We might be well placed on an up-and-coming market to have all our ducks in row when zinc is back to good form,” Mr. Taylor said.
When that will be depends on the company’s ability to raise the financing to complete the development of the Prairie Creek mine that was originally envisioned as a silver mine back in 1982 “when silver was $40 an ounce,” Mr. Taylor said. Silver actually soared much higher than that during that exuberant period — rocketing to $107.50 an ounce in Jan 1980 before falling down to $5.90 an ounce in Feb. 1993. It then spiked again at $51.23 in April 2011 before diving to $13.80 in Dec 2015 and has since picked up to $15.36 in February 2016.
With financing partially provided by the U.S. Hunt brothers, $64 million was spent between 1980 and 1982 to construct a zinc – silver and lead mine at Prairie Creek, which never actually produced anything and is currently being rehabilitated by Canadian Zinc Corp. “We have a mill on site, so we’d produce zinc concentrate and lead concentrate on site and then we’d truck it down to rail head in Fort Nelson, B.C., and then bring it down by rail,” Mr. Taylor said. “The closest smelter would be Trail, B.C., and they have indicated some interest but there seems to be more interest overseas in Korea and such right now.”
That smelter in Trail is owned by Teck Recources Ltd., which says on its website that it’s the third largest producer of mined zinc in the world. Aside from producing zinc concentrate at its Red Dog mine in Alaska and Pend Oreille operations in Washington state, Teck processes concentrate from other mines at its Trail complex. In 2014, Teck produced 659,700 tonnes of zinc concentrate as well as 277,400 tonnes of refined zinc.
Transport costs take a bite out of zinc
Mr. Taylor said Canadian Zinc’s Prairie Creek mine has a “very interesting” transportation corridor for hauling its 62 per cent zinc concentrate from the mine. First it would travel 500 kilometres in “40 or 50 tonne B-line trucks with belly dumps.” Then it would travel another 1,000 to 1,300 kilometres by rail to port.
“So, transportation is huge and it takes a bite out of the revenue but we have a good resource that could last for over 17 years … The problem with our location is we’re just remote. But once we’re established I think it could be a long-term mine.”
In central Newfoundland, Canadian Zinc is doing exploratory work on about half a dozen properties, Mr. Taylor said. In December, the company announced a deal with Buchan Minerals Corporation to conduct joint research on seven volcanogenic massive sulphide deposits in the region — four held by Canadian Zinc and the others by Buchan. “Some of them have significant resources, but not enough to consider on standalone economics,” Mr. Taylor said. So the companies are looking at establishing a centralized milling facility in the region and have their eyes on a mill at Teck Resource’s recently closed Duck Pond copper-zinc mine, which is within 90 kilometres of Canadian Zinc’s holdings
“The economics would be very attractive too,” Mr. Taylor said. “And the (Newfoundland) government is very interested on continuing mining in the area.”
Other companies enter zinc fray
Mr. Taylor’s isn’t the only Canadian company with zinc aspirations. The similarly named Canada Zinc Metals Corp. has a lead-zinc play in B.C. called the Akie property near Mackenzie as well as 68,000 hectares of properties nearby in what is called the Kechika Trough. Canada Zinc Metals did not respond to a request for comment. However, a Jan. 25 news release on the company website said the Akie project “remains the primary corporate focus.” The release also noted that certain of its properties in the Kechika Trough are the subject of a 2013 option agreement with Teck Resources and Korea Zinc Co. Ltd. Under that $8.5 million option, Teck and Korean Zinc could acquire up to 80 per cent interest in what are called the Pie Option properties.
A June 2014 article on www.miningfeeds.com noted that the Akie property “hosts the Cardiac deposit, which is one of the top undeveloped zinc-lead-silver projects in the world.” The Kechika Trough, meanwhile, “is an extension of the world class Selwyn basin from the Yukon,” the article said. Akie’s proximity to Mackenzie is “strategic” because of its rail access to Teck’s Trail smelter, the report pointed out. “As well, rail access is available from Mackenzie to Prince Rupert, which is home to a deep-sea port that would allow for shipping of concentrates overseas,” the report said.
Imperial Metals, meanwhile, has a 50 per cent interest in the Ruddock Creek lead/zinc property and the Huckleberry copper mine, both in B.C. Ruddock Creek, 155 kilometres northeast of Kamloops, encompasses 21,156 hectares consisting of 42 mineral claims, said a news release on the Imperial Metals website. Mitsui Mining and Smelting Co. Ltd., at 30 per cent, and Itochu Corporation are the other owners of Ruddock Creek.
New Brunswick mine catches wave early
“A lot of these junior companies are really trying to poise themselves to catch that next zinc wave,” Mr. Ioannou said. Vancouver-based Trevali Mining has already caught the wave, having begun production in July at its Caribou mine and mill in New Brunswick. The 3,106-hectare property, 50 kilometres west of Bathurst, produced 12,464 tonnes of zinc concentrate in the third quarter of 2015 and 14,616 tonnes of zinc concentrate in the fourth quarter of 2015. As of Feb. 21, the mine had generated 10,373 tonnes of zinc concentrate this calendar year.
Requests for comment from Trevali weren’t returned. In a Feb. 24 news release, though, the company cautioned that its production plan at the Caribou Zinc Mine “is based only on measured, indicated and inferred resources, and not mineral reserves, and as such does not have demonstrated economic viability.” Trevali is a “zinc-focused” mining company that also owns the Halfmile mine and Stratmat deposits in New Brunswick as well as a producing operation in Peru. Nova Scotia-based Seaboard Transport began trucking zinc and lead concentrate from the Caribou mine in July 2015 to Glencore’s smelter in Belledune, 85 kilometres from the mine, Seaboard reported in a recent newsletter on its website. Seaboard didn’t respond to a request for comment. However, the newsletter noted that the trailer being used to haul the concentrate is “a quad axel live floor,” a photo of which appears in the newsletter. The company has two of its own units and two lease operators hauling up to 400 tonnes of material daily seven days a week. An important element of the project, the newsletter noted, is a driver apprenticeship program the company instituted with the Pabineau First Nations community. Two of the drivers hauling concentrate are from that community.
Low dollar benefits Canadian developers
“There’s a huge benefit right now for being a Canadian developer and having a Canadian operation,” said the unidentified metals analyst. “It is a tough space to get capital in for new growth but it does benefit from the (weaker) Canadian dollar, which is a very material change over the last 18 months … making these mines more economic than they would otherwise be.”
Mr. Ioannou said that low commodity prices have made it more difficult for operators to raise financing, which means that most new projects will be delayed. “But even more importantly is there just haven’t been that many big discoveries, nothing nearly big enough to replace a Century Mine, or a Lisheen, or a Brunswick mine,” he said.
The 2013 closure of the Brunswick mine had a huge impact on Canada’s zinc volumes, as NRCan’s 2015 Fact Book noted. In 2014, Canadian mines produced 352,745 tonnes of zinc, 17 per cent less than the 426,545 tonnes they produced in 2013. Figures from Statistics Canada showed that New Brunswick’s zinc production dropped to zero in 2014 from 60,408 tonnes in 2013. Also contributing to the drop that year were the closure of the Bellekeno mine in Yukon and lower zinc production at the Kidd mine in Ontario and the LaRonde mine in Quebec, said NRCan’s 2015 Fact Book.
Another sign of zinc’s fall from grace is in railway car loadings. Statistics Canada reported that the country’s railways loaded 4,579 cars with zinc concentrate totalling 403,414 tonnes in 2015. That was the third straight year of declining zinc volumes from the 12,117 cars and 996,673 tonnes in 2012, which represented the biggest zinc concentrate rail volumes since 2004, when they exceeded a million tonnes.
Canada refines zinc from elsewhere
In a curious twist, Canada’s production of refined zinc increased in 2014 over the previous year. That’s because Canada imports a lot of zinc concentrate from other countries and refines it at Teck’s facility in Trail, B.C., Hudbay Mineral Inc.’s smelter at Flin Flon, Man., and Noranda Income Fund’s operation at Salaberry-de-Valleyfield, Que. Canadian smelters imported 487,000 tonnes of zinc in concentrates in 2014, far more than the 332,000 tonnes in 2013. Most of the concentrates came from the U.S., Burkina Faso, Namibia, and Peru, NRCan’s Fact Book noted.
Canada’s zinc production has been dropping for decades. In 1995, production was 1.1 million tonnes, according to Statistics Canada. Annual production was still over a million tonnes in 2001. By 2003, Canada’s annual zinc production had dropped to 757,307 tonnes, which was still double what it would become in 2014. The longer term story is that zinc reserves are being diminished. The 2014 Facts and Figures report from the Mining Association of Canada pointed out that Canada’s zinc reserves totalled 27.74 million tonnes 1980, but had shrunk to 4.13 million tonnes in 2010, although they did recover to 4.81 million tonnes in 2011, the last year of the association’s figures.
The U.S. Geological Survey estimated total global zinc reserves at 230 million tonnes in 2014. Australia had the largest reserves, at 62 million tonnes, followed by China at 43 million tonnes. Canada’s reserves of 5.9 million tonnes ranked eighth among zinc producing nations.
Transition to deficit anticipated
Mr. Ioannou sees all factors — lower reserves and reduction in production — as harbingers of a big transition from a surplus of zinc to a deficit. Driving that will be continued demand from China. Even though China’s growth has slowed — and questions have been raised about the Chinese government’s own economic numbers — the most conservative estimates still peg its annual growth at around four per cent for 2016. When China’s economy was growing at around 20 per cent a year a decade ago, it was a much smaller economy than it is today, Mr. Ioannou pointed out. “Back in 2006, that 20 per cent growth was like a $350 billion absolute dollar growth figure,” he said. “Fast forward to today, because the base has grown so much over the course of a decade or so, all of a sudden five per cent growth on 2014 numbers is actually $450 billion. So it’s actually bigger absolute growth but the market’s very much focused on the optics of the growth rate.”
The nature of China’s economy is also changing, noted the unidentified analyst. For example, while demand for low-grade construction steel, such as rebar, is declining in China, the demand for galvanized steel is expected to rise. That’s because it is an additive used in mid-cycle development such as automobile production “versus early stage development” like building construction. “So the demand should be there,” the unidentified analyst said. “It’s just that in this market where you have overcapacity in China, there is no one really pushing the demand angle on any of these commodities because the demand angle is very soft.”