Publishing Date 04 May 2012 2:31pm GMT Author Summary
It is never easy to get excited about zinc but if one of the world’s biggest mining companies, and one of the smallest, are correctly interpreting market signals the outlook for a dull metal is much brighter than it appears to be
It is never easy to get excited about zinc but if one of the world’s biggest mining companies, and one of the smallest, are correctly interpreting market signals, the outlook for a dull metal is much brighter than it appears to be.
Xstrata, and its commodity-trading cousin, Glencore International, are in no doubt that zinc is on track for a significant production shortfall, and a sharply higher price.
Ironbark Zinc agrees, and while few people have heard of Ironbark they should soon because apart from owning an interesting potential zinc-mine development it is a company proposing to introduce Chinese construction methods to Europe – that is if you count Greenland, a self-governing part of Denmark, as part of Europe.
Citronen, a large, flat-lying, zinc deposit at the top end of Greenland is the target of tiny Ironbark and its powerful friends that include Glencore, the base metal producer, Nyrstar, and China Nonferrous Metals.
Discovered 20 years ago by the Canadian company Platinova, Citronen has always been regarded as too remote, too ice-bound and too expensive to develop, especially when zinc is selling for less than US$1 a pound, such as now.
What has changed, or to be more accurate what appears to be changing, is the outlook for zinc supply with some of the smartest people in the metals industry predicting that a zinc boom will occur sometime in the next few years.
Ironbark chief executive Jonathan Downes says he is confident that the zinc market will move in his favour soon, but also acknowledges that the global stockpile of the metal is worrying investors and hurting existing zinc miners.
His plan is to spend approximately US$500 million developing Citronen into a mine producing (in concentrate form) between 100,000-and-150,000t/y, plus small amount of lead, (5,000-and-13,000t/y).
Operating costs, according to a preliminary financial study last year, will be between US$0.37/lb of zinc and US$049/lb with the annual throughout of ore between 3Mt and 3.6Mt.
In the early years, ore will come from an underground mine designed to tap the highest-grade material, switching to an open-pit after year five to bulk-mine lower-grade ore with the mine having a minimum life of 16 years, and almost certainly a lot more given ongoing exploration success.
Said quickly and it sounds easy, though zinc mining never is. In the week before Mr Downes spoke with me the Australian zinc producer, Bass Metals, put its Hellyer processing plant into mothballs and retrenched staff because of the low zinc price. A few days later, another Australian zinc miner, Kagara, declared itself insolvent, calling in administrators to run the business.
Two zinc company failures in two weeks is hardly a vote of confidence in the metal, which crashed from around US$1.70/lb in early 2007 to less than US$0.50/lb in mid 2008, and has only managed briefly over the past four years to get its head above US$1/lb.
Zinc is such a grim picture of failure and disappointment that it is difficult to reconcile the optimism of people such as Mr Downes, until you look into the future and consider predictions of a theoretical gap opening between zinc supply and demand.
“The zinc market today is a fascinating place,” Mr Downes said. “The price is down, but the big zinc players such as Nyrstar, Glencore and Xstrata are spending heavily to boost their exposure to the metal.
“Last year Nyrstar spent US$1.3 billion on a zinc shopping spree, so you have this curious situation where the big companies are investing, as small companies fail.”
Mr Downes speaks from experience as boss of a company capitalised on the Australian stock market at a modest A$73 million, but with Nyrstar and Glencore high on his share register. Nyrstar owns 26.5% of Ironbark. Glencore owns 11.4% and has also provided US$50 million in debt via a convertible note facility.
In Ironbark there is an example of how different parts of the market are seeing zinc. Small investors are disinterested, hence Ironbark’s low share price. Big investors, with a deep understanding of zinc are both buyers of the stock, and bankers to its plans for Citronen.
The only explanation for this hot-and-cold attitude is one of time, with a significant upturn in the zinc market unlikely for the next two-to-three years.
“What we’re seeing in the zinc business today is typical of the metal,” Mr Downes said. “We’re not seeing any new mine developments because of the current over-supply and low price.
“No-one is prepared to put money into new mines until they see a price increase, but that can change almost overnight. As the stockpile disappears the price will go ballistic.”
Good times ahead
Supporting that view of a zinc boom to come is research compiled by Xstrata and based partly on work by the specialist consulting firm, Brook Hunt.
In a table used to convince investors that investment in zinc makes good sense, Xstrata claims that with expected mine closures the zinc industry will need to develop about 7Mt of new mine capacity by the year 2020, and about 14Mt of capacity by 2025 “in order to meet expected demand”.
Projects that Xstrata and Brook Hunt classify as probable cover only 2.4Mt, while other projects classified as possible could help cover the gap though their “timing and delivery remains uncertain”.
What that assessment leads to is the sort of graphic display popular with investment banks selling a supply shortfall story with a “mine production required” line rising strongly out to the year 2025, and the “probable projects” line falling away sharply.
China is the usual suspect on both sides of the story, demanding more zinc to galvanise steel, but with domestic production growing at just 3% thanks to declining grades in its mines, the closure of old mines and lack of exploration success.
Capping off the Xstrata case for a zinc boom is a long list of predicted mine closures, with a forecast 1.9Mt of zinc disappearing from the market by 2016, but with only 800,000t likely to arrive in the shape of new mines.
The start of the big decline is 2013, when four mines are scheduled to close. The mines are: Brunswick, Perseverance, Snow/Trout Lake and El Mochito. Collectively, they will remove 442,000t of zinc from the market, about half the 910,000t stockpile currently in warehouses managed by the London Metal Exchange.
In 2014, another 274,000t of zinc would be removed from the market with the forecast closures of the Lisheen, Kassandra, Angas and Mt Garnet mines, following in 2015 when the Century, Duck Pond and Golden Grove mines account for another 594,000t of zinc no longer available to the market
In 2016, the mines to close (according to Xstrata/Brook Hunt) will be Skorpion, Myra Falls, Mae Sod, El Toqui, Mahr Tunnel, Raura and Pomorzany mines which means 410,000t of zinc will be scratched, followed in 2017 by the closure of Cannington, Guemassa and Cayeli, removing another 164,000t of zinc metal.
It is the looming supply shortfall which has Nyrstar, Glencore, Xstrata and other companies with a deep involvement in zinc scouring the world for future potential sources of the metal that, in the case of Ironbark’s Citronen project, takes them almost to the end of world.
Located on the Citronen Fjord on the north coast of Greenland (with the North Pole next stop) the Citronen zinc orebody is a classic sedex structure (sedimentary exhalative) probably formed when hot fluids were ejected into water, resulting in the formation of a simple, flat-lying structure.
Citronen access
If it had been located almost anywhere else on the planet, the near-surface Citronen orebody – with a resource estimated so far of 132Mt of material assaying 4.1% Zn and 0.4% Pb – would have been depleted decades ago given the simplicity of the required mining method.
That it has not been mined is a function of the erratic zinc price and the fact that the fjord is only open when the sea ice melts, which is for about three months of the year.
Enter Ironbark and its combination of zinc-hungry financial supporters (Nyrstar and Glencore) and its new friends at China Nonferrous that are offering the type of engineering, design and banking deal that few (if any) European or North American companies can contemplate.
The Chinese proposal is enticing, with Mr Downes hopeful that the final capital cost estimate due back from China Nonferrous later this year could deliver a significant price reduction.
“There is the potential for China Nonferrous to reduce Citronen’s capital cost by as much as 20%,” Mr Downes said. “Obviously, when you release a feasibility study it’s hard to undo comments on costs, so we’re holding off on a final cost until we complete our reviews.
“We think we’ll get the cost down to mid-to-low US$400 million range, which will bring a different mindset.
“Best of all is that China Nonferrous offers lump-sum, fixed-price contracts, with financing assistance provided in the form of 70% debt, at around 2.5% above Libor (the London interbank) rate, plus the right to buy up to 20% of the project directly, which could, theoretically, take the project to being fully funded.
Downes conceded that deals like that never work out precisely as promised, but if he comes close with what the Chinese are proposing the Citronen project could become a game-changer not only for the zinc business, but also for the way mining projects are funded and constructed in Europe.
Few European engineering and design companies can compete with the package of services being offered by China Nonferrous, and even fewer can compete with the financing terms given the parlous state of European banking.
Greenland is a long way from China, but the Citronen zinc project is bringing China and its aggressive (and well-funded) mine construction companies closer to Europe.
(20min delay)