IBG in today'sWall St Journal

By ANJANI TRIVEDI
July 15, 2016 3:08 a.m. ET

If there’s a glimmer of hope for natural resources player Vedanta, it is lowly zinc. But in a lesson that could prove instructive across the world of commodities, the rally in this ugly duckling of metals is unlikely to be enduring.
Zinc prices are up 36% since the beginning of the year. That’s helped Vedanta’s share price nearly double, aided by the company’s short-term fixes to its debt load.
Now, Vedanta is essentially doubling down on the stuff. Already a major producer, the London-listed miner has dedicated half of its $1-billion capital expenditure for the coming year to zinc, which is predominantly used in galvanized steel for cars and buildings.
Vedanta’s outsized spending on zinc is a reversal from years of allocating an average 20% of capital to its zinc operations, which have accounted for 30% to 50% of Vedanta’s earnings before interest, depreciation and amortization.
Vedanta’s move to get ahead of the zinc rush may seem prescient.

Zinc has been an anomaly in the commodities market: It is expected to be in deficit for at least the next two years, meaning there is more demand than supply.
Vedanta is essentially restarting big plans it had before global miners went into cost-cutting mode. It dedicated $630 million to one of the world’s largest zinc deposits at Gamsberg in South Africa but later slashed expenditure to $400 million. It has spent just over $20 million on it in total. The miner last week reiterated its commitment to this project and says it plans to spend $200 million this year.
Yet Vedanta’s existing zinc operations in India fell short of analysts’ production target last quarter. There have also been painful government approval processes and civil society backlash around its mines, as well as a battle over retrospective taxes. In search of higher-grade ore, Vedanta is moving from open-pit mining to more cost-intensive underground mining.
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If Vedanta pins its hopes to a sustained recovery in zinc prices, others may have the same idea. Last year, a slew of zinc mines were shuttered. Glencore cut 4% of global zinc output by closing mines that were largely profitable on a cash basis, according to Andrew Thomas at Wood Mackenzie.
If Glencore started bringing back capacity, Vedanta’s underperforming zinc mines could struggle further. Some smaller producers, such as Australia’s IronBark Zinc, have already even begun raising capital to get their zinc mines on the road.
And while zinc appears to be running in deficit, that has actually been the case since at least 2012, according to Credit Suisse, with hidden inventories getting released when prices rise even a little. As other commodities approach production levels that imply a deficit, investors should be wary of the same cycle asserting itself.
Vedanta’s bigger issue than zinc is its continuing battle with a bloated balance sheet. With that in mind, it may serve Vedanta to tread carefully with zinc.

http://www.wsj.com/articles/why-zinc-isnt-cure-all-for-this-miners-health-1468566537