Zinc bulls got ahead of themselves when they drove the price up...

Zinc bulls got ahead of themselves when they drove the price up to $US1.10 a pound in May last year.

Their enthusiasm was understandable given that of all the metals, zinc has the best outlook.
Unlike most of the other metals, there has been a combination of zinc production cuts (Glencore) and mine closures on deposits being mined out (Century, Lisheen and others).
China’s crackdown on polluting Ma and Pa small-scale operations has also served to tighten things up on the supply side.
Factor in unspectacular but steady growth in consumption and there is broad agreement that the zinc price will need to get a move on from the end of this year to provide the encouragement for new mine developments.
As much as 3.8 million tonnes of new annual production has been estimated to be needed by 2020. But all the possible and probable development projects around the world to fill the demand gap are only good for a fraction of that, what with capital constraints and lengthy planning and approval processes.
All that feeds in to expectations that the zinc price will take off around the end of the year, if not earlier, with the zinc bulls having got a little too excited by laying their bets 20 months ahead of time.
The rewards will come for the bulls. But a much shorter reward horizon is on the cards for those that have remained ambivalent to the zinc story until now.
The zinc price remains friendless at the moment at US85c a pound, so gaining exposure to the unfolding story is still available against a less than hot backdrop.
The price is well up on its nasty January low of US66c a pound. But US85c a pound is still nothing to write home about. Zinc gets interesting when it is north of $US1 a pound. It hasn’t been within cooee of that (on an annualised basis) for years. But most forecasters expect that to change come (calendar) 2017. Macquarie for one forecasts $US1.05 a pound in 2017, rising to $US1.17 a pound in 2018 and $US1.28 a pound in 2019 ahead of reversion to a long-term price of $US1.05 a pound.
There are a number of ASX juniors looking to capitalise on the opportunity that zinc supply/demand fundamentals suggest have finally arrived for the galvanising metal.
Energia Resources (EMR)
ASX-listed Energia Resources (EMR) is at the front of the queue with its Gorno zinc project near its namesake town — a sister town to Kalgoorlie if you can believe it — in northern Italy.
A diary check shows that it is about now that the Perth-based Energia is due to release a scoping study in to the redevelopment of Gorno, a redevelopment because the thing was mined by the government-owned ENI in the 1980s.
Ahead of it being released it can be said that the expectation is that it will point to a $75 million-$100m development capable of producing 35,000-40,000 tonnes of contained zinc equivalent (it comes with lead and silver).
More to the point is that because of hundreds of kilometres of underground development work left behind by ENI, Gorno is a near-term development opportunity that is expected to have robust economics, with cash costs of around US50c-US55c a pound (after byproduct credits) the expectation. Analysts following the stock reckon production could start in late 2017 which would make Gorno’s return to production sweetly timed if the earlier thematic of rising zinc prices comes to pass.
Euroz, which is close to the company, has an 11c a share price target on the stock while Argonaut, which visited the alpine mine earlier in the year settled on an 8c target. Given Energia had a last sale of 4.1c share for a market capitalisation of $25m, the difference between the share price targets is neither here nor there.
Both serve to highlight the embedded upside in Energia, firstly to becoming a zinc producer, and then the leverage it will have to zinc price improvement.
Using what is a conservative zinc price assumption compared to the rest of the pack of US95c a pound from 2017-2018 and $US1 a pound long-term, Argonaut estimated steady state (project level) earnings of $39m from 37,000 tonnes of zinc equivalent production.
Against Energia’s current market cap, that sort of earnings capability is interesting in itself. Presumably the scoping study will include a matrix showing the earnings sensitivity to various zinc price scenarios, both to the upside and downside, and the current price.
The sensitivity will be extreme either way and given we are in a new era of extreme volatility in commodity markets, the leverage to the upside from here could in itself be enough to see the Energia share price get a move on.
The real clincher though will be when Energia has secured financing for the project and all the final approvals are in. Aiding its cause on the financing front is the expectation that Gorno’s high zinc/low iron concentrates will be keenly sought by smelters to blend with lower quality stuff.
That opens the door on potential offtake finance support, or export credit agency funding for that matter.
Ahead of all that, Energia was holding about $12m in cash and listed shares at December 31 so it is well funded to complete work on a definitive feasibility by about October. By then, the zinc price should be firming up, according to the pundits anyway.
Cheering on zinc more than most will be Energia’s executive chairman, Alex Burns. Directly and indirectly, he holds about 23 per cent of the company.
He is used to success in the resources space.
In November 2010 as managing director of the once upon a time $1m junior Sphere Minerals, Burns happily sold the company and its Mauritania iron ore project to Xstrata for $514m.
His timing was impeccable. Not so for the Mick Davis-led Xstrata, since taken back in house by its controlling shareholder, Ivan Glasenberg’s Glencore.