interesting article

Oversupply puts zinc under pressure

STEELMAKING materials such as iron ore, coking coal and manganese have hit the headlines this year in light of record prices due to a boom in demand from the industrialising economies of China and India.

What has received less attention is the fall in the price of other steelmaking materials - notably zinc and nickel.

Zinc is a key ingredient in galvanised steel that helps limit rust and corrosion. Galvanised steel is used in many high-demand products, such as roofing, handrails, consumer appliances, metal pails and automotive body parts.

Despite the high demand for steel, the zinc price has more than halved in the past year because the commodity is one of those rare metals in oversupply.

Although China imports huge amounts of iron ore and alumina to make up for its lack of domestic supply, it is a net exporter of zinc. Supply is also expanding elsewhere in the world, and the International Lead and Zinc Study Group predicts that production of refined zinc metal will rise by 6.4 per cent this year.

Despite the gloomy picture - and the recent fall in the zinc price below $US1 a pound for the first time in three years - the world's largest zinc producers such as Xstrata, Teck Cominco and Zinifex are confident prices will bounce back.

Merrill Lynch analysts agreed. They say the current zinc price is low enough to start the closure of high-cost mines and to delay the financing and start-up of new mines. In the meantime, Goldman Sachs JBWere have predicted that the high-cost Broken Hill miner Perilya will swing to a loss.

The Drum has examined some Australian zinc miners whose production costs are low enough for them to emerge as winners.

Low-cost advantage

Kagara, formerly Kagara Zinc, has stripped the zinc from its name since it also produces copper and is exploring for nickel. But it still mines zinc in Queensland, and its largest project, Admiral Bay, is a zinc prospect in Western Australia.
Despite lowering its 2008 price zinc forecast from $US1.15 a pound to US99c a pound, Goldman Sachs JBWere only cut 2 per cent off its estimate of Kagara's earnings. Kagara's advantage is that it is a low-cost zinc producer, with cash costs of US57c a pound including byproducts at its Mount Garnet operation. It will next year start producing 50,000 tonnes of zinc and 8000 tonnes of copper a year from its Mungana project, with cash costs of US30c a pound including byproduct credits. Therefore, it would take an extremely low zinc price for its operations to become unprofitable.

Meanwhile, Kagara is continuing to explore at Admiral Bay, a giant former Rio Tinto project. Kagara recently said it would consider sinking an exploration shaft on the site to cut the cost of drilling the deep deposit, but the first resource is still expected later this month.

Long-term plan

Not everything has gone to plan so far for the WA zinc-copper miner Jabiru Metals at its Jaguar mine. The initial recoveries from the plant were in the 50 per cent range rather than the 75 per cent range forecast in the feasibility study, leading to a delay in the mine becoming cash-flow positive.
But since March Jabiru has rectified the situation and is able to focus on extending the five-year life of the mine, which should produce 68,000 tonnes of zinc and 32,000 tonnes of copper concentrate next year.

Jabiru recently raised $52 million through an entitlements issue, and its largest shareholder, Palmary, took up its full rights to 27 per cent of the shares. Palmary is the Ukrainian group that took over Consolidated Minerals last year.

The funding will help Jabiru prove up more resources at Jaguar and to advance with its Stockman project in Victoria. Jabiru expects to release a resource estimate at Stockman early next year, with the first production in 2011. Patersons Securities forecasts Jabiru will have zinc cash costs of US73c a pound this year, falling to negative US13c a pound next year due to the extensive copper and silver credits.

Growth potential

Like Jabiru, Terramin Australia recently asked shareholders to help it fund growth prospects. Funds from a $16.5 million share purchase plan will be put toward a second zinc exploration prospect in Algeria.
Unlike Kagara and Jabiru, Terramin is not yet in production. But it is definitely not far off. The plant at its $70 million Angas mine in South Australia starts progressive commissioning this month, with the first concentrate to be shipped in August.

At full production, Angas will produce 30,000 tonnes of zinc a year and 12,000 tonnes of lead, with some added gold, silver and copper credits. That will give it a zinc cash cost of just US20c to US30c, the lowest quartile of global cash costs, making it robust in any zinc market.

But the main game for Terramin is its big Tala Hamza project in Algeria. Tala Hamza is interesting enough to have attracted the attention of Canada's Lundin Mining, which has emerged on the Terramin register with a 4 per cent stake.

Still, despite the corporate interest, the Terramin executive chairman, Kevin Moriarty, says he has no plans to sell out anytime soon.

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