Tuesday, November 08, 2005 THE Metal Detective thought he would never live to see the day. But zinc, the most frumpy of metals, has suddenly become sexy again ?a bit like Madonna in her new video.
Often mined with its drab relation lead, zinc is the stuff used to galvanize steel. You find it in those slimy grey bubbles frothing to the top of smelly flotation tanks during the mill tour.
Mining zinc does not have a great investment track record in Australia.
Even punters more senile than MD can probably recall the inglorious demise of Pasminco in 2001 and the subsequent failure of Western Metals in 2003.
Both collapses had more to do with large debts and poor currency bets rather than specific mining problems, though persistent rock-bottom zinc prices did not help their cause.
What a different environment our dogged zinc miners now find themselves in.
Copper has hogged most of the headlines, but zinc's recent performance has been even more stunning.
Since the start of July zinc prices have risen by nearly one-third, easily shading the 19% price hike in copper over the same period.
Speculators have finally woken up to zinc's well-hidden charms, realising that years of rubbishy prices have halted investment in new mining capacity.
Now the world is short of the stuff.
At a London conference earlier this month, analysts predicted that most base metals will see prices erode next year as supplies improve.
Not so zinc. While broker HSBC believes that nickel prices will slump 20% in 2006 and copper 14%, zinc is tipped to remain steady.
All of this is music to the ears of Australian zinc miners.
But it is interesting to look at how their fortunes have varied in the current bull market.
Zinifex, the company that rose from Pasminco's ashes, is the standout performer. Its shares are up 75% since July 1 as high metal prices feed through to better-than-expected profits.
Shares in Kim Robinson's Kagara Zinc have also done well, rising 40% over the same period as the group's Mt Garnet mine in North Queensland churns out low-cost metal.
The share price gain is a strong vindication of Robinson's "keep it simple" zinc plan based on low capital costs and ore for a central plant sourced from a number of deposits.
In contrast, Perth-based Perilya must rank as the poor cousin of those zinc luminaries.
Its shares have risen just 16% as investors fret about costs at its Broken Hill operation.
There is no doubt that Broken Hill has proved to be a much harder slog than Perilya thought when it bought the mine from Pasminco's administrators in early 2002 at a cost of $90 million.
At the time, Perilya said that changed mining practices would cut operating costs and establish Broken Hill as a "sustainable operation, which is competitive on a world scale".
Three years on the mine is still running but - despite a near doubling in zinc prices - continues to consume too much cash.
Yet broker Patersons Securities believes that Perilya has turned the corner after problems with mine sequencing and productivity "robbed" Perilya of participation in the zinc price rally.
"Patersons is confident that stability is achievable and that Broken Hill's status as the 10th largest zinc producer in the world will gain some market attention in the medium-term," it said in a recent note.
Aside from recent mine improvements ?zinc production rose 14% in the September quarter - Perilya has made a couple of smart financial moves.
In September it sold 17.2 million ounces of payable silver ?a by-product at Broken Hill ?to US-based Coeur d'Alene for an up-front payment of US$36 million.
Brokers welcomed the deal, which strengthened Perilya's balance sheet as well as freeing up cash for several development options.
But new managing director Len Jubber is yet to convince all the doubters.
Euroz Securities, for instance, notes that Broken Hill remains a high cost, capital-intensive mine with operating costs of more than $US0.40/lb.
In the September quarter, the average zinc price was $US0.59/lb generating a margin of $US0.14/lb.
Euroz estimates that this generated gross earnings of around $A15 million.
But after capex etc, the net cash flow was $A4.4 million and "post royalty payments and exploration expenditure there was no surplus cashflow", said Euroz, which retains a "Hold".
Yes, there are good reasons why Perilya has lagged some of its competitors.
But, with plenty of cash in the bank, the new management team is now identifying areas at Broken Hill that can be improved.
In such an ageing mine, those enhancements won't be easy to find.
Nevertheless, Jubber should be the right man for the job, having led the rejuvenation of the Macraes gold mine in New Zealand over the past seven years.
MD wishes him luck. It would be nice to see a legendary Australian mine regain a bit of lustre, like Madonna.
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