Zinc got off to a rough start in 2016, but it ended the year as the best-performing metal on the LME. Many market watchers are optimistic about the base metal‘s prospects in 2017, and John Kaiser of Kaiser Research is one of them.
In the video interview above, he explains zinc’s supply and demand dynamics, noting that in the past there’s been little interest in bringing new zinc deposits online because China has been such a dominant producer. “Because China has always increased supply to meet any growth in demand, the price has never really gone up, so nothing has been developed,” he says.
Now, however, Chinese zinc production is running into problems. According to Kaiser, China produces the metal from small deposits, “many of them very polluting” — as the country continues to crack down on pollution, it will become more difficult for it to produce as much zinc as it has in the past. “That, I think, will help zinc go a lot higher than people expect,” he believes.
In light of those circumstances, Kaiser sees zinc optionality plays as “really interesting.” InZinc Mining (TSXV:IZN), which is focused on its Utah-based West Desert project, is one of his favorites. “This is almost like a hybrid optionality type of system where we know this is here, we know at what price this is worth developing, but is there a lot more,” he says.
Watch the video for more of Kaiser’s thoughts on InZinc Mining and the zinc market as a whole. He also discusses Arizona Mining (TSX:AZ), which was one of his picks last year. You can also read the full transcript below or click the following links to go directly to different parts of the interview:
INN: The zinc price did very well last year, and I know many market watchers are hoping that will continue. Can you talk a little bit about what pushed the zinc price up last year?
JK: Zinc did terrible last year initially. It eventually turned around and finished the year above $1.20. $1.20 is kind of the magic price where a lot of deposits start becoming interesting. Now, for a number of years it has been known that major zinc mines like Lisheen and Century and Brunswick are shutting down. And because China has been the dominant zinc producer – they have 40 percent of global supply – there hasn’t been much incentive to bring new deposits into production.
There are a number of large deposits up there in remote locations. You need to bring infrastructure into these areas, and you need to have confidence that $1.20 zinc is the new long-term reality. Because China has always increased supply to meet any growth in demand, the price has never really gone up, so nothing has been developed.
We have this problem where the naturally growing global economy – I mean, zinc demand grows by GDP growth rate type of thing – there’s a crunch coming where there will not be enough supply available. But then the knock on this has been, “well, don’t worry about it. China, which produced almost nothing in 1980, they’ll just produce more.” And that’s where people are starting to wake up and say, “no. China has plateaued.”
Chinese zinc supply comes from small deposits, many of them very polluting — the concentrates [are] processed by small refineries which dump all the mess into the local water system. These have been mined for the last 30 years. They’re reaching their own limits in terms of how much deeper you can chase them. They tend to have a lot of heavy metals in there that are poisonous, like cadmium and so on.
A few years ago, China did a study where they realized that their entire food supply was contaminated with heavy metals. The reason is [that] they irrigate most of their crops from river water, and the river is the toilet into which all these mines and smelters have been dumping their wastes. And China is undergoing an environmental awakening that has to be pushed through — the biggest threat to the rule of the Communist party is an uprising by rich and poor because the food they’re eating is contaminated. The air is polluted. They have to crack down on pollution, and they have to crack down on corruption.
We hear all this talk about this big corruption drive that Xi Jinping has got going. Beijing has lost control at the local level of bureaucracy. So now they need to reestablish control so they can enforce these pollution requirements. Last year, they started installing water-quality stations at around 350 cities as a strategy to shame the local bureaucrats into finding out where this poison is coming from and shut it down. This will ultimately curtail a lot of Chinese zinc supply. This is the big surprise that’s lurking in the wings. While here they talk about pulling the plug on the EPA, in China they’re talking about strengthening the EPA [so] that the Communist party will not suffer a revolution at the hands of its people. That I think will help zinc go a lot higher than people expect, which is why we’re facing a major zinc bull market.
And the street, Bay Street and so on, they’re already getting it. They’re now looking for zinc projects because they see this metal is going to be running for several years, and will stabilize at a higher real price in the way that copper did. Copper never went back to a dollar, [or] anything like that, it’s $2 plus — we’ll see something similar happen to zinc.
INN: China has been the main factor threatening a zinc price rise, and now it’s basically out of the picture. Is there anything else that would be a big threat?
JK: China is not going to be out of the picture. Its role will diminish, and so there will be a need to develop resources outside. China itself is now importing zinc concentrates.
This is where zinc optionality plays are really interesting, and there are not very many of them. One of my favorites is InZinc Mining, which acquired the West Desert project in Utah back in 2005. It had a run when zinc went to $2, but then with the 2008 crash zinc ended up back below $0.80. That project requires $1.20 zinc to be worth something. Zinc is back at this level. The company has woken up from its 10-cent slumber, and they need to spend $3 million just to check out if this system is all there is. This is almost like a hybrid optionality type of system where we know this is here, we know at what price this is worth developing, but is there a lot more? I think it’s a very similar situation to the Hermosa-Taylor Project of Arizona Mining, where they spent $40 million on a near-surface open-pitable resource that didn’t really work at the metal prices we ended up with, and probably wasn’t possible to permit in that part of the world.
INN: And Arizona Mining did very well last year.
JK: Yes. That was the star junior of all the companies out there, I had it as a Bottom Fish at $0.35. In fact, I talked about it a year ago with INN saying, “this is going to be really interesting.” At $0.46 in early March I made it a formal recommendation; it was kind of easy to see this because there’d been work done by ASARCO in the past that had created dots way over here that showed high-grade stuff. Then the company itself started to chase the oxide mineralization transition to sulfides. They started chasing it down and said, “oh wow. Look at the grades here, this is better than this oxide stuff” … they put out a resource of about 40 million tonnes of a decent grade, but you could tell they were just drilling in the part where they had the patented claims. You could see this type of system is going to be 200 million tonnes, and over the course of the year they started finding sweet spots in it. They wanted to develop it as a 10,000-tonne-per-day underground mine, which is the limit if it’s shaft based.
The market’s sort of fallen in love with this because the zinc price has gone up, [and] there’s a decent silver credit and lead credit to it. But there’s also the possibility [for] what they call the chunnel option, where if they can figure out how to drive an adit underground they could be mining on multiple faces and hauling up way more than 10,000 tonnes per day. That would allow this to be a world-class America-based zinc mine. [The stock is] back at $3 or so — to go higher it needs the zinc price to go higher or this chunnel option to become a reality. If they get that, then they have the potential to explore the whole area, because this area is a big, big system. There’s a nearby underground copper system that’s probably related to this. There’s probably all kinds of good stuff to be found that will be underground mineable, and in this part of the world you’re going to need to do it underground mineable because there would be too much opposition with regard to an open-pit mine.
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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in contributed article. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
Arizona Mining is a client of the Investing News Network. This article is not paid-for content.
John Kaiser owns shares of InZinc Mining.