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Executives from Trevali Mining, Nevsun Resources and Hecla Mining hashed out zinc supply and demand fundamentals at the Scotiabank Mining Conference 2014. Here’s an overview of what they had to say.
Scotiabank’s Mining Conference 2014, held in Toronto from December to 2 to 3, covered a lot of ground, but for those in the zinc space no doubt the standout was a panel titled “Finally Zinc’s Time to Shine.”
Hosted by analyst Mark Turner, it featured Dr. Mark Cruise, president, CEO and director of Trevali Mining (TSX:TV), Cliff T. Davis, CEO and director of Nevsun Resources (TSX:NSU,NYSEMKT:NSU), and Phillips S. Baker, Jr., CEO of Hecla Mining (NYSE:HL). Trevali is a zinc-focused base metals miner with operations in Peru and New Brunswick, while Nevsun operates the open-pit Bisha copper mine and Hecla is the largest silver producer in the US.
Panel points
As zinc market watchers well know, the metal’s prospects are good. Top zinc mines — such as MMG’s (HKEX:1208) Century — are on their way out, and with demand rising and no major mines waiting in the wings, the base metal has fallen into deficit. For at least the near future, that’s where it’s expected to stay.
Cruise, Davis and Baker highlighted those points in last week’s panel, but also delved a little deeper into what exactly is driving the market. Here’s a brief summary of some of the topics they touched on:
- Substantial rise in Chinese supply unlikely: According to Cruise, the zinc market is currently in deficit by 150,000 tonnes; however, given that China produces between 35 and 38 percent of the world’s zinc, it’s important to consider how the Asian nation may react to the shortage — for instance, will it step up production? For his part, Cruise isn’t too concerned. As he explained, during zinc’s last price run, Chinese zinc production “almost plateaued.” That’s significant because it indicates that the country’s easily accessible material has already been “ripped out of the ground.” That, combined with the fact that global head grades are dropping, particularly in China, means the country’s zinc mines likely have the highest costs in the world. Finally, Cruise pointed out that the search for a replacement for Century has been in the works for years, so market participants shouldn’t hold their breath for one to show up now.
- Non-Chinese supply also stalled: Outside China, it will be similarly difficult for companies to increase zinc supply. As mentioned, no major new mines are in the works, but aside from that Baker pointed out that companies with smaller-scale zinc operations they could put into production will need to see higher prices before they consider doing so. For example, the metal would need to hit $1.50 per pound before his company would consider putting in the effort to produce zinc from its Star mine.
- Silver price impact: Zinc supply is also being hurt by the fact that silver miners are suffering. Cruise said that if the white metal stays below $18 to $20 per ounce, it’s likely that some miners will stop or curb production, with the impact being that zinc by-product comes off the market. Hecla’s Baker concurred.
- Increased demand: Amidst all of those supply-side issues, demand for zinc is on the rise. In particular, Cruise pointed to the metal’s new use in fertilizer as potentially significant. He said that application was endorsed by China’s Ministry of Agriculture last year, and that in 2014 the country used 110,000 tonnes of zinc in fertilizer. By the end of the decade, that amount should rise to 500,000 tonnes. Meanwhile, Davis pointed out that an “amazing” amount of zinc is used as countries urbanize, and said he expects demand in aggregate to rise 50 percent in the next 15 to 20 years.
The takeaway
While last week’s panel likely brought no surprises for those who are already fans of zinc, it’s certainly good to get confirmation that in the turmoil of today’s markets, at least one commodity appears to have a solid outlook. It will be interesting to see how companies like Trevali, Nevsun and Hecla perform as supply of the metal grows tighter.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Related reading:
The Zinc Deficit Has Arrived — Here’s What You Need to Know