Are New Mines Threatening Zinc’s Positive Price Outlook?

Zinc’s medium-term price outlook is positive, Stephen Briggs, a senior metals strategist in commodity markets strategy at BNP Paribas, recently told Metal Bulletin; however, if too many new zinc projects come online, that forecast may worsen.

“There is a good medium-term story, but that’s tending to disappear, and is being pushed further out,” he said. That’s because “[t]he bullish case is built on the key mine closures that we’re starting to see.” Such closures include the shutdown of Xstrata’s Brunswick 12 mine about a month ago and the impending shuttering of MMG’s (HKEX:1208) Century mine and Vedanta’s (LSE:VED) Lisheen mine.

The problem, Briggs believes, is that too many zinc companies see their mines as the solution to the decline in production that these closures will bring about. “None of them is huge. It’s a bit like copper in the sense that nobody is talking about very, very large mines, but there are quite a lot of medium-sized new mines and expansions. They’re mostly of the 100,000-tpy order of magnitude,” he explained.

Replacing production wouldn’t be a problem if there was demand for it. However, Briggs noted that the market is “awash with excess inventory,” stating that zinc inventories in London Metal Exchange-listed warehouses remain high. FastMarkets’ Zinc Analysis and Forecast Q1 2013 report elaborates on that point, noting that “[d]espite last year’s 3.5-percent fall in refined zinc production to 12,618,000 tonnes, there is no actual shortage of capacity or of metal.” The reason is that a 5-percent increase in mine output in 2011 has created a build up of concentrate inventory.

It’s this excess that has Briggs worrying about whether more zinc mine output is as necessary as miners seem to think it is.

Who’s building zinc mines?

Who are the miners that could benefit from recent and upcoming zinc mine closures? Here’s a brief look at three of them:

Trevali Mining (TSX:TV,OTCQX:TREVF), a zinc-focused base metals development company operating in both Canada and Peru, is one company that believes the zinc mine shutdowns will be to its advantage. So much so that, according to its website, it intends for production from its New Brunswick-based Caribou mine and concentrate plant, where operations are set to begin in early 2014, to coincide with their closure. Trevali received an operations permit for the complex at the beginning of the month, and looks to be on track to meet that goal.

Vancouver-based Canadian Zinc (TSX:CZN,OTCQB:CZICF), a development-stage company, also seems to be looking to benefit from the closures. It hopes to bring its Prairie Creek mine, located in the Northwest Territories, into production “as soon as possible.” Already in the final stages of permitting, it is likely that the mine will come online sooner rather than later.

Currently in production is the Bracemac-McLeod mine, which started up just last week. The mine is a joint venture under which Donner Metals (TSXV:DON) holds a 35-percent stake and Glencore Xstrata (LSE:GLEN) holds the remaining 65 percent. Like Caribou and Prairie Creek, Bracemac-McLeod is intended to benefit from zinc mine closures. In fact, it was brought into production specifically to replace production from Xstrata’s Perseverance mine “without a gap in feed to the Matagami mill,” according to Donner’s website.

What’s ahead for zinc?

Though Briggs notes that ”[w]e would need two or three years of deficit to erode the inventory that has built up in the past five years,” he also expects zinc to rise above $2,000 per tonne by the end of 2013 as “the medium story is still quite positive.”

Similarly, FastMarkets states, “[f]or now, the stock overhang seems to be well managed by a combination of cash-and-carry deals and restricted load-out rates – these are expected to keep supply regulated.”

The takeaway, then, seems to be that at least for now, the zinc market remains in a good place. Moving forward, however, investors may want to keep an eye on how many new zinc mines come online and how their production affects the market.

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.

Related reading:

PROJECT UPDATE: Trevali Receives Operations Permit for Caribou Mine, Concentrate Plant