Think Zinc for Longer-term Gains, Analysts Reaffirm

Over the last few months, zinc market watchers — including FastMarkets, Research and Markets and Stefan Ioannou of Haywood Securities — have noted that while zinc prices are not likely to experience much movement for the remainder of 2013, longer term the metal’s outlook is positive.

Two similar reports, this time from HSBC Holdings (LSE:HSBA,NYSE:HBC) and MoneyWeek, surfaced in July and August. Here’s a brief look at what they say.

Silver accounts for 40 percent of the by-product material produced from zinc mining, and normally “helps reduce costs for mineral companies,” Bloomberg quotes HSBC as saying in a recent article. However, “[a] falling silver price effectively raises the cost curve in the zinc industry,” according to Andrew Keen, global head of metals and mining equity research at the bank.

While that’s not the best news for zinc miners — Keen states that “[silver] doesn’t have to fall as far as it used to to trigger closures of mine capacity” — it does indicate that zinc prices may be set to improve. As Bart Melek, head of commodity strategy at TD Securities in Toronto, points out in the Bloomberg piece, “[w]ith lower silver prices the cost has gone up for some zinc miners. That will put more pressure on the zinc price to go up.”

Looking at zinc’s future from a different angle, MoneyWeek’s Dominic Frisby reported that based on the current rates of discovery and production, lead and zinc will be in the shortest supply in the next 10 to 15 years. Citing a presentation given by Richard Schodde, managing director of MinEx Consulting, Frisby explains that “for supplies of a metal to be sustainable, miners need to find about twice as much of the mineral as is currently being mined.” However, by Schodde’s count, in the next decade, zinc’s discovery-to-production ratio will fall to 0.7, with discovery rates neither able to match current demand nor maintain future supplies.

Based on that information, Frisby, like HSBC, believes that zinc has good long-term prospects and is a metal that investors should keep an eye on.

Company news

Donner Metals (TSXV:DON) reported last Tuesday that it has forfeited its interest in the Quebec-based Bracemac-McLeod zinc-copper mine and mine property area as a result of an “uncured default” under the Metal Purchase Agreement it entered with Sandstorm Metals & Energy (TSXV:SND), Sandstorm Metals & Energy (Canada) and Sandstorm Gold (TSX:SSL,NYSEMKT:SAND).

Put more simply, Donner “failed to pay amounts owed under a development and operating agreement with Glencore … with respect to Donner’s share of the monthly expenditure at Bracemac-McLeod,” MetalBulletin explains. Bracemac-McLeod is operated by a subsidiary of Glencore Xstrata (LSE:GLEN), and Donner’s interest in Bracemac-McLeod was sold to Glencore on August 30.

Also that Tuesday, Perilya (ASX:PEM), owner of the lead-zinc-silver Broken Hill mine, received a takeover offer from Shenzhen Zhongjin Lingnan Nonfemet Company (SZSE:000060), its majority shareholder and China’s number-three zinc producer. Perilya’s independent directors are unanimously in support of the proposed takeover “in the absence of a superior proposal” and subject to an independent expert “determining that the Scheme is in the best interests of Perilya’s shareholders,” the company’s press release states.

The release also notes that the offer price — $0.35 per Perilya share — is a 59-percent premium to Perilya’s closing share price on August 30.

Junior company news

In late August, Avrupa Minerals (TSXV:AVU) purchased a 7.5-percent interest in Innomatik Exploration Kosovo, bringing its stake in the company up to 100 percent. Avrupa owns five exploration licenses in Kosovo that contain base and precious metal targets.

Paul W. Kuhn, CEO of Avrupa, believes that “purchasing the remaining 7.5% interest in Innomatik [will allow] the Company to better negotiate with potential JV partners on its properties in Kosovo.”

On September 4, Nevsun Resources (TSX:NSU,NYSEMKT:NSU) revealed for the first time drill results completed by the previous owner of the Mogoraib River exploration license, which includes Hambok, a copper-zinc massive sulphide deposit. Further mineral resource definition drilling is now taking place.

The same day, Canadian Zinc (TSX:CZN,OTCQB:CZICF) announced that it is about to start a new diamond-drill exploration program at its Northwest Territories-based Prairie Creek project. “Five drill holes totalling approximately 2,500 metres of coring are planned to test a large multi-stacked gravity and electromagnetic (“EM”) geophysical anomaly that is estimated to be at a depth of between 200 and 450 metres below surface, situated approximately one kilometre from the mine site, outside but adjacent to the defined mineral resource,” the company’s press release states.

The news follows Canadian Zinc’s August 20 closure of a bought-deal private placement of flow-through shares with Canaccord Genuity through which the company raised C$4 million.

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

Related reading:

Zinc Prices to Remain Steady Throughout 2013

Zinc’s Medium-term Outlook Positive, Says Haywood’s Ioannou