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Does Zinc Stink? Maybe Not This Time! Dr Stephen Bartrop

27/4/2017

As part of the paid subscription Breakaway Mining Research Daily and Weekly Reports, Dr Stephen Bartrop - Director Breakaway Research, has written a report breaking down the zinc sector, including thoughts on what represents a good investment. To receive these recommendations, you will need to subscribe to the Breakaway Mining Research Daily and Weekly by clicking here. Here is an extract of this report (without recommendations).

Does Zinc Stink? Maybe Not This Time!

Zinc has been a perpetual disappointer as many market forecasts have come unstuck as forecast zinc supply never turns out to be as dire as it is interpreted to be. Indeed there have always been major mines shutting down as reserves are exhausted but manage to keep going longer than anticipated. I am reminded of what an ex CEO of MIM (now Glencore) once told me, that he can remember one good year for zinc in the past 30 years!

The outlook for zinc started to change back in October 2015 when Glencore announced the curtailments of 500,000 tonnes zinc in concentrate production by Glencore pushed the concentrate market into a significant deficit while global mine production was steadily falling in the background. Many analysts have been upbeat on the zinc price, largely reflecting ongoing forecast supply constraints. We are more mildly bullish and believe the best was to play the zinc story is through a diversified base metal approach – base metals often perform in unison, which is normally driven by unexpected demand at a time when supply is constrained and stocks are low. The other reason is that there aren’t any great ‘pure’ zinc stocks apart from some of the exploration juniors.

Increases in mine production and approved projects have been summarised by RBC and are listed below in Figure 1: Mine Production Increases At Existing Operations And Approved Projects. This most significant impacts are the development of King Vol in Queensland, the impact of Bisha in Etritrea and Antamina in Peru.

 

Figure. 1. Mine Production Increases At Existing Operations And Approved Projects.

 

Source: RBC

 

In comparison, production falls at the various mines account for around half of these increases in production. As evident in Figure 2: Zinc Mine Production Reductions At Existing Operations, the big production falls stem from the closure of Century, and Lisheen and the delay in moving from open pit to underground mining at Rampura-Agucah in India

 

Figure 2. Zinc Mine Production Reductions At Existing Operations

 

Source: RBC

 

In terms of supply/demand balance, Breakaway Research has aggregated data from a number of sources to formulate a consensus around the outlook for zinc in Figure 3: Supply/Demand And Zinc Price Forecasts.

 

Figure 3. Supply/Demand And Zinc Price Forecasts.

 

Source: ILZSG, RBC, Merrill Lynch, Macquarie, Breakaway Research

 

The forecasts present a solid case for zinc prices increasing beyond the current LME spot price of US$1.23/lb. Indeed, the 12% increase to our forecast average price of US$1.38/lb average price in 2018 will underpin the performance of zinc related stocks.

The following chart Figure 4: Historical Zinc Price Against Inventories As Expressed In Weeks Of Consumption plots the historical zinc price against inventories as expressed in weeks of consumption.


Figure 4. Historical Zinc Price Against Inventories As Expressed In Weeks Of Consumption


Source: RBC

 

Figure 4 (above) suggests that inventories at less than 5 weeks of consumption are bullish for the zinc price and we are moving well below this level.The forecast low levels of inventories could lead to extremely high zinc prices although historically this has only be realised on selected occasions and prices above a real price of US$1.25/lb meet with some resistance.

We will continue to monitor the situation but normally the risk lies with the emergence of unexpected zinc concentrate supply coming out of China.

The Zinc Cost Curve (Figure 5) is relatively flat and existing production is not at risk in the current zinc price regime.

 

Figure 5. C1 Zinc Cost Curve.


Source: RBC

 

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