Australia’s Zinc Transition Underway

Australia’s Zinc Transition Underway

In the most recent sign of Australia’s transition to zinc mine production, China’s state-run zinc miner, MMG (HKEX:1208), announced earlier this month that it will pursue its AU$1.49-billion Dugald River zinc-lead-silver deposit in Northwest Queensland, Australia.

MMG’s Dugald River project is just one part of wider global efforts to expand zinc production in anticipation of the global zinc supply shortfall that is expected to hit in the coming years.

“This will be a significant investment for MMG and one which demonstrates our confidence in the long-term outlook for zinc,” said Andrew Michelmore, MMG’s CEO, in a company press release.

Dugald River — whose project financing is expected to wrap up in late 2013 — will contribute between 200,000 and 220,000 tonnes of zinc concentrate annually over its 10-year project life. That will help backfill the loss of 500,000 tonnes of annual production from the company’s nearby Century mine, which is expected to close by 2016.

Xstrata’s (LSE:XTA) zinc division is also placing bets on the base metal. This week, it announced plans to increase ore production at its zinc-silver-lead Lady Loretta mine, also located in Northwest Queensland, by 33 percent, to 1.6 million tonnes (Mt) a year.

The latest expansion at Lady Loretta will increase its initially planned maximum output by 60 percent, and the injection of an additional AU$59.2 million will bring the company’s total investment in the project to $362.2 million

“This increase in high-grade ore supplied to our Mount Isa processing facilities reflects Lady Loretta’s important place in our regional production profile,” Xstrata Zinc Australia’s COO, Brian Hearne, said in the company’s news release.

Australia’s zinc resources are prized for their strategic proximity to key Asian markets, where metal and zinc demand are projected to be greatest in the coming years. Third behind China and Canada in mine output, Australia has some of the world’s best economic zinc resources thanks to large zinc-lead-silver deposits at McArthur River, Cannington and Century.

Short-term zinc price effects

Despite the long-run demand projected from emerging Asian economies, the timing of production increases will have to be strategic.

Earlier this year, the International Lead and Zinc Study Group released 2012 statistics that show a sharp rise in zinc mine production and a fall in metal and concentrate demand. LME zinc prices have fallen by 15 percent over the same period, despite surges at the beginning of 2012 and in the fall.

Arab News notes that zinc surpluses at LME warehouses also hit record highs this year, topping 1 Mt for the first time since 1995; similarly, Platts reported that LME-warehouse surpluses of the metal rose to 1,227,175 tonnes on December 19.

Those in charge at Xstrata and MMG are hoping that the Mount Isa and Dugald River projects will avoid the current surpluses. Production at both won’t come online until after 2015, when demand, slated at 4 percent annually, is expected to overlap with the closure of major zinc mines in Australia and Canada.

News of rebounding industrial demand in India and China has brought some renewed confidence in the Asian market as investors look for projects to meet demand for zinc, which is used to galvanize and strengthen steel used for industrial purposes.

Korea Zinc, a government-run zinc refiner and major supplier of refined zinc to Chinese markets, recently increased the premiums it charges above LME cash prices for 2013 deliveries. The increase was the result of Chinese smelter production cuts taking hold of markets, according to a Business Recorder article.

Existing refined zinc supplies remain tied up in financial deals or long queues, justifying the higher zinc premiums, the same article notes. Creating new supply will certainly build on these existing sources, but should demand materialize, shortages — not stockpiles — are expected to be the norm for zinc markets.

 

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