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Essential Metals & Mining Insights - January 2021

Industry Top Trends 2021: Metals and Mining

Zinc surplus expected to continue amid price's return to pre-pandemic level

Analysts expect zinc to remain oversupplied after it recently became the second of the S&P Goldman Sachs Commodity Index industrial metals to have prices return to pre-pandemic levels, after copper.

Zinc's rise in the past two weeks prompted special analyses from Australia's Eden Asset Management and London's Capital Economics, and the price rose further to US$2,398.50 per tonne on Aug. 6, its highest point since January, before retreating to US$2,234.75/t the next day.

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Australian independent analyst Gavin Wendt told S&P Global Market Intelligence that traders, speculators and funds have been buying back into zinc following the March sell-off. With copper, iron ore and oil having rallied strongly, he said it is "not unreasonable that zinc has also caught speculative interest."

Upside threat

Unlike copper, Capital Economics expects the zinc market to remain oversupplied "for the foreseeable future." It said in an Aug. 6 note that the price will struggle to push much higher, especially if refined output holds up as expected.

The firm suspects zinc's outperformance is due to mine supply issues, because although government-imposed lockdowns in most major metal mining nations are being relaxed, the rate at which mine output can be brought back could be slowed by still-high infection rates threatening to reduce labor availability.

The risks are greatest in Latin America, which leads the world in new confirmed virus cases by a wide margin, Capital Economics said. It estimated refined zinc output will rise by around 0.5% in 2020, even as mine supply declines by about 1.5%.

Given Capital Economics expects refined output to increase by a further 2.2% in 2021, keeping zinc in surplus as demand recovers, the firm is sticking with its end-2021 zinc forecast of US$2,400/t, roughly in line with the current price.

Eden Asset Management said in a same-day note that consensus estimates suggest a supply deficit for zinc emerging from 2022, with the price strengthening as a result to levels around US$3,000/t, which were last seen in 2018.

Though these estimates are thought to be dependent on macroeconomic tensions easing, they are also supported by historically low levels of refined zinc stocks, Eden Asset Management said, noting it is therefore "cautiously optimistic" on zinc's outlook.

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In July, Market Intelligence increased its 2020 zinc price forecast to US$2,021/t from US$2,000/t, based on the metal's performance up to that point and a greater demand forecast in China, while estimating zinc would average US$2,197/t in 2021.

Though Eden Asset Management expects a supportive environment for zinc-exposed equities, executive director Nicholas Boyd-Mathews said there are few "pure play" zinc producers around, with the bulk of global zinc production outside China coming from diversified miners.

This also reflects the fact that zinc is often produced from mines with metal coproduction such as copper, lead or silver.

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Eden Asset Management Executive
Director Nicholas Boyd-
Source: Eden Asset Management

There are a number of potential new mine developments held by ASX-listed companies, but Boyd-Mathews told Market Intelligence that zinc assets have historically proven to be tough to build and operate for juniors, as the cost curve generally favors large-scale operations.

Yet zinc is an important industrial commodity, and Boyd-Mathews said projects in Australia, which has more than 30% of the world's known zinc reserves, are "always going to attract a premium" to those in less favorable jurisdictions.

In this light, Eden Asset Management is watching New Century Resources Ltd.'s operating results at its Century zinc tailings retreatment project in Queensland, as well as new producers such as Heron Resources Ltd.'s Woodlawn project in New South Wales.

Red River Resources Ltd.'s restart of operations at Thalanga in Queensland is another notable development in Australia outside the large-cap diversified miners.

No bull market

Veteran Australian investment banker Anna Nahajski-Staples of Paloma Investments had two zinc explorers mentioned to her on Aug. 4 when she spoke to Market Intelligence.

"European gold funds were taking significant positions in gold stocks at around US$1,280 per ounce in early 2019, which was then followed by a voracious appetite from family offices and private high-net-worth investors later in the year coming into the same stocks, interested in backing early-stage gold exploration for the first time in several years," she said.

"These funds tend to be quite contrarian and I'm noticing there is a growing interest in base metals, in particular zinc and copper," which could be based on hopes that a vaccine for the coronavirus developed in the next nine months would send base metals higher, she said.

Ironbark Zinc Ltd. Managing Director Michael Jardine said the zinc price is "not in bull market territory by any means, and is probably still marginal in terms of incentivizing new supply, so there is still quite a bit of upside to go."

Jardine, whose company has been trying for years to get Citronen in Greenland into production as one of the world's largest undeveloped zinc-lead resources, said New Century did well during a price spike to get Century into production with a high level of sunk capital.

Though the task is harder to get any genuinely new development up with all the associated upfront capital, he said Citronen's size means the cutoff grade can be flexed up and down to make it economic in various ways.