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Question marks over future of Australian zinc exploration

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Question marks over future of Australian zinc exploration

S&P Global Market Intelligence analysis points to zinc exploration in Australia rising in line with the rest of the world in 2018, but juniors and analysts believe the closet is bare as far as decent brownfields opportunities go and greenfields is too risky.

Recent research revealed S&P Global Market Intelligence's expectation that zinc should outperform in 2018, even with exploration allocations for most commodities on the increase.

Most of the budget increase is expected to come from the junior sector and from larger producers that are reopening mines due to price support, and S&P Global Market Intelligence's Nova Scotia-based associate director for Metals & Mining Research Mark Ferguson said this should be no different in Australia.

However, S&P Global Market Intelligence's numbers show [see graph below] that there will need to be a significant turnaround for this to occur, given exploration has been steadily falling since 2012 — a trend which was replicated globally, until 2017 when it started rising.

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Australia's zinc exploration spend dropped from US$46.9 million in 2016 to US$33.7 million, while the world's overall spend rose from US$378.4 million to US$489.4 million.

"Zinc exploration shot up 29% from 2016 globally [in 2017], and given the momentum in prices that's continued into this year, I'd be shocked if it didn't go up by roughly that amount again this year," Ferguson said.

"No doubt there will be a lot of juniors jumping on that bandwagon again, despite everybody expecting a lot of production to come back on stream later this year."

Glencore Plc, the world's top zinc miner, said in December that it planned to restart some zinc production and boost spending, though this would not occur until after 2018 when overall production is still expected to drop.

However, its Lady Loretta mine in Queensland will start phased production this year with 100,000 tonnes, then 60,000 more tonnes in 2019, though production from that project only represents about a third of the output Glencore suspended two years ago.

Ferguson said many market watchers believe zinc prices will retreat "not too far out," but by that time many companies will have been able to capitalize on the equity markets to raise money for their projects and will already be committing to put money into the ground.

"Next year that rate of growth will certainly start to taper off because prices will start to drop in the second half of the year, which is most pertinent for the juniors especially," Ferguson said.

"Given the population of juniors in Australia focused domestically, I would absolutely expect a strong response in their budgets, especially through the end of the fiscal year, then depending on how equity markets maintain their levels of support for the sector, I wouldn't be surprised if that carried into Q1 fiscal 2019."

The problem — verified by both ASX-listed junior Metalicity Ltd., which owns Australia's biggest zinc exploration project Admiral Bay, and Perth-based Greenfields Research director John Sykes — is that the cupboard is largely bare as far as decent brownfields projects go.

Metalicity Projects Manager Leonardo Romero said his company was now looking in Peru and more broadly in South America after an exhaustive but ultimately fruitless search around Australia for another brownfields project to explore and develop.

"Our view is that it's not that there isn't any interest in this space, it's that the projects aren't here, so the money is being spent elsewhere," Romero told S&P Global Market Intelligence.

As for Glencore's telegraphed production ramp-up, Romero believes that's easier said than done, though more S&P Global Market Intelligence research noted that Glencore's zinc in concentrate production hit 209,400 tonnes, excluding mined metal from the 70%-owned Kazzinc Consolidated was 3.8% above the prior quarter but almost 18% below the year-earlier period.

"They've been saying they're going to increase production but they still need to go through the technical challenges to achieve that. It's easy to say, but there's a lot of pieces that need to work correctly to reach those new rates," Romero said.

Sykes agreed that it's "not entirely obvious" where the decent brownfields opportunities are in Australia, while greenfields does not align well with the market's expectation of immediate returns.

"The classic ones that juniors like are an old mine that can be restarted or has some tailings to reprocess, of the very straightforward exploration around the mine that can be swiftly drilled out and converted into value for the market," he said.