Are Zinc Mining Companies Too Bullish?

Zinc has enjoyed one of the most positive fundamental pictures of all the base metals. The looming closure of major mines such as Century in Australia and, next year, Lisheen in Ireland has most analysts predicting that this year's deficit may only getting worse in the years to come.

According to the World Bureau of Metal Statistics reported just this week that January to February this year the market was running a 25-kiloton surplus, not much changed from last year’s running average. Reported stocks fell, however, by nearly 111,000 tons over the first two months of the year, mostly at LME warehouses where some 56% of visible global stocks are held.

Meanwhile, Chinese demand is reported to have risen 10.6% compared to the same first two months of 2013 and refined production rose by 5.3% for the same period, contributing to increased imports. But not all imported Zinc is being consumed in China. Like copper and iron ore, a proportion is being held in financing deals and true consumption is likely lower than it seems.

Miners, however, are feeling pretty bullish, according to the FT. Trevali , another Canadian miner, is preparing to reopen its Caribou mine, which was closed five years ago due to weak prices.

If old mines are being reopened, money will be committed to new mines in the planning stage. With above-ground stocks estimated at some 2 million tons it could be that miners are getting a little ahead of themselves. Certainly, mines take a long time to restart and even longer to build from scratch. By their very nature, mining companies have to think long-term, but it would be interesting to know what the break-even cost for these mines truly is. Teck CEO Don Lindsay is quoted as saying over a three year period, starting from last year, some 1.3 million tons of production will be closed due to mine depletion in a market of just 13 million tons a year and one that was estimated to be in surplus by only 114k tons last year that’s a sizeable loss of supply. What is not so clear is how many other Pend Oreille’s and Caribou’s are being built. New mine supply, although more fragmented in terms of size and location than those closing may make up a sizeable contribution to filling that shortfall. Positive future yes, but not the market squeeze that would see prices hit 2006 peaks again.

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Written By: MetalMiner