A man without enough zinc is likely to suffer from a loss of taste, smell, hair, and sexual arousal. It’s the zinc in oysters that is one reason, at least, for their popular association with libido.
For miners of the bluish-white metal, however, global insufficiency is proving to be very good for business. Although it is one of the most abundant of the minerals buried in the earth’s crust, and one of the most common in metal applications, the scarcity of zinc can be blamed on the Chinese – and not because they think its libidinal value is as good as rhinoceros horn, or tiger’s tooth. In the year 2000, China’s share of global zinc consumption was 15%. Five years later, it had risen to 27%, dwarfing everyone else. Annual growth in Chinese demand was 20% between 2003 and 2005, 13% in 2006, and 9% in 2007.
Total global consumption of zinc (refined) this year is estimated to be 12 million tonnes. Mine and smelter supply looks like reaching 11.86 million tonnes, roughly matching demand. But the three past years of deficit of supply have caused a halving of estimated zinc stocks, including London Metal Exchange (LME) measured stocks.
The effect is obvious – the price of zinc has rocketed. It was $1,084 per tonne in 2004; $1,382 in 2005; averaging $3,267 in 2006, with a record high of $3,990 in May of that year; and this year, with a forecast correction, the average price is expected to be $3,600. This week’s price is about $3,520.
Zinc is usually mined as a by-product, most often with copper and lead. The largest producers in the world are, in descending order of magnitude, Korea Zinc Group, Xstrata, Zinifex, Umicore, Glencore and Boliden; their output ranges from 893,000 tonnes per annum to 433,000 tonnes (2005). Several of these companies have increased their attributable zinc output by acquiring other companies, or their zinc divisions. In 2003, Xstrata took over MIM, and Boliden Outokumpu; in 2006 Glencore acquired Kazzinc, and Lundin Mining, Eurozinc. Three months ago, Zinifex and Umicore announced their intention to merge their zinc businesses into a single company to be called Nyrstar. None is a pure zinc player, and none is sitting on top of global sized zinc reserves.
The location of the largest reserves of zinc in the world is a matter of debate. Russian experts claim their country’s reserves range between 32 million tonnes and 46 million tonnes. At the top end, these would make Russia the leading stockist, followed by Australia with about 17% of the global aggregate, and Kazakhstan with 34 million tonnes. Canada and India trail with 23 and 18 million tonnes apiece. China ranks 6th on the reserves table, with 16 million tonnes.
The paradox of sitting on so much undeveloped, unvalued mineral wealth did not bother Soviet resource planners; they went out of business in 1991. The paradox did not become apparent again, this time as an entrepreneurial opportunity, until steelmakers began to rebuild their domestic markets, and the revival of manufacturing created more Russian demand for zinc coatings than the refineries were able to provide. Until the past five years of rapid growth in demand, there was little incentive for Russia to develop over one hundred zinc deposits that were identified in the Soviet period. Mine output, on 2005 data, was 177,000 tonnes, ranking 12th in global terms. In refining, Russia dropped to 17th, with production of 206,000 tonnes.
Domestic consumption in 2005 was just 153,000 tonnes; that’s far below the Soviet consumption level of 600,000 tonnes per annum. It translates into 1.3 kg per capita. China is already at double the Russian level, 2.2 kg, while Europe averages 6 kg and the US 4.2 kg. Catch-up by Russian consumers is forecast by Alfa Bank metals analyst Vladimir Zhukov to reach 2.2 kg/pc within a decade. Two-thirds of Russian consumption is driven by the need for galvanized steel used in construction and auto manufacture. Chemical applications of zinc account for 14% of consumption, and brass manufacture, 9%. Russian steelmakers have been adding to their coated steel line capacities, and turning out hot-dip galvanized product at a 19% rate of compound annual growth. This has fired growth of demand for zinc supplies to the steelmills, of at least 10% this year.
The zinc catch-up started in earnest in 2006, when the federal government put up for auction two mining licences with almost 3 million tonnes of zinc reserves. This year, development of another 3 million tonnes of reserves at four Altai region deposits is due to start. A combination of speculative factors, asset synergies, and mineral diversification has drawn the no.2 and no. 3 Russian copper miners, Urals Mining and Metallurgy Group (owned by Iskander Makhmudov) and the Russian Copper Company (Igor Altushkin), to accumulating zinc deposit licences, which Zhukov terms “possibles” for mine development.
The diversified Moscow investment fund Metropol has positioned itself with two of the largest undeveloped zinc reserves in the country, Ozernoye (8 million tonnes) and Kholodenskoe (14 million tonnes). Zhukov calls these “probable” for development. Metropol has told Mineweb that the Ozernoye mine will have capacity to produce 6 million tonnes of ore per annum, and is due to come on stream in stages between 2008 and 2012. The associated refinery at the site, in the southeast Siberian region of Buryatia, will produce 100,000 tonnes of refined zinc, plus lead and silver, also commencing in 2008. The mine, refinery, and related power and transport, is estimated to cost almost $800 million.
Metropol’s second zinc project, the Kholodinsky mine and processing complex, also in Buryatia, will have an estimated ore output of 2 million tonnes pa, and cost $250 million to build. Metropol has no history of bringing mine projects to completion, or of raising the large capex sums required. Consequently, there may be a bid by Metropol to cash out part of its 51% stake in Ozernoye, or its 100% holding in Kholodinsky, possibly with a zinc or multi-mineral international. To date, there has been no test of the federal government’s attitude towards the strategic value of prospected, but undeveloped zinc deposits; and no call for approval of a foreign buy-in. There has been a declared reluctance, however, to allow Chinese or Kazakh mining companies to acquire control stakes in copper deposits in southeastern Siberia. The big undeveloped Sukhoi Log goldfield has already been declared off limits for foreign miners. The federal mine licensing agency, Rosprirodnadzor, has told Mineweb it is checking compliance with the mine licences that have been issued to date to Metropol.
To Moscow mine analysts and brokers, the Russian fundamentals look strongest for the pure zinc players, and since Chelyabinsk Zinc (ticker CHZN) managed its initial placement offering last November, it is the best known, and most accessible for investors. Chelzinc is the largest zinc producer in Russia, with output last year of just under 150,000 tonnes, growing to 200,000 tonnes in 2010. Four years ago, when its output was 10,000 tonnes higher and domestic market share 72%, Euromin Holdings of the Netherlands sold its 87% stake in the company to the current Russian owners, Vadim Shevtsov, Andrei Komarov, and Alexander Fedorov. Between them, they control 52%. The free-float is 48%. This week’s share price is $162.50, or $16.25 per GDR.
Between last November and the end of June, Chelzinc’s price fell by 11%; this compared with the average gain among its international zinc mining peers of 16% in the same period. In the past month, Chelzinc’s price has accelerated by 18%. This upward momentum has defied the relatively flat trajectory of the zinc price, which is down 26% since last November.
Michael Kavanagh, Uralsib Bank’s metal analyst, believes the Chelzinc discount “even to miners seems to be unjustified, given that smelters – which is essentially what Chelzinc is – should generally have higher valuations than miners at the top of the cycle, as smelting profits are more stable.” According to his calculation, Chelzinc’s share price has been discounted by an average of 31% this year (PE basis) to international zinc miners, and 44% to international zinc smelters. On July 4, Kavanagh was projecting 18% upside on the share price to $190 ($19/GDR).
That was just before the news of Sochi’s win of the 2014 Winter Olympic Games. This has triggered a reassessment of Russia’s construction boom vectors. On July 18, Zhukov of Alfa Bank raised his price target for Chelzinc to $210/share, $21/GDR. This represents an upside if 27% from today.
The risks for Chelzinc, warn the analysts, amount to too much of a good thing. According to Kavanagh, the “key risk” is that in pursuit of expanded zinc capacity to supply the market, Chelzinc “may overpay for upstream assets.” Should the metal price turn downward, “investments may prove value destructive”. The other big risk, according to Zhukov, is domestic competition in Russia, leading to an over-supply in relation to domestic demand.