I am very heavily invested in zinc: SLK.V was up over 20% today and MMG almost 10%. In addition my largest holding SIL which has barely budged, owns 65% of a mine that will be producing 225,000 tons annually at a cash cost of .51 even though its perceived as a silver mine. I have upgraded my fair value net of country risk on SIL to $54.
This was copied from another source investor village posting. you may find it of interest:
Zinc Supply
The International Lead Zinc Study Group (ILZSG, www.ilzsg.org, Zinc Statistics) estimates World zinc Consumption at 10,774,000 tonnes, Metal Production at 10,319,000 tonnes and Mine Production at 10,008,000 million tonnes.
Zinc supply deficits:
Zinc Consumption – Zinc Metal Production = -455,000 tonnes
Zinc Consumption – Zinc Mine Production = -766,000 tonnes
Zinc Metal Production – Zinc Mine Production = -311,000 tonnes (concentrate shortage)
Inadequate mine production, in spite of the stimulus of high metal prices, has created a serious concentrate shortage for zinc smelters. Smelter capacity and zinc consumption are approximately equal; smelters could supply demand, if mines could supply sufficient concentrate. Smelters are forced to produce below capacity and consumers forced to buy from London Metals Exchange (LME) inventory, explaining the inventory reduction from 780,000 tonnes of April, 2004 to 276,325 April 5, 2006.
Zinc mine reserves are being depleted faster than new production is coming on line, there is a lack of new discovery and late stage projects. Sierra Mojada is among the projects capable of coming on line in the next few years
The solution to the zinc market deficit is addition of new supply; whether, from new mines, mine expansion or restarting shut down production. Given that most mines have anticipated the supply deficit for some time, the continuance of tight supplies indicates mines are producing at their maximum capacity and either have no additional capacity or have chosen not to develop it until the zinc price increases sufficiently to justify expansion.
Zinc projects in development and restarts
(see graph)
Source: Yukon Zinc Corporation
These additions will be offset by mine closures due to reserve depletion. Closed mines and announced mine closures are: Sullivan, Pine Point, Polaris, Mt. Isa, Broken Hill, Cerro de Pasco, Kidd Creek and other mines that are near the end of their reserves. Century, located in Australia, is the world’s second largest zinc producer at 500,000 tonnes per year, its ore reserve is forecast to be depleted by 2018. The proposed restart of the Lennard Shelf deposit in Australia with historic annual production of 180,000 tonnes of zinc has only 18 months of ore reserve remaining. The 160,000 tonne McArthur River mine in Australia's Northern Territory will close unless the Mines Ministry approves its conversion from underground to open pit and to do so must overrule the Environmental Ministry which has rejected the conversion.
Andrew Roebuck of TeckCominco at the 2006 American Zinc Association convention forecast that mine closures will remove 1.4 million tonnes of zinc production by 2011 and Teck Cominco has produced the following chart illustrating the new mine production required to fill the “Zinc Gap” by 2015.
(see graph)
Harlan Meade President of Yukon zinc stated in a recent shareholder letter “Certainly, to survive the record low zinc prices in 2001-2003 period, many underground zinc mines (making up about 80% of world production) high graded their reserves, reduced underground development and cutoff exploration. Some of these mines ramped up production in second half of 2005 to take advantage of higher zinc prices; by mid 2006 don’t be surprised to see some of these producers hit the wall when they cannot sustain production.”
The 2005 zinc supply deficit between consumption and metal production is 455,000 tonnes per annum and 766,000 between consumption and mine production (ILZSG above) and new consumption last year is estimated to have increased by more than 600,000 tonnes. LME inventory April 7, 2006 was 270,375 tonnes and daily consumption is about 29,000 tonnes, equal to 9.2 days supply. LME inventory at the current rate of depletion of about 11,600 tonnes per week will be depleted in 23.3 weeks or about 6 months.
The New Orleans complication. Hurricane Katrina contaminated a portion of the New Orleans LME warehouses inventory, which is undeliverable until it has been cleaned and approved for delivery. From the Dow Jones Newswire:
"This is a labor intensive task. Each bundle weighs one ton with 44-45 plates each weighing around 46 pounds and each bundle has four straps," an industry source said.
Warehouse companies are struggling to recruit staff as most of New Orleans remains uninhabitable.
A curfew remains in place in the flooded area, where many of warehouses are located while power still hasn't been restored to many buildings, the source said.
"It takes a team of three to four people about 15 minutes per bundle. There is a staff shortage," zinc analyst Graham Deller at consultancy CRU said.
"Another problem in New Orleans is a shortage of barges and lorries that are needed in the reconstruction of the port. This is slowing shipments," Deller said.
“The LME has been gradually lifting suspensions as it inspected material and warehousing sheds, but maintained suspension on 2,819 lots, or 70,475 tons affected by flood water and require cleaning.
New Orleans warehouses currently hold 203,700 tons of LME stocks, with canceled warrants at 45.53%.
Canceled warrants denote material due to leave the warehouse soon but also incorporate the remaining suspended warrants.” (Elisabeth Behrmann; Dow Jones Newswires; +44 (0)20 7842 9412; 03-24-06 1138ET)
The 203,700 tonnes at the New Orleans warehouses is 75% of the total LME April 7 inventory of 270,375. The cancelled warrants, 45.53% of 203,700 equals 92,745 tonnes leaving 110,995 tonnes of inventory of which 70,475 is undeliverable until it is cleaned, which leaves a deliverable inventory of 40,480 tonnes, 1.4 days of consumption. The problems related to cleaning the suspended lots and the condition of the New Orleans port facilities, lack of equipment and labour slowing delivery will reduce the ability to timely supply demand putting additional pressure on the market.
The deficit will be with us for the foreseeable future, until new discoveries, restarts and expansions provide reserves sufficient to meet expanding demand and replace depleted reserves.
The available zinc inventory will go to the highest bidder. Zinc price has responded to the supply deficit and consequent depletion of LME inventory with an increase from a low of $0.335 per pound on November 7, 2001 to $1.34 per pound on April 10, 2006. With continued depletion of inventory zinc price should continue to increase and will likely continue to do so until new supply balances the market. Contrary to some analysts that forecast a balanced market by 2008, Metalline sees no solution to this problem until well after 2015, new discoveries may not be forthcoming and demand may go unfulfilled at any price.
Zinc Total Cash Costs
The average smelter cost to produce zinc is about $0.35 per pound, $770 per mt, represented by the red line in the above chart. Smelters account for essentially all zinc production. Consequently, smelter price determines the minimum zinc price, as smelters cannot produce below cost, for any length of time, and remain in business. This proposition was tested in 2001 to 2003 when prices ranged $0.34-0.37 per pound. Skorpion, located in Namibia, Africa, at 150,000 tonnes per annum and Mae Sod, in Thailand, at about 20,000 tonnes per annum being the principle oxide zinc producers. Mehdiabad, in Iran, is projected to produce about 450,000 tonnes from oxide and sulfide ore and be in production by about 2010.
The above chart demonstrates that during the period of low zinc prices, from about 2000 to 2004, few mines have been profitable and that it requires zinc prices above $0.60 for mines to be profitable. The Century Mine in Australia, one of the largest and highest grade zinc mines has cash costs of $0.37 per pound. With overhead added to cash costs to determine total costs even Century had marginal profitability until the recent rise in zinc price.
Looking sweet for zinc for several years to come! Yet another indication we have seen little out of this metals boom yet - the incredible oversupply and depressed 20 year deep bear market has skewed the world's view - people came to take metal inputs as uber-cheap components of the manufacturing process. Those days are gone - metals prices will be robust for many years to come. Eventually, if sufficient projects come online then the market will stabilise - copper for example has more robust production expansion possibilities and we will probably see copper prices fall to more moderate levels in the mid-term. But zinc is a differnt story because the typical sulphide deposits are far more difficult to find and mine.
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