In London this week I spoke with a private equity fund specialising in the mining and metals sector which has a keen interest in zinc. They cast a critical eye over the limited pool of development-track projects held by Juniors and the conclusion was that athose reviewed lacked quality and some had significant flaws or red flags. This combined with the procession of zinc mine closures over the next few years tells me that we are looking at a train crash in slow-motion. Why do I say this? It takes seven to ten years of dedicated commitment from effective management teams and investors to discover and develop a new zinc mine. For some time now it has been particularly difficult to finance earlier stage zinc exploration projects. However there are some green shoots as can be seen this week with the positive market response to a Juniors drilling results at a carbonate-hosted zinc-lead project in Turkey, which I visited earlier this year, and I am quite taken by the potential for discovery of relatively small but high-grade deposit extensions and indeed completely new deposits within a little known but historic zinc mining district.
If you explore for a metal or mine ore and produce a concentrate then it probably makes sense to try and understand the market for the refined end-product. The zinc market is more or less in balance and we have seen zinc prices relatively flat over the last few years despite historically high zinc inventories. China which consumes about 45 percent of the worlds zinc supply and is also the biggest miner of zinc is the pivotal in supply-demand equilibrium going forward and the driver behind the medium-term zinc price. Or is it?
Squirrels gather and hoard nuts and although prone to greed the intention of this seasonal gathering of such a busy little animal is not to create a shortage for others but to survive the winter. It seems that the human species can be more devious and calculating and indeed can hoard to create shortages and strangely this can be under the shady umbrella of legitimacy.
LME warehouse zinc stocks peaked in 2013 at just over 1.2 million tonnes and they are now at about half that level. A critical parameter for stocks is the measure of how many days of global supply these stocks represent and it is this metric which seems to be more important to price historically than some prediction of a looming medium-term demand-supply gap, no matter how compelling. However there is the visible and the invisible and within the visible the question of what is available and not bound up in financing deals and how quickly you can physically load the metal out of a warehouse. It is the so called load-out-rate which is the problem and which may require a stent to unblock the arterial flow of metal to to galvanizer. So for that reason let us take a glimpse at warehouse inventories and the part played by speculators and traders. It is only a glimpse to whet the appetite as it is a complex world of intrigue.
Zinc technically went into slight deficit in the last quarter of 2013 but did not impact price much because inventories are still at relatively high levels. In the last 30 days zinc stocks have declined by nearly eight percent. This might seem good for the zinc price but there has been a disconnect between stocks and price over the last few years. In fact exchange stocks have little relevance to price setting on the LME. The fall in inventories has been driven by a rush to lock in financing deals for zinc while they are still profitable. This erosion of zinc stocks is happening at a time when supply and demand is almost in balance and not as one might expect by strong surges in demand which cannot be met. The reason is that only a fraction of the zinc inventories in warehouses is going to the end user for galvanising steel, most of the metal is underpinning financing deals. So what are these deals? Banks and investors store metal in warehouses to take advantage of very low interest rates and when a market is in contango where prices are higher for forward contracts than for spot contracts. Non LME warehouses which offer lower storage rents attract stocks from the LME and then it becomes invisible. The difference between the rates at LME-registered warehouse rates of 43 45 cents per day per tonne and 10 cents which can be negotiated at non-LME depots. So a question might be deficits in mine supply appear next year how much can be met by these invisible, unreported stocks?
Back in 2012 New Orleans played host to just over 63 per cent of the LMEs zinc and if you include Detroit, Chicago and Baltimore with another 128,000 tonnes this took the US share of LME warehouse stocks to 78 per cent which is a staggering amount of the global float. This is a curious thing when you discover that the US accounted for only eight percent of global zinc consumption and just 1.8 percent of global refined zinc production in 2011. So why would you ship zinc around the world to store it as far as possible away from the end users in Asia? Why would anyone then move stocks from New Orleans where Goldman Sachs and Glencore own facilities to Vlissingen in the Netherlands which is owned by Pacorini, a warehousing unit of Glencore? One reason is that you might get to start a new queue and a backlog of zinc coming onto the market.
There has always been daily limits set by the LME for the removal of metal from its warehouses. LME rules allow warehouse operators to release much less metal per day than they take in. This load-out rate gets further constrained with so much metal in stock and the physical constraint on availability of access, forklifts and trucks for the actual volumes that can be removed. If you constrict supply by sucking up zinc stocks then you can attract a premium for your metal above the spot price. The zinc premiums have risen from $120 to $130 per tonne in January in Rotterdam to $140 to $150.
If I was a trader I might want primary production to secure my supply and then if I was able to postone gratification I could even store the nuts until it was the most advantageous time to sell. The trader is the guy in the market with the most intelligence of how it all works and leveraging that knowledge and building a dominant share of third-party traansactions is a smart way to manage the price and make money without taking your coat off. The miner has to wait till the lack of concetrate in the market bites to profit and cover the lean years but he can easily miss the cycle if it is a small mine with a relatively short life-of-mine.
So like many commodities where the bulk of the trade is between the producer and the end-user it is third-party transactions around the margins by dominant traders where not only prices are set but premiums are contrived.
PS: If you are interested have a look at my Post on May 7th entitled We love zinc
John P. Barry
Managing Director of Irus Consulting Ltd. and Professional Geologist
A widely travelled and highly experienced economic geologist, John Barry is a confidential counsellor to the likely investor contemplating a considerable investment in the intricate business of mining metals. Dont take a flyer and trust altogether in luck and invest your money in an exploration or mining project on the strength of a printed prospectus or the advice of an interested friend without the preliminary investigation and site visit of a reliable geologist with a basic grasp of commerical reality. Irus Consulting provides strategic and practical management advice and guidance to its clients. Time is a precious commodity for my clients, and indeed myself, as it relentlessly ebbs away and so I try as best I can to avoid the mediocre - those projects and their champions which do not engender enthusiastic belief and passion.
Irus Services Include:
- High-level strategic advice
- Practical guidance and assistance on project sourcing, acquisition and implementation
- Rapid identification of key project value-drivers and potential fatal flaws.
- Capacity building and coordination of external consultants.
- Design and targeting of effective marketing campaigns
John Barry was part of very small teams which discovered and sourced several multi-million ounce gold deposits in Africa. He has worked as an economic geologist since 1988 and as a consultant and then responding to the entrepreneurial spirit he was a founder and manager of three public resource companies which raised a total of US$70million. These resource companies are currently successfully exploring and developing gold and base metal projects in Europe, and sub-Sahara Africa. John has seen a lot of rocks working for consultancies such as CSA in both Ireland and Australia and as Senior Associate Geologist with Chlumsky Armbrust & Meyer LLC which is based in Denver. He is a specialist in zin-lead exploration and in 1992 joined the exploration team which discovered the Lisheen zinc-lead deposit in Ireland as the resource was being expanded in the first couple of years after discovery and in 2008 led the first non Polish exploration company to successfully enter and acquire a major resource-project in the Upper Silesian Mississippi-Valley-Type (MVT) zinc-lead district in southern Poland the worlds largest minerlised district of its kind. John (P.Geo and EurGeol) holds a Masters Degree in Geology from Pennsylvania State University and a MBA from the Edinburgh School of Business, Heriot-Watt University, Scotland.
I would like to think that I have shown the tenacity, patience and focus required to implement many of my better ideas over the years and that I have learned valuable lessons from some failures. I believe one of my strengths is in communicating quite complex technical ideas in a concrete way that can be easily understood. I am a team- builder and motivator by projecting my enthusiasm and vision for a project. I am committed to the development of young geologists through supportive delegation. John is now moving more from managing public companies to freelance consultancy and a more advisory role so as to concentrate increasingly on assisting management in effective exploration and discovery. He is Managing Director of his own Exploration Management and Geological Consultancy: Irus Consulting Ltd. Please visit www.irusconsulting.com for more information and free newsletter registration.
John is now moving more from managing public companies to freelance consultancy and a more advisory role so as to concentrate increasingly on assisting management in effective exploration and discovery. He is MD of his own Exploration Management and Geological Consultancy Irus Consulting Ltd.