Scotiabank commodities specialist Patricia Mohr says a cyclical recovery in zinc and nickel is underway, leading to dramatically higher prices in 2015. (See below for information about specific zinc and nickel stocks).
In the latest Scotiabank Commodity Price Index report, Mohr says global supply and demand conditions for ‘refined zinc’ are in ‘deficit’ in 2014, meaning that world consumption of slap zinc exceeds production.
This has helped to reduce London Metal Exchange and Shanghai Futures Exchange stocks by 21% since 2013.
Mohr said Chinese imports of ‘refined’ zinc have jumped by 39.3% through July.
Solid underlying demand growth – up about 7% in 2014 -- is being driven by strong auto production, the rising content of galvanized steel in cars to prevent rust and low operating rates at Chinese smelters due to weak treatment charges and poor profitability.
While zinc ‘concentrate’ supplies remain ample, Mohr said ‘concentrates’ will likely also move into ‘deficit’ by 2016 due to significant mine depletion at operations that include:
Australia’s 480,000-tonne Century mine in mid-2015, the world’s third largest zinc mine.
The 132,000-tonne Lisheen mine in Ireland in 2016.
The deficit forecast also takes into account closures at the Brunswick and Perseverance mines in Canada.
Mohr says overall mine output should ramp up. However, her Scotiabank report says recent prices have not been high enough to “incent” sufficient new mine development to meet world demand.
Hence market conditions will become genuinely tight in 2016, she said.
But published reports say the picture is about to get even more rosy. This is because fertilizer is expected to emerge as another source of demand for zinc.
A Wall St Daily says studies completed in Brazil, China, India and Turkey showed that adding zinc as a micronutrient in fertilizer raised crop yields by 8% to 12% and increased zinc content in the harvested grains by 20% to 40%.
As plants need zinc to synthesize proteins and generate energy, IHS is predicting that the biggest demand growth sector for zinc chemicals through 2018 will be in fertilizer (using zinc sulfate mostly).
IHS is a leading global source of critical information and insight.
Meanwhile, a recovery in nickel prices is also under way.
London Metal Exchange nickel has spurted from US$6.31 a pound in December 2013 to US$8.64 in July and should climb to US$10.75 in 2015 and US$12 in 2016, the Scotiabank report says.
In Mohr’s view, the January 11, 2014 ban on the export of unprocessed nickel-containing ore from Indonesia (accounting for 28% of world supplies) is likely to hold (without exception).
She goes on to write that the world supply and demand balance will shift into a market deficit in 2015 as China depletes its inventory of Indonesian ore for Nickel Pig Iron production (used in stainless steel).
Prices will remain high until 2016 (second half) when new processing plants become available in Indonesia, Mohr said, adding that 16 have been proposed, funded mostly by China.
There is no specific reference to copper in the Scotiabank report, likely because analysts remain divided over the future direction of prices. As noted in a Reuters report, opinions are split over whether copper will continue its recent rally or lose ground over the rest of 2014.
London copper prices have gained 3.4% between August 14 and Tuesday’s close of $7,054 a tonne, although they are still down 4.2% since the start of the year.
Trevali Mining Corp. (
TSX: T.TV,
Stock Forum) is a base metals mining company with one producing operation in Peru and an advanced stage mine under development in Canada.
Teck Resources Ltd. (
TSX: TCK.B,
Stock Forum). Dundee Capital has a buy rating on Teck with a 12-month target of $29.
The move came after Teck increased its zinc production guidance by 6% for 2014. By restarting its Pend Oreille zinc mine before the end of this year, Teck could increase its zinc production by another 5-7% next year, Dundee said in a research report.
Pasinex Resources Ltd. (
CNQ: C.PSE,
Stock Forum) said last week it had raised $677,370 from a private placement financing to fund exploration at the Pinargozu zinc-lead project in Turkey.
Sierra Metals Inc. (
TSX: T.SMT,
Stock Forum) said last month that drilling at its Yauricocha property in Peru encountered wide zones of high grade zinc mineralization. The Yauricocha property comprises multiple low-tonnage bodies. It produced one million tonnes of ore averaging 135.1 grams per tonne silver, 3.24% lead and 6.9% zinc from 1996 to June 2014.
HudBay Minerals Inc. (
TSX: T.HBM,
Stock Forum). Having recently agreed to merge with
Augusta Resources Corp. (
TSX: T.AZC,
Stock Forum) is focusing on the Flin Flon Greenstone belt in Manitoba. It’s 777 mine produces zinc,copper, gold and silver. The company also has processing facilities that include a state of the art zinc plant, which produces high-grade zinc metal in three cast shapes from zinc concentrate. It is one of three primary zinc producers in North America.
Sherritt International Corp. (
TSX: T.S,
Stock Forum) is engaged in nickel and cobalt mining via a 50% stake in the Moa Joint Venture in Cuba and its 40% stake in the Ambatovy Joint Venture in Madagascar. Amatovy has an annual design capacity of 60,000 tonnes of nickel and 5,600 tonnes of cobalt. Currently Moa produces approximately 38,000 tonnes of nickel and cobalt annually.
Royal Nickel Corp. (
TSX: T. RNX,
Stock Forum) is aiming to develop its flagship Dumont nickel project near Amos, Quebec. The project is estimated to host 6.9 billion pounds of nickel in proven and probably reserves. The company is also exposed to nickel via its interest in the Aer-Kidd property near Sudbury and the West Raglan project in Northern Quebec.
FULL DISCLOSURE: Sierra Metals, Trevali Mining, and Pasinex Resources are Stockhouse Publishing clients.