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Backwardation in Zinc Market Signals Strong Demand and Tightening Supplies

Zinc is in a bull market. Over the past two years, global supplies of the metal have fallen by 3-4% while demand has continued to rise. In recent months, the resulting price increases have been accelerating. One-year spot zinc trading at $1,000 per pound in June 2017 is now near $1,500 per pound, according to KITCO data (http://nnw.fm/53yPa). That 50-percent increase has led to a market condition known as backwardation, when spot prices rise above current futures prices. With backwardation signaling strong demand and tightening supplies, proactive miners like Zinc One are taking steps to increase output and take advantage of a favorable market.

The recent increases in the spot price of zinc will undoubtedly make shuttered operations look more viable. Respected industry consultants Wood Mackenzie believe the critical issue for the market, in the near to medium term, is the response of the world’s largest producer, Glencore. The world’s No. 1 zinc producer is widely expected to return its major zinc mines to full production, but the timing remains uncertain. For the medium to long term, Wood Mackenzie questions ‘whether the zinc mining industry will be able to develop sufficient new mine capacity to offset scheduled mine closures and the incremental increase in global demand’ (http://nnw.fm/0YUHz). That disquiet is real. Nothing has changed since the International Lead and Zinc Study Group released its Spring 2017 report (http://nnw.fm/yl6VF), which forecast an increase in global demand for refined zinc metal by 2.6% to 14.30 million tons in 2017.

The present supply shortfall hasn’t gone unnoticed by Zinc One Resources (OTC: ZZZOF) (Z.CA), which is focused on the acquisition, exploration and development of prospective and advanced zinc projects. The Vancouver-based company plans to revive the past-producing Bongará Zinc Mine project, which was discovered in 1973 and mined by a previous owner from 2007 to 2008 employing open-pit methods, but it was subsequently shut down due to declining zinc prices.

At that time, the zinc oxide rich mineralized soil was dug up and dried on site and then shipped 540 kilometers (just over 335 miles) westward to the coast where it was processed through a Waelz kiln using a process technology typically applied to recover zinc from flue dust in steel mills. A greater than 60% zinc calcine was captured and subsequently marketed to smelters and refineries in Peru and the United States.

While in operation, Bongará showed its value, with high zinc grades above 20 percent and recoveries from surface deposits exceeding 90 percent. A neighboring asset is the icing on Zinc One’s cake. Adjacent to the main Bongará site is the Charlotte Bongará Zinc-Oxide Project, which has several at-surface high-grade drill intercepts providing numerous drill targets (i.e. 29.5% zinc across 15.5 meters, 26.1% zinc across 12.5 meters and 29.7% zinc across 11.5 meters), many with blue-sky potential. This is the first time that these two assets have been controlled by a single operator, giving Zinc One a unique opportunity to delineate a substantial high-grade, zinc-oxide resource along a 6-kilometer-long trend (3.7 miles), from which 55.1 million pounds of zinc (358 tonnes per day) have been produced in the past. Zinc One also has access to all data and technical work dating back to the 1990s and controls a third zinc prospect located in British Columbia, Canada as part of its portfolio.

Moreover, Peru’s Ministry of Energy and Mines has suspended the closure of the Bongará Zinc Mine, which allows Zinc One to take another important step forward in its plans to reopen production at Bongará by utilizing the current Environmental Impact Assessment attached to the project for current and future permitting (http://nnw.fm/O82uE).

The company recently reported promising results from an ongoing surface sampling program at the Bongará Zinc Mine (http://nnw.fm/82oMy). The highest grades have included a surface channel sample (#38) with 47.73% zinc over 8.1 meters from a dolomite, a surface channel sample (#72) that yielded 25.65% zinc over 19.7 meters from a dolomite breccia, and 32.50% zinc over a 3.8-metre depth from a dolomite breccia in an exploration pit (#425).

 

With zinc prices at a 10-year high, investors are awakening to the growth potential of key industry players. Backwardation in the markets has reinforced that positive outlook, with refiners willing to pay a premium (over future prices) in the spot market to secure supplies. As demand continues to rise in a post-recession world, zinc seems more than likely to maintain its luster.

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