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Soaring Zinc Price, Mounting Supply Deficit Create Opportunity for Sector Operators

Zinc supplies are dwindling, and spot prices are soaring. Futures look robust, as well, and, despite a minor pullback toward the end of the week of October 23, there appears to be a stable forward price trajectory for the foreseeable future.  As fundamental drivers such as China’s reduced production of mined and refined zinc loom large, the upside for smaller sector participants such as Vancouver-based Zinc One Resources, Inc. (OTC: ZZZOF) (TSX.V: Z) (Zinc One Profile) is now coming sharply into focus, and there is still plenty of upside for other sector players like Vedanta (NYSE: VEDL), Hecla Mining (NYSE: HL), Southern Copper (NYSE: SCCO) and Teck Resources (NYSE: TECK).

According to a recent Technavio report, zinc demand is projected to continue providing upward of 2 to 3 percent CAGR, as it has in preceding years. The report predicts that the global zinc market will bear a hearty 4 percent CAGR through 2021 on the continued strength of vectors such as China’s trillion dollar-plus “One Belt, One Road” infrastructure development initiative, given that more than half of the demand for zinc comes from galvanizing (steel) applications. Zinc on the London Metal Exchange hit a 10-year high of $3,308 per metric ton ($1.50 per pound) in October and hit a nine-and-a-half-year high on the Shanghai Futures Exchange of $4,048 per metric ton. Meanwhile, stockpiles of zinc on both the LME and SHFE are at some of their lowest levels since 2008 and 2009. As of the end of the week of October 23, the cash/three-month LME spread is in significant backwardation, adding further weight to the supply shortage in the spot market. According to the International Lead and Zinc Study Group, the zinc supply shortfall was up 30 percent year-on-year for the first eight months of 2017 alone.

Such factors are what makes a smaller zinc-focused developer like Zinc One Resources (OTC: ZZZOF) (CVE: Z) so interesting, particularly given the company’s direct access to historically proven high-grade zinc-oxide mineralization via its Bongara zinc-oxide mine project in mining-friendly northern Peru’s mineral-rich Amazonas Region, obtained via the acquisition of Forrester Metals in June. In concert with the acquisition, Zinc One Resources closed a fully subscribed $10 million private placement that will fund exploration and development costs at Bongara, and it tapped industry veteran Dr. William “Bill” Williams (PhD, Economic Geology) as its COO.

Williams brings a considerable amount of raw experience to the table, having previously served as president and CEO of gold/copper-focused Orvana (OTC: ORVMF), as well as vice president of the copper/molybdenum-focused private company Phelps Dodge Exploration. And quite the table it is, with a proven management team of exploration geologists and engineers whose top three members have over a century of combined mining experience focused on advancing projects into production. Williams will no doubt be instrumental when it comes to ensuring the short-term and long-term success of the roughly 20,000-acre Bongara mine project and adjacent Charlotte Bongara site, which represents nearly 7,700 additional acres of drill-tested high-grade zinc oxide mineralized land.

Williams is joined by a management team with a track record of raising capital, leveraging an extensive network to identify new projects and negotiate potential acquisitions. Backed by this management team, Zinc One is in a favorable position to execute its business plan to successfully bring its Bongara Mine Project back into production and achieve near-term cash flow. A look at the project’s history emphasizes this potential.

The Bongara Zinc project was discovered in 1974 and was mined in 2007 and 2008 via open-pit operations covering just 37 acres of the massive site. The mine yielded 358 metric tons per day resulting in a 60 to 65 percent zinc end product using a very simple Waelz kiln process before the mine was shuttered in late 2008 due to the slumping market price for zinc. In addition to more recent sampling, this historic record offers a solid indicator that the project’s output can be readily extracted and processed using simple and straightforward techniques. The project has good road access and exceptional community relations with the locals.

Extant sampling and analysis indicates a sizeable zinc-oxide mineralization trend that runs all the way along the Bongara Zinc Mine site for nearly three-quarters of a mile, extending northwest into an additional exploration area (Campo Cielo) where trenching and pit mining have shown similarly high-grade zinc-oxide mineralization. The companion Charlotte Bongara mine site is adjacent to the northwest of Bongara. This is the first time these two projects have been controlled by a single operator, and, post-acquisition, they comprise an exceptional opportunity for Zinc One Resources to delineate a substantial trend of high-grade zinc-oxide that stretches for nearly two-and-a-half miles. The historical resource estimate (PDF) from Forrester on the Bongara project contains additional data and technical work stretching back to the 1990s.

The historical measured and indicated resource for the Bongara project is a hefty 1,007,796 metric tons at a grade of 21.61 percent zinc (plus 209,018 metric tons at 21.18 percent zinc inferred). With over 26,247 feet of drilling having already been completed on the project — including gorgeous intercepts such as 29.5 percent zinc across 50.9 feet, 26.1 percent zinc across 41.0 feet and 29.7 percent zinc across 37.7 feet. It is rare for zinc mineralization grades to be as exceptionally high as they are at Bongara, and the fact that the mineralization is on the surface only enhances the project’s expected economics. Ongoing surface sampling at Bongara recently showed (http://nnw.fm/o3ghQ) even more promising results, including two surface channel samples reading 47.73 percent zinc over 26.6 feet and 25.65 percent zinc over 64.6 feet, as well as an exploration pit sample of 32.50 percent zinc over 12.5 feet.

Such highly prospective and drill-tested geology at a past-producing, low-risk project, based on past production records, makes Zinc One Resources very attractive to investors, particularly because the simple metallurgy and 90-percent-plus prior recovery rates mean that the company could have very little trouble generating cash flow from the project. As one of the only new zinc companies with near-term production potential and a projected mine life estimate at Bongara of a decade or more, the exceptionally high-grade on-surface mineralization at this project will likely be coming online just as the zinc market supply gap peaks. The company expects a three-year production timeline moving forward, with an increased resource estimate by Q2 next year and a PEA by Q3 2018.

Zinc One is one of the few new zinc companies with near-term production potential, placing it among the ranks of mature companies with a deeper history in metals.

Vedanta’s (NYSE: VEDL) share price has been feeling the momentum from rising zinc prices, climbing to just shy of a yearly high at around $21 (October 30 close). Goldman Sachs (NYSE: GS) recently upped its stake in the company by 3.9 percent (to $3.99 million) after JPMorgan Chase (NYSE: JPM) went whole-hog earlier in October, upping its stake by a whopping 5,527.9 percent (to $1.164 million). With around a 72 percent share of the India zinc market under its thumb and occupying the number two slot for global production behind Glencore, Vedanta, which owns a 64.9 percent stake in subsidiary Hindustan Zinc, is well positioned to capitalize on higher zinc prices moving forward.

With four operating mines in North America and a bevy of exploration projects, Hecla Mining (NYSE: HL) is the biggest primary silver producer in the entire region. However, the company’s zinc component is starting to shine as the price rises. The company had around 111,000 tons of zinc in the proven reserves category at the close of 2016, with the lion’s share located at the company’s deep underground Lucky Friday mine in northern Idaho’s Coeur d’Alene Mining District, from which the company ships lead and zinc concentrates up to British Columbia for processing by Teck’s massive smelting and refining complex in Trail.

Teck Resources (NYSE: TECK), a diversified mining, smelting and refining group, is one of the world’s top metallurgical producers of coal and zinc and has been looking more toward zinc as the price of coal continues to sag. The company recently reported record zinc production for the second quarter in a row (102,300 metric tons) at its massive Peruvian copper-zinc mine, Antamina. It also upped the 2017 zinc production guidance for the Red Dog site to as much as 550,000 metric tons, with plans to have shipped one million tons of zinc concentrate as the season ends during the first week of November.

Southern Copper (NYSE: SCCO) has a substantial zinc production footprint in Mexico and continues to see big profits on the strength of rising copper prices, with better-than-expected Q3 earnings and a doubling of net profits compared to the same quarter last year. Zinc sales increased for Southern Copper nearly in proportion to the rise in copper sales for the company during the quarter, with zinc sales 31.4 percent higher than in Q3 2016. That’s an astonishing figure for a company that is better known for copper, and, with a supply deficit in the cards for copper similar to the one in the zinc market, SCCO may just be getting warmed up.

Mounting demand for zinc from markets like China and a supply deficit the likes of which we haven’t seen in a decade spell big things for companies with skin in the zinc game. Zinc One is in an especially unique position as one of the few younger zinc companies with near-term production potential. If successfully placed back into production, the company’s Bongara Mine Project stands to be one of the continent’s highest-grade zinc mines.