Backwardation in Zinc Market Signals Strong Demand and Tightening Supplies

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Nov 09, 2017, 07:30 ET

NEW YORK, November 9, 2017 /PRNewswire/ --

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 Resources, Inc. (OTC: ZZZOF) (TSX-V: Z) (Zinc One Profile), Hecla Mining Company (NYSE: HL), Southern Copper Corp (NYSE: SCCO), Teck Resources (NYSE: TECK) and Vedanta Ltd (NYSE: VEDL) 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) (TSX-V: Z), 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).

Meanwhile, Hecla Mining Company (NYSE: HL), which produces gold, silver lead and zinc, has announced 'substantial increases in production of all four metals' in the third quarter ending September 30, 2017 (http://nnw.fm/6iqBs). In particular, production of zinc was 14,498 tons for the third quarter. Hecla, although primarily focused on silver and gold, unearths substantial quantities of zinc ore in its exploration activities. Its Greens Creek and Lucky Friday mines have reported large proven and probable zinc reserves. It is mainly known, however, as a leading, low-cost silver producer with operating silver mines in Alaska (Greens Creek), Idaho (Lucky Friday), and Mexico (San Sebastian) and as a gold producer with an operating mine (Casa Berardi) in Quebec, Canada.

Strangely zinc production was down (by 20%) at the Southern Copper (NYSE: SCCO). As its name indicates, this is a company focused mainly on copper, with operations in Southern Peru and Northern Mexico. It is the world's largest publicly traded copper mining company and the world's seventh largest copper mining company. In addition, it produces large quantities of zinc. Reporting for the third quarter 2017, the company said it had produced 19,572 tons of zinc (http://nnw.fm/w6Dk8 ).

However, Teck (NYSE: TECK), the world's No. 3 zinc producer continues its reliance on the silvery metal. It has reported that 26% of its gross profit in 2016, before depreciation and amortization, came from zinc. In 2016, Hecla produced 662,000 tons of zinc contained in concentrate and expects to increase that in the near future. At its Red Dog operation in Alaska, the largest zinc pit in the world, a vein of hard-to-refine but zinc-rich rock with ore holding about 24 percent zinc (compared to 14 percent in the pit as a whole) has been discovered.

Vedanta (NYSE: VEDL) has already started to increase output. The company announced (http://nnw.fm/e73IT) that 'mined metal production at its Indian zinc unit rose 42 percent in the first half, boosted by higher ore production across all its mines.' The company said its open-pit operations at subsidiary Zinc India reached 452,000 tons for the half-year ended September 30, 2017. This marks a 180 degree turn for Vedanta. It was just two years ago that it closed its Lisheen mine in Ireland. At the time, Lisheen was Europe's second-largest zinc mine with a capacity of around 175,000 tons. Its closure reduced global supplies by around 1.3 percent.

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.

For more information on Zinc One Resources, visit Zinc One Resources (OTC: ZZZOF) (TSX-V: Z)

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