* Major mines going offline in 2012-2015
* Zinc shortfall expected starting in 2013
* Very few producing juniors left, mid-tiers may be next
By Julie Gordon and Aftab Ahmed
TORONTO/BANGALORE, June 28 Zinc producers are
betting on higher prices in coming years, bringing a possible
round of consolidation as miners jockey to reap the benefits.
Even though experts predict a surplus of zinc this year,
they expect prices to rise within the next two years, and
refiners, mid-sized miners and major producers are already
looking for juniors to snap up.
"I think zinc is a 2013 story," Stifel Nicolaus analyst
George Topping said of the price of zinc, which is used to
galvanize metals and prevent rust. "But if you're an industry
player you need to be in earlier. Beat the rush."
Names like Trevali Mining (TV.TO), Tirex Resources (TXX.V)
and even mid-tier producer Lundin Mining (LUN.TO) crop up as
potential targets, given that some company valuations have
fallen as zinc prices sag.
The metal is down more than 6 percent at $2,273 a tonne so
far this year and well off the 2006 high over $4,500.
If there is a rush coming, Belgian producer Nyrstar
(NYR.BR) is ahead of it. It bid C$663 million ($674 million),
including a dividend, for Canadian miner Breakwater Resources
BWR.TO last month and bought Farallon Mining late last year.
The Breakwater bid will push Nyrstar closer to its goal of
mining at least 50 percent of the concentrate that feeds its
smelters around the world and it has focused attention squarely
on the long-stagnant zinc industry.
"Nyrstar has been buying smaller zinc deposits over the
last two years, but the move on Breakwater brought their
strategy to the market's attention," said Topping. "If they're
buying you have to take note of that. They're the experts."
At first sight it's an odd time to buy up juniors, given
that zinc stocks in LME warehouses are at their highest level
since 1995 and the International Lead and Zinc Study Group
expects global refined production to exceed demand for the
fifth year running in 2011.
For a graphic on top zinc mining countries
For a factbox on zinc: [ID:N1E75R0UL]
But all that is set to change by 2013, when the closure of
big mines -- Xstrata's XTA.L Brunswick mine in Canada and
Minmetals'(1208.HK) Century zinc mine in Australia -- will
usher in the first zinc market deficit in seven years.
Bulls say those closures, combined with soaring Asian
demand, could create a 3 million tonne shortfall in the metal,
long seen as the less-alluring sister metal to copper.
"While we would certainly stop short of getting bullish
just yet there has been a noticeable improvement in the
perception of the zinc market outlook recently," Standard Bank
analyst Leon Westgate said in a note to clients.
SMALL FRIES, BIG GUYS
The problem for big name producers like Minmetals, Glencore
(GLEN.L) and Vedanta Resources (VED.L) is that with Breakwater
off the market, there aren't many zinc options left.
"If you look around the world, there are only a very
limited amount of pure-zinc players with producing assets,"
said BMO Capital Markets analyst Johannes Faul.
Trevali, which plans to have two mines in production by
early 2012 and is targeting 80,000 tonnes a year by 2015, is
seen as one of the few remaining targets.
With a market capitalization of just C$130 million, it
could be a deal for a forward-looking producer with cash.
Miners should also watch Tirex Resources, which owns the
Mirdita project in Albania, and Canadian Zinc, which owns the
Prairie Creek project in Canada. Both are in development,
highlighting that investors need to be in for the long-haul.
"We're quite positive on zinc in the mid-term, but it's
still a bit early to get excited about zinc equities over the
next 6-12 months," said Faul.
For Minmetals, a mid-tier diversified producer like Lundin,
HudBay Minerals (HBM.TO) or Boliden AB (BOL.ST) might be a
better fit as it looks to replace the 500,000 tonnes a year
that it will lose when Century closes.
Lundin, flying solo after a deal to merge with Inmet Mining
IMN.TO fell through, plans to produce some 120,000 tonnes of
zinc this year. But analysts said the diversified miner may be
overvalued, as its stock has nearly doubled in 12 months.
HudBay, on the other hand, is up just 8 percent in the last
12 months, and down some 26 percent so far this year.
It will produce around 80,000 tonnes of zinc in 2011 and
plans to ramp that up to over 125,000 tonnes by 2016.
But even as zinc prices inch toward $2,300 a tonne, the
galvanizing metal is still well behind copper, which at over
$9,000 a tonne may be a better bet for deal seekers.
"In terms of the M&A market, we will probably see more
activity in copper just because there are far more copper
junior companies to be acquired," said Raymond James analyst
(Additional reporting by Bhaswati Mukhopadhyay in Bangalore
and Melanie Burton in London)