Now is the moment to take a hard
look at the state of supply for zinc and platinum, says Matthew O'Keefe of
Mackie Research Capital Corporation. In an exclusive interview with The Gold Report,
O'Keefe explains how market fundamentals are about to pop up some serious
game changers in this space. International demand for zinc and the platinum
group metals is booming, but the global supply is about to seriously
contract. Well-financed mining corporations will celebrate, while others miss
The Gold Report: What is the current state of
demand in the international zinc market?
Matthew O'Keefe: As a base metal, demand for zinc
mirrors economic growth. When industrial growth is slow, demand for zinc is
slow. The zinc supply is currently about 13.2 million tons (Mt) per year
versus demand of about 13 Mt per year. Due to the current gap between supply
and demand, inventories are high.
But things are
going to change pretty dramatically during the next year or so. In Q1/13, the
first of a number of large zinc mines is slated to close down.
MO'K: Zinc mines tend to be smaller
than gold and copper mines with fewer very large producers. But early next
year, the first of several large mines will close; the Brunswick No. 12 mine
owned by Xstrata Plc (XTA:LSE) with production of about 275,000 tons (275 Kt)
"As a base metal, demand for zinc mirrors economic
Later in the
year, another large one, Xstrata's Perseverance mine in Quebec, is scheduled
to shut down. Along with a few smaller operations, the market will lose more
than 0.5 Mt next year alone, which is a big chunk of production. That will
start the trend of depleting zinc inventories. In 2014, more large mines will
close: Lisheen in Ireland, and Iscaycruz in Peru. These are structural
changes in the industry because there are no large operations to replace
them. The global decline in inventory should perk-up the price of zinc.
TGR: Why are these mines scheduled to
MO'K: These mines are at the end of
their lives. Zinc mines, like all mines, have finite life spans. But they
also tend to be fairly discrete deposits compared to the large porphyry
deposits that dominate the copper industry that can often be expanded to
capture lower grades. But the issue is more one of timing as the closure of
several large zinc properties is occurring close to the same time. Usually,
closures are offset by the development of new mines, but there is only one
new large producer starting up: the Perkoa mine in Burkina Faso with about 90
Kt per year. That's less than half of what the larger mines are producing,
highlighting the looming supply-demand imbalance.
TGR: With gold mines, as technology
improves and the price of gold goes up, you can access tailings and basically
re-mine the property.
MO'K: There have not been major changes
in the mining technology for zinc. And zinc has not enjoyed the sustained
price rise of gold or copper. Therefore, not much money has been thrown at
improving zinc mining technology.
TGR: What is the primary use of zinc?
MO'K: Zinc is mainly used for
galvanizing steel. It's used in brass and some other manufacturing so it's a
true base metal used almost entirely for industrial purposes. Underneath that
nice paint job on your car, it is the galvanized steel that keeps it from
rusting. It's a major metal in construction. All of the high rises, and many
houses, use galvanized steel studs. Duct work is galvanized steel. Growing
economies require growing supplies of zinc.
TGR: What regions are rich in zinc?
MO'K: Zinc is globally available, but
most zinc production comes out of China, South America, Australia and Canada.
TGR: How will the imbalance between
supply and demand affect the price of zinc?
MO'K: A supply shortage should drive
the price of zinc up. And with it, capital will flow to bring more mines into
production. It's a typical exploration cycle. When prices are high, there's
money available to explore and develop new mines. When prices are low, belts
tighten and there is not a lot of extra money allocated to exploration or
development. Losing the big producing mines means that there will be more
demand for zinc to close the supply gap. A number of junior projects are well
staged to succeed, if they get funding.
TGR: Such as?
MO'K: I recently screened North
America-listed zinc names looking for companies positioned to take advantage
of an increased zinc price balanced with the window of reduced supply. They
all have relatively short time frames to production and good exposure to the zinc
Corp. (TV:TSX; TREVF:OTCQX) is a near-term producer with two assets and
it will be the only real pure play zinc producer around. It has almost
completed building the Santander mine in Peru with partner Glencore
International Plc (GLEN:LSE; 0805:SEHK) and is scheduled to commence
production in early 2013. In mid-2013, if all goes well, production will
commence at Trevali's Halfmile mine in New Brunswick. That is a much larger
operation, with a significant amount of upside in the area. It will be the
cash-flowing zinc name—the next Breakwater Resources or Farallon Mining
development stage there is Canadian Zinc Corporation (CZN:TSX; CZICF:OTCQB), which
is awaiting final permitting for its Prairie Creek deposit in the Northwest
Territories. Prairie Creek was made famous by the Hunt brothers, who first
developed and built it back in the 1980s for its significant silver
byproduct. By 2015, it could be a large zinc
producer exploiting a very high-grade deposit with a significant silver
Metals Inc. (CFB.TSX) is another developer but not as well known. It has
recently signed a memorandum of understanding (MOU) on project financing for
its Tulsequah Chief project in northern British Columbia. Chieftain is only
about one-third zinc levered, so you don't get as much torque in it but the
copper and gold co-products are also quite attractive.
advanced explorers I cover Foran Mining Corp. (FOM:TSX.V). Foran is planning to
complete a preliminary economic assessment (PEA) on its McIlvenna Bay project
in Saskatchewan over the next six to eight months, which constitutes a major
derisking exercise. Foran's project could be a perfect fit for HudBay Mining
(HBM:TSX; HBM:NYSE) and its complex in Flin Flon, Manitoba, about 60
kilometers away, and could be more of a takeover target than some of the
others on this list. Foran will be an interesting one to watch.
Resources Ltd. (RTH:TSX.V) is another exciting explorer with its Olza
project in the zinc district of southern Poland. It's earlier stage, but has
the potential to leapfrog ahead with a deal to access the nearby Pomorzany
mill that is running out of ore. In the meantime, it continues to add to
drill around its 20 Mt zinc-lead resource, which has the potential to grow
significantly in terms of tons and grade.
TGR: You also cover platinum. What is
the story there with supply and demand?
MO'K: Platinum, palladium and rhodium
are the principal platinum group metals (PGMs) or platinum group elements
(PGEs). Platinum is mainly used for making catalytic converters for reducing
noxious fumes from cars. The automotive market is a bit flat in North America
and Europe, but a rapidly growing middle class has created huge demand for
cars in Brazil, China and India. Because environmental standards in these
countries are going up, new cars are being fitted with catalytic converters,
which use 3–7 grams platinum and palladium.
"In South Africa, there have been a
couple of success stories in discovering new platinum deposits outside of the
traditional Western Bushveld Complex."
The supply side
for platinum is fairly fixed. There is some production in North America and
other places. But 85% of platinum comes from South Africa. Most palladium is
mined in Russia. There is a need to find additional
supply elsewhere because South Africa and Russia pose various types of
obstacles for foreign investors.
In South Africa,
foreign firms are required to find a black economic empowerment partner, a
"BEE" partner, to cover 26% ownership interests. The agreement
includes commitments for management control, employment equity skills,
socioeconomic development—important steps but BEE is very well
supported in South Africa so it's not an obstacle any more. The real issue
for platinum and palladium explorers is access to good ground. The bulk of
the metal comes out of the Bushveld Complex in South Africa, and that real
estate is mostly controlled by three majors—Anglo Platinum Group
(AMS:JSE), Lonmin Plc (LMNIY:OTCBB) and Impala Platinum Holdings Ltd.
(IMP:JSE)—but a few explorers have managed to
squeeze into the Bushveld Complex. And in South Africa, there have been a couple of success stories in discovering new platinum
deposits outside of the traditional Western Bushveld Complex. Some pretty
interesting deposits, possible game changers, have turned up in the Northern
TGR: Do you have names?
MO'K: On the production side, Platinum Group
Metals Ltd. (PTM:TSX; PLG:NYSE.MKT) has a joint venture in the Western
Bushveld, and its project is in one of the last, best areas to mine because
it's relatively shallow. To put this in context, the bigger companies are
sinking very large, very expensive, very deep shafts spending $1.5 billion
(B) to build these challenging projects. Platinum Group Metals, on the other
hand, has shallow mineral resources, which mean simple ramps and declines,
lower capital costs—about $506 million—and relatively short
timeframe to production. The company should be finished with construction on
its Western Bushveld project next year.
"The recent disruptions in South Africa have brought to
the fore the fact that South Africa is our major supplier of PGMs; extracting
that supply is getting more challenging and more expensive."
exploration side, Platinum Group Metals has discovered a new
platinum-palladium and gold deposit in the North Limb of the
Bushveld—called the Waterberg—which is thicker than the
traditional Bushveld. The biggest problem with the Western Bushveld is that
it's a very thin zone—only about 4–5 feet (ft) thick. That means
operations have to employ a lot of manual labor, a
lot of guys chipping away at it, crouched over, in very harsh conditions. The
North Limb deposit is 10–20 ft thick. These greater thicknesses are
suitable for mechanized mining, which is much more efficient. It also means
fewer potential labor issues and lower operating costs. This deposit could be
a game changer in a country where labor issues are
becoming more and more critical.
TGR: What is the life span of those
mines likely to be?
MO'K: In the Bushveld, the life span is
related to PGM prices. At higher prices, a miner can
afford to go deeper. There is a lot of PGM resource in South Africa. The
question is economics. A lot of the platinum mines are not economically
viable at present; they cannot support new development. Some of the majors are shelving new development projects. Prices need
to rise. There is a lot of cost pressure in South Africa on labor and capital
costs. Mines deeper than 1,500 meters are just too costly.
TGR: Why is South Africa so blessed
MO'K: Geology. The Bushveld Complex is
a very special, layered intrusion in the 2-billion-year-old geological basin.
It has concentrated platinum, palladium, rhodium and some other metals within
a very thin five-foot zone. A century ago, it was mined from the surface. Miners
have been following the sheet down dip ever since. But the deeper the mine,
the higher the costs.
TGR: Are we looking at a constriction
in the supply of platinum?
MO'K: Yes, I would say so because
there's nothing like the Bushveld anywhere else in the world. The PGM
deposits that have been found outside of South Africa don't have the same
amount of platinum, they're mostly palladium, and they're nowhere near as
big. There are some other platinum deposits around the world, but, again,
it's a cost issue. We really need to see platinum sustained over $2,000/ounce
(oz) to support new development from these lower-grade deposits.
TGR: Will price rise as supply
MO'K: I think so. Some of the South
African mines are closing and some have been producing at a loss for quite
some time. You can almost hear a board of directors saying to itself,
"We can spend $1.5B to develop another one of these mines, which we know
is going to be marginal if the price stays below $2,000/oz. Why not look at
the new discoveries in the Northern Bushveld? It is amenable to mechanized
mining and contains tens of millions of ounces. Maybe we should move toward a
mechanized, more modern-type mining."
TGR: Are labor costs going to continue
MO'K: Yes. In South Africa, there have
been violent incidents with striking platinum workers. They want higher pay.
There have been regular increases in pay over the last few years, but it's
become more and more acute. The issue is not going to go away. In fact, it
has recently spread to the gold, iron ore and trucking industries.
TGR: Can rising labor costs be
absorbed by price increases?
MO'K: They should—prices have to
rise. When the strikes started happening in South Africa, the price rebounded
quite strongly, because mines were losing production. There is greater
awareness now that there is a supply constraint, and that we are relying on
South Africa for the bulk of our platinum production.
TGR: Are there any other juniors
outside of South Africa?
Platinum Corp. (NKL:TSX.V; PNIKD:OTCPK; P94P:FSE) is a North
America-based company with a copper-nickel-platinum-palladium discovery in
the Yukon. Originally, it was a high-grade, small resource that had been
around for a while. Prophecy took a new look at the drill data, and updated
the resource to include a larger halo of "disseminated
mineralization," which is lower grade, but large and continuous. This
year, the Prophecy completed a PEA, which shows a very robust project
potential. It's still in the early days, but potential PGM production is a
couple hundred thousand ounces a year, which is a sizable supply. It is continuing
to explore and develop that deposit.
TGR: Given that the two metals that
we've talked about—zinc and platinum—appear to be on a trajectory
of diminishing supply, are the majors in this field going to be scooping up
MO'K: With zinc, the Glencore/Xstrata
merger is happening right now. Those are super seniors and the merger should
add more discipline to the sector. But I expect takeovers, rather than
mergers, in the junior and middle space, because that's what we've seen in the
past. There aren't many names in zinc, and what seems to happen is that after
a good zinc asset is derisked it is promptly scooped up by Xstrata, Glencore
or Nyrstar (NYR:EN Brussels). We saw that in 2011 with Breakwater and
Farallon. They were small producers and both got scooped up by Nyrstar. The
big guys want to lock in production. They own smelters, and they want to
guarantee supply of concentrate.
Trevali will be
a prime candidate for a takeover when it's ramped up toward 200 Kt/year.
Perhaps it’s the new Breakwater. Foran seems an excellent fit for
HudBay. And there are new players on the scene. China CAMC Engineering Co.
Ltd., which is a Chinese company, acquired Procon Holdings Inc. as a Canadian
subsidiary and through Procon signed the MOU with Chieftain to acquire up to
30% of the company and its projects, which might just be the beginning.
Rathdowney is well positioned in the Olza zinc district to consolidate some
existing mining assets or be consolidated for its growing resource and land
Then, on the PGM
side, you have to look at Platinum Group Metals and its excellent prospects.
There is an overhang on the stock until the debt gets finalized but it should
still be very attractive for its Waterberg discovery. Either it can sell that
mine off or get acquired by a larger company that
wants the new production and access to the game-changing region.
Then there is Ivanplats Ltd.,
a private company formed by Robert Friedland. It is slated for an initial
public offering next month. It has several assets including a PGM deposit in
the Northern Bushveld, which is very similar to Platinum Group Metals'
Waterberg discovery. When the IPO makes that valuation public, we will have a
better data point on the actual value of the Waterberg discovery.
TGR: Any final thoughts?
MO'K: Platinum and palladium are timely
right now. Prices are running up, for good reasons. The recent disruptions in
South Africa have brought to the fore the fact that South Africa is our major
supplier of PGMs; extracting that supply is getting more challenging and more
expensive. Prices have to go up in response.
We're early on
zinc. The snapshot of the zinc market today looks as if it's in oversupply
and there's lot of inventory so it's not that exciting. But watch it at the
end of Q1/13 when Brunswick No. 12 closes. This should start a steady drop in
inventories and rise in prices.
TCR: Matthew, glad to have you join us
MO'K: It's my pleasure.
Matthew O'Keefe is managing director, mining research at
Mackie Research Capital Corporation.
O'Keefe was selected as the #1 mining analyst in the Wall Street
Journal's 2010 'Best on the Street'
survey. O'Keefe has 11 years of investment experience, and began his career
as an exploration geologist with a number of major and junior mining
companies, spending five years in the field before becoming a mining
specialist for Griffiths McBurney & Partners. Most recently, O'Keefe was
a mining analyst with Cormark Securities. O'Keefe received a Bachelor of
Science in geology from the University of Toronto, a Master of Science in
geology from Queen's University in Kingston and an MBA from the Richard Ivey
School of Business at the University of Western Ontario.
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1) Peter Byrne of The Gold Report conducted
this interview. He personally and/or his family own shares of the following
companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Foran Mining
Corp., Platinum Group Metals Ltd. and Prophecy Platinum Corp. Streetwise
Reports does not accept stock in exchange for services. Interviews are edited
3) Matthew O'Keefe: I personally and/or my family may own shares of the
following companies mentioned in this interview: Platinum Group Metals Ltd. I
personally and/or my family am paid by the following companies mentioned in
this interview: None. I was not paid by Streetwise Reports for participating
in this story.
Canadian Zinc Corporation : Chieftain Metals Inc. : Foran
Mining Corp. : Ivanplats Ltd. : Platinum
Group Metals Ltd. : Prophecy
Platinum Corp. : Rathdowney Resources Ltd. : Trevali Mining Corp.
: 49 North Resources Inc.
: Alderon Iron Ore Corp.
: DNI Metals Inc.
: Majescor Resources Inc.
: New Millennium Iron Corp.
: Orvana Minerals Corp.
: Revett Minerals Inc.