The renaissance of the lead and zinc industries what does the future hold? Huw Roberts CHR Metals GFMS Precious & Base Metals Seminar London 14 September 2006
Current state of lead & zinc markets Global lead market now appears balanced with metal placed on warrant in LME warehouses earlier this year likely to be drawn out before year-end. Global demand growth is strong (> 4%) but weak in West (< 1%). Zinc market deficit last year of 400kt and similar deficit this year. Real prospect that LME inventories will be largely drawn down before (concentrate) supplies increase sufficiently to match higher demand. After a period of weakness LME lead prices reflect current tight supply situation, but we forecast a decline in 2007. Zinc price supported by falling stocks and outlook that market will remain tight in 2007.
Today s focus What does the future hold? Demand growth for both lead and zinc appears robust with few signs yet that high metal prices have had much longterm effect on consumption Much talk of a Supply Gap How much hyperbole? What are the facts?
Interpreting the analysis Metal demand Historical and forecast consumption of refined metal (Chart does not show smelter demand for concentrate) Secondary supply Includes true recycling (but not direct use of scrap, eg in brass production) and the use of secondary lead and zinc bearing materials by primary smelters Supply from existing mines Mines that were already in production at the end of 2005 We have made an allowance in our forecasts for unexpected production losses Total shown is after allowance for processing losses at smelters Gradual decline reflects closure of mines due to reserve depletion Committed projects Mines brought into production during the course of 2006, where construction is already underway or where a firm decision to proceed has been taken No mines in this category to enter production after 2008 most 2006 or 2007 Likely projects Still a degree of uncertainty about timing Additional Chinese mine supply Our assessment of likely increase in Chinese mine supply Data on projects is limited and many smaller mines continue to open/operate Probable projects Our assessment of projects which appear technically and financially robust enough to be developed may still require completion of BFS Mainly post 2008 developments no addition post 2011
How big is the zinc supply gap 16 14 12 10 8 6 4 2 0 Million tonnes Zinc supply. from Probable Projects from Additions in China from Likely Projects from Committed Projects from Existing Mines from secondary Metal Demand 2000 2002 2004 2006 2008 2010 2012 2014
How big is the lead supply gap 12 Million tonnes 10 8 6 4 2 Lead supply. from Probable Projects from Additions in China from Likely Projects from Committed Projects from Existing Mines from secondary Metal Demand 0 2000 2002 2004 2006 2008 2010 2012 2014
Is there a supply gap? If mine developments proceed as planned then both the zinc and lead markets will move into a situation of over supply by the end of 2007 this assumes that there is sufficient capacity to treat all concentrates produced Initially, surplus metal production will be absorbed by the markets to rebuild working inventories this may include some semi products and downstream product inventories. By the end of 2008 there appears to be a significant risk that metal inventories will be growing in excess of market requirements. Our forecast of mine supply does not take into account every project currently being put forward for development some companies might even accuse us of being too conservative when it comes to their projects. The identified supply gap in the future should be filled provided metal prices do not fall back to earth too quickly.
Why are lead/zinc mine projects being developed when projects for other metals appear few and far between? Low barriers to entry Geologically and geographically diverse/relatively small average orebody size Capital costs are low price expectations high Lack of consolidation/few industry leaders
Zinc projects are relatively small with generally lower entry costs 35% 30% 25% 20% Percent of mine/project sample Projects (135 in sample) Mines (83 in sample) 15% 10% 5% 0% >10 >5 >2 >1 >0.5 >0.2 <0.2 Million tonnes contained zinc
2003 Some consolidation of mine ownership but also fragmentation China 21.6% Other 39.9% Other 30.3% China 27.9% Teck Cominco 6.3% Top 10 38% Zinifex 5.8% BHP Billiton 2.2% Penoles 2.2% Volcan 2.6% HZL 2.8% Anglo 3.2% Xstrata 3.8% Glencore 4.4% Noranda 5.2% Lundin 1.7% Penoles 2.2% Volcan 2.8% Boliden 3.0% Anglo 3.5% HZL 4.8% Top 10 41.8% Glencore 5.1% Zinifex 5.6% Xstrata 7.1% Teck Cominco 6.0% 2006
Zinc: Shortfall in mine output key issue Mines in production currently very profitable but after several years of very low prices the project pipeline has been slow to deliver new output. c/lb Paid Zn 70 60 50 40 30 20 10 0 ZINC CASH OPERATING COSTS H1 2005 Average LME cash price H1 2005 Cum Zn kt Dynamic cost curves www.minecost.com 1400 1200 1000 800 600 400 200 0 $/t Paid Zn
Zinc: Higher prices raise costs Typical costs now a fraction of zinc price Average price YTD $2911/tonne ZINC CASH OPERATING COSTS YTD 2006 c/lb Paid Zn 100 90 80 70 60 50 40 30 20 10 0 www.minecost.com Cum Zn kt 2000 1500 1000 500 0 $/t Paid Zn
Zinc what does the future hold? Recovery in prices and falling TCs have kick-started a range of projects several of which will be in production next year.... but time is still needed to complete feasibility studies and permitting, obtain financing and undertake construction, especially for projects in probable category and others New mine projects in the pipeline for 2007/ 2008/2009 but may still be subject to delays Limited potential for new mine production in the very short term Smelter utilisation rates increasing now but not much capacity being planned and/or constructed outside China
Lead what does the future hold? Lead mine supply to rise on the back of zinc mine projects not solely because of demand for lead concentrate Huge capacity to smelt concentrates in China, turning mine production swiftly to metal Lead recycling continues to expand Disruption in China a potential risk other markets depend heavily on exports of refined lead from China If metal inventories rise fast, lead mine capacity will have to be lost
CHR METALS LIMITED Regular market commentary/detailed forecasts/confidential market research assignments In-depth analysis of the global lead and zinc industries Copper, lead, zinc, molybdenum and nickel mine costs in association with World Mine Cost Data Exchange. CHR Metals Limited Hamble House Meadrow Godalming, Surrey UK GU7 3HJ Tel: +44 1483 424442 Fax: +44 1483 527322 E-mail: huw.roberts@chrmetals.com Web: www.chrmetals.com