South32’s big zinc bet speaks volumes about supply-driven price outlook

Zinc has long been the most unfashionable of the metals yet it has a back-of-the-decade supply deficit outlook that could well put a rocket under prices.

So it really should be thought about alongside copper, which BHP said during the week was also getting closer to a “fly-up’’ in prices because a supply deficit originally expected in the back third of the decade could well happen sooner.

The big voice on zinc’s credentials as a go-to metal along-side copper is in none other than South32 (S32) boss Graham Kerr.

South32 has just got around to pressing the go button on a development of its Taylor zinc-lead-silver deposit in sunny Arizona.

Ignoring acquisition costs and early expenditure, Taylor comes with a capex bill of $US2.16 billion for some 253,000-290,000t of zinc-equivalent production starting in the second half of the 2027FY.

It has an initial life of 28 years and according to South32, it has an annual average EBITDA capability of $US400m.

So it is very much a South32-scale project. Having said that, if South32 thought the current zinc price of $US2,379/t was here for all time it would be a case of whoa, hold your horses.

But in making its final investment decision, South32 used a zinc price of $US3,207, some 35% higher than the current price.

Surprisingly, its bullish assessment of where zinc is headed is not reliant on equally bullish demand growth forecasts.

It said demand growth of 2%pa to 2031 versus 1% in the previous decade reflects zinc’s increasing intensity of use, with its rust-proofing galvanising properties on show in the world’s monster build-out of wind and solar infrastructure.

It is the converse situation on the supply side of the equation. South32, with its $US3bn-plus bet on Taylor, said the supply side was constrained.

“China, the world’s largest producer, has not been able to lift supply due to rising environmental regulations and declining grades,” South32 said.

“Globally, processed zinc grades have nearly halved since the early 2000s and Taylor has been the only major discovery in the past decade (others will dispute that).

“With global zinc demand growth expected to outpace production by about 3Mt to 2031, an industry challenge of similar magnitude to copper, we expect higher incentive zinc prices as Taylor ramps up to nameplate capacity.”

Now there will be those that will say South32 needed to plug in 35% higher-than-spot zinc prices to make Taylor seem more attractive as an investment proposition. But given the all-up spend is more than $US3bn, and it is already deeply involved in the zinc market through Cannington in Queensland, surely it has a better feel for where zinc is headed than the bloke next door.

As a big a bet on zinc as South32’s Taylor project represents, the group’s diversified production portfolio means its leverage to the 35% higher prices it sees coming is muted somewhat.

Rumble:

That’s not the case with some lesser companies out there with zinc exploration/development assets. They could well become the subject of renewed focus in response to South32’s bullish zinc assessment.

Rumble (RTR) falls in to that category. A $300m company back in April 2021 when it made its large-scale Earaheedy discovery, the company’s market cap has since fallen away to $50 million at Thursday’s market price of 7.4c a share.

Although a large-scale resource has already been defined, upside at the project for more tonnes is a given. The grade is not in the same class as South32’s Taylor but it is an open-cut proposition, unlike Taylor.

This year could be a big one for Rumble as it continues to expand the resource base, both at the known deposits and at new prospects like the recent Mato discovery 10km west of the main Chinook deposit.

But the real game-changer in 2024 is likely to be what comes from dense media separation (DMS)/ore sorting testwork, with DMS having the potential to upgrade the metal content of material entering a processing plant by first rejecting waste rock.

Brisbane broker Wilsons initiated on the stock last year and this week maintained a 40c price target, saying the DMS/ore sorting testwork could materially expand the economic potential of the resource base.

And on the resource base (93Mt at 3.1% combined zinc-lead and 4.1g/t silver), the broker said it believed Earaheddy had the potential to become a super-sized zinc-lead resource (more than 300Mt).

It is also worth mentioning that 30-year industry veteran Peter Harold now has his Harold Boots under the table at Rumble as its new boss. He knows about zinc too having spent his early years at the Golden Grove operation.

Develop:

Bill Beament’s Develop (DVP) is another to have strong leverage to zinc thanks to the Woodlawn project near Canberra and the Sulphur Springs project in the Pilbara.

They actually go one better by having the other deficit-emerging metal, copper, as part of their metals mix.

Develop, owned 15% by Beament of Northern Star fame, added lithium to its portfolio in November last year with the acquisition of the undeveloped Pioneer Dome deposit south of Kalgoorlie. And it is further diversified with its growing mining services business.

The Pioneer Dome pick-up explains Develop’s share price weakness in January but it has been rebuilding in recent weeks as sentiment towards things lithium is showing signs of improvement.

A scoping study on Pioneer Dome by the previous owned in February 2023 arrived at a post-tax NPV of $367m based on a spodumene pricing assumption of $US1,500/t and a higher US exchange rate of 70c.

Spot spodumene pricing is below that now but it is starting to dawn on lithium’s naysayers that its current beaten-up level won’t last. Take a look at Pilbara’s (PLS) profit presentation slides this week, which include charts from Benchmark forecasting a four-fold increase in demand by the end of the decade.

That requires the development of lots and lots of Pilbara-sized operations. It won’t happen unless incentive pricing returns. And incentive pricing is well north of $US1,500/t.

But back to Develop’s zinc exposure. Develop prefers to quote its production potential form Woodlawn and Sulphur Springs (Woodlawn is fast approaching production) in a copper equivalent potential of 50,000tpa.

At Thursday’s closing price of $2.33 a share, Develop’s market cap is sitting at $565m which is probably about right for an emerging 50,000tpa copper equivalent producer, ahead of the potential for a “fly-up” in copper (and now zinc) prices that is.

But then there is the cash-flow production mining services business, and the lithium.