Analyst view: Assessing zinc’s place in the base metals boom

Amid the broader post-COVID bull run across the commodities complex, base metal mainstays zinc and lead have diverged this year from the market leaders.

At the macro level, the relative underperformance of zinc compared to other base metals (most notably copper) can be traced to a number of global supply/demand factors.

But dialling in at the company level, those catalysts haven’t served to cramp activity entirely.

A number of ASX-listed zinc plays remain well-funded to continue project development, and explorers that unearth high-grade mineralisation have found strong investor support for additional drilling activity.

Price catalysts

Like other base metals, zinc prices posted a steady rebound last year from their pandemic crisis lows near US$2,000/t.

Demand for zinc has been supported by the strong rebound in industrial production across the largest global economies, along with ongoing pledges for major government infrastructure initiatives.

Tied to that macro theme is zinc’s core use case as a primary input in galvanised steel, which drives around 50 per cent of global zinc demand on a first-use basis according to the ILZSG (International Lead and Zinc Study Group).

But so far in 2021, copper has continued to all-time highs above US$9,000/t while zinc has stalled around US$3,000/t – still below 2018 levels.

“Zinc definitely lacks the investor draw that copper does, and I’d say there’s a couple of reasons for that,” says Hedley Widdup, director at specialist resources investment firm Lion Selection Group.

“Firstly, copper is clearly connected to the global battery thematic, while zinc is not as central to the growth of that sector,” Widdup told Stockhead.

Secondly, he said it’s worth assessing why copper is at all-time highs while zinc has jumped but is still well below its highs.

“There might be multiple reasons for that, including speculation by traders,” Widdup said.

“But broadly I think you could say the copper market is tighter than zinc in terms of meeting demand (whatever the demand is driven by), and subject to greater interruptions such as strikes.”

Industry stats show the global zinc metal market was operating at a “substantial surplus” in 2020 of around 500,000 tonnes, according to Concord Resources research director Duncan Hobbs.

And while that supply build-up did follow four years of deficits which collectively amounted to 1.4 million tonnes, the 2020 surplus amounted to almost 4% of the total market size – the heaviest in “almost 30 years”, Hobbs said.

In that context, it would be “a big ask” for global zinc demand to eclipse the supply surplus in 2021.

“Increases on this scale have been seen only six times in the last 50 years, and usually after steeper drops than in 2020,” Hobbs said.

Market activity

If supply/demand forces don’t drive zinc back towards 2018 levels above US$3,500/tonne, are conditions still conducive to project development and ongoing activity in capital markets?

Based on the recent momentum for ASX-listed zinc plays, the answer is still yes. A number of companies operate in the space, with project maturities spanning from early stage exploration to the proving-up of resource estimates.

Late last year, resident Stockhead analyst Guy Le Page flagged Alta Zinc (ASX:AZI) as a stock to watch.

The company has been running drill programs at Gorno – its brownfields zinc project in northern Italy where it holds exploration licences through to 2026.

Drill results in 2021 revealed more high-grade mineralisation at the site, at which point AZI completed an additional $3.75m capital raise in late March.

The round was backed by Melbourne’s Smorgon Group, a cornerstone investor, and attracted institutional demand from global resources fund Rab Capital.

Evidence of ongoing liquidity in capital markets at the company level for zinc/lead explorers was further demonstrated by Perth-based explorer Rumble Resources (ASX:RTR).

A 26-hole drill program at the company’s Earaheedy project in Western Australia intersected visual zinc-lead mineralisation, with fast-tracked drilling confirming a major discovery in mid-April.

By the end of April, RTR had received firm commitments from institutional investors for a $40m share placement at 50c – a premium of around 400pc to its pre-discovery trading price at the start of the month.

RTR said the funds raised will allow it to significantly scale up its reverse circulation drilling program and begin initial metallurgical test work.

Rounding out some bullish Zn-PB market activity in recent months was Variscan Mines (ASX:VAR), which acquired rights to the advanced San Jose zinc project in Spain in 2019.

In May, the company advised that underground drilling had intersected high-grade zinc mineralisation above and below existing mine stopes at San Jose.

In response, investors sent the stock more than 80 per cent higher in intraday trade, with VAR shares consolidating those gains over the past week.

Taken in aggregate, the results demonstrate that market activity at the ground level remains robust for explorers that can unearth high-grade mineralisation.

While macro catalysts may not drive zinc prices to new all-time highs like copper and iron ore, zinc is still the world’s fourth-most globally consumed metal in an environment where industrial production has exceeded pre-COVID levels in multiple regions.

In that context, recent evidence indicates that conditions should remain supportive of investment and project development for zinc companies over the medium term.