When I wrote my last article, named "Trevali Mining: Prepared For The Zinc Bull", I received some public as well as private feedback which inspired me to take a closer look at some of the other "zinc plays". In this article I will briefly introduce some of the more interesting zinc plays. I intend to pay more attention to these companies in a series of articles.
There are not too many companies with a significant exposure (more than 50% of revenues or earnings) to zinc. Zinc is often produced as a by-product of copper, gold or silver mines. As a result, zinc is produced by various mining companies but it mostly doesn't impact their financial results too much. Some of the biggest zinc producers are big diversified mining companies such as Glencore (OTCPK:GLNCY), Teck (TCK) or Vedanta Resources (OTCPK:VDNRF). Glencore mined 1.387 million tonnes of zinc in 2014, which attributed to approximately 5% of its EBIT. Vedanta produced 1.245 million tonnes of zinc in 2014, which attributed to 33% of its EBITDA. Teck produced 937,000 tonnes of zinc in 2014 and it accounted for approximately 27% of its EBIT.
The above mentioned companies are an important part of the global zinc business but zinc is not in the center of their attention. A significantly higher leverage to zinc prices provide the companies listed below.
Nyrstar (OTCPK:NYRSY) is a Belgian mining company focused on zinc and lead production. It is the world biggest zinc smelter (1.1 million tonnes of zinc smelted in 2014) and the 5th biggest zinc miner (278,000 tonnes of zinc). 70% of the Nyrstar's 2014 gross profit was attributable to zinc.
Hindustan Zinc (OTCPK:HNDZY) is an Indian zinc producer that belongs to the Vedanta group of companies. Sesa Sterlite (SSLT), a subsidiary of Vedanta Resources, owns 64.9% of Hindustan Zinc and the Indian government owns 29.5%. The remaining 5.6% of shares are listed on Indian stock exchanges NSE and BSE and the ADRs are traded in the USA. Hindustan Zinc mined 770,000 tonnes of zinc and refined 750,000 tonnes of zinc in 2014.
Trevali Mining (OTCQX:TREVF) is a growing junior miner that produced 23,000 tonnes of zinc in 2014. It has one producing mine in Peru, but a second one, located in Canada, should start its production by the summer of 2015 and it should grow Trevali's zinc production by 42,000 tonnes per year. The company is smaller and more risky than the abovementioned zinc producers, but it is more leveraged to zinc prices, it is expanding its production and it has a significant exploration potential. Trevali Mining is my favorite zinc play.
Canadian Zinc (OTCQB:CZICF) is a Canadian exploration company focused on development of the Prairie Creek Mine. The deposit contains proven & probable reserves of 2.812 billion lb of zinc equivalent (1.075 billion lb of zinc, 1.093 billion lb of lead, 25 million toz of silver). The proposed underground mine should produce 76 million lb of zinc, 90 million lb of lead and 2.2 million toz of silver per year, over the 11 year mine life. The post-tax NPV(8%) is $155 million and the post-tax IRR is 31.7%. The mine is fully permitted and some infrastructure built in the 1980's is in place. The estimates say that it is worth approximately $200 million. The biggest problem of the project is the financing of the capex. Although the initial capex is only $193 million, the company has been unable to secure the financial package yet. Moreover the pre-feasibility study was completed back in 2012 and the NPV and IRR would be lower, using the current metals prices.
Chieftain Metals (OTC:CFTMF) is another Canadian exploration company. It owns the Tulsequah Project located in British Columbia. The proven & probable reserves contain 520 million lb of zinc, 121 million lb of copper, 78 million lb of lead, 11 million toz of silver and 356,000 toz of gold. An annual production of 47 million lb of zinc, 11 million lb of copper 32,000 toz of gold is expected according to the updated feasibility study. Cash costs per 1 lb of zinc should be $-0.25, net of by-product credits. The post-tax NPV(8%) is $145.9 million and post-tax IRR is 21.9%. The initial capex is $198 million. Also Chieftain Metals will have hard times trying to finance the mine construction. It had closed a gold-stream agreement with Royal Gold worth $45 million, but Royal Gold canceled it on December 23.
Zazu Metals (OTC:ZAZUF) has an exposure to zinc via the Lik deposit in Alaska. There is a 50:50 JV between Zazu Metals and Teck, but Zazu can get 80% of the Lik deposit, by spending $25 million by 2018. The Lik deposit contains inferred and indicated resources of 4.25 billion lb of zinc, 1.4 billion lb of lead and 35.9 million toz of silver. The PEA anticipates an annual production of 273 million lb of zinc and 75 million lb of lead concentrate, with opex of $0.63/lb of zinc, net of by-products. The post-tax NPV(8%) is $83 million and the post-tax IRR is 13.4%, using zinc price of $1/lb, lead price of $1.01/lb and silver price of $19.43/toz. The estimated total capital cost is $352 million.
A Wild Card:
Ivanhoe Mines (OTCQX:IVPAF) has three world-class projects. One of them, the Kipushi Project, contains resources of 11 billion lb of zinc and 1.2 billion lb of copper (historical, NI 43-101 non-compliant resource estimate). The project is 68% owned by Ivanhoe Mines and 32% owned by Gécamines, a company controlled by the government of the Democratic Republic of Kongo. The Kipushi deposit is exciting for its extremely high-grade nature. The ore in the Big Zinc Zone contains over 40% of zinc. For example the drill hole KPU040 intersected a 70 meters long interval, grading 43% zinc, 5.5% copper, 244 g/t silver and 71 g/t germanium. The exploration results indicate that the historical resources will be not only confirmed but even significantly improved. The Kipushi deposit is a world-class zinc project. It is located in a country with a higher political risk and the production won't start anytime soon, but it has a huge potential.
Disclosure: The author is long TREVF.
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