DETROIT () -- It was announced today, June 5, 2006, that U.K.-based ZincOx Resources [LSE:ZOX] had finalized its purchase of the now inactive Big River Zinc Corporation (BRZC) from its current (foreign) owner (since 1996), Korea Zinc Co Ltd [KSE:010130]. The total purchase price was announced as $15.25 million. Korea Zinc bought the company in 1996 for $50 million.
American environmentalists in their zeal to protect the health of the citizens of the zinc-ore rich American Midwest no matter what the economic consequences may be for the region itself or for the country as a whole have delivered into the hands of a very perceptive British Company a gold mine in the guise of a zinc recycling operation that will also be able to process zinc ore concentrates when and if they should ever again become available economically.
Big River Zinc's plant in Sauget, Illinois, near the Mississippi River, ceased producing zinc from ore concentrates on January 29, 2006. This was said by the company to be due mainly to its inability to economically import zinc ore concentrates through the Port of New Orleans. There is now just one primary (producing zinc from ore concentrate) smelter operating in the United States.
"I am not surprised," one concentrate trader said of the closure. "The two [primary] U.S. smelters (the other being Zinifex Ltd.'s [ASX:ZFX] Clarksville, Tenn., plant) have been prime candidates for closure since they are landlocked and dependent on expensive imported feed."
There are today still 12 secondary (fed from scrap materials) zinc smelters operating in the U.S.
At the same time as the above transaction was taking place, Switzerland-based Glencore (a private company owned by Willy Strothotte since 1994, purchased from Marc Rich, who was pardoned by Bill Clinton for massive federal tax evasion) announced that it will close on its purchase of Asarco's Tennessee Mines Division (TMD) before the middle of this month, June 2006.
Among the assets being purchased by Glencore for more than $60 million are several underground zinc mines in Tennessee and the 7,600 tonne/day capacity Young Mill in Jefferson County, Tennessee. Operations at all of these locations have been suspended since the end of 2001 and all properties have been on care and maintenance only. In addition, the Asarco unit of which they were all a part filed for (Chapter 11) bankruptcy in November of last year (2005).
So, what's going on?
Do ZincOx and Glencore think they will be successful in dealing with the environmentalists who have shut down America's Midwestern zinc mining industry?
The answer to the above question is no if one means will they be able to re-open the zinc mines any time soon, but the answer is yes if one means that both ZincOx and Glencore plan to offer a service that the environmentalists will applaud.
I think that both companies plan to mine the great American scrap metal and residue mine for zinc.
American consumption of all forms of zinc in 2005 was 1,370,000 tonnes. About 60% of this consumption was imported as refined zinc, another 13% was imported as ore concentrates for the primary smelters and the balance was recovered in the 12 secondary smelters from scrap and waste produced domestically. Most of the zinc ore and concentrates still produced in the United States (86% of which come from the Red Dog Mine in Alaska) are exported. The major reasons are environmentalism and the cost of transportation.
Here is the key to understanding the motives of ZincOx and Glencore. Of all of the zinc consumed in the United States, 75% is utilized in Illinois, Indiana, Michigan, New York and Pennsylvania primarily by the steel companies, 55% of the zinc consumed was used to make galvanized steel (the biggest consumer of this product is the OEM automotive industry) and 20% was used to make zinc based alloys (again the largest user being the OEM automotive industry).
ZincOx is building a parallel line at Big River's primary zinc refinery in Sauget, Illinois, to recover zinc metal from EAFD, Electric Arc Furnace Dust. Electric arc furnaces produce steel from scrap metal, not from iron ore. The scrap metal feed from OEM automotive stamping plants contains zinc, because OEM automotive sheet metal is galvanized (zinc coated) as a primary method of resisting corrosion. In the electric arc furnace method of producing primary steel the zinc in scrap feed is volatilized and is carried to the 'baghouse' downstream of the furnace where it is collected as a hazardous waste! Today, this 'waste' is typically taken to a landfill by a specialized service that charges the mills a 'landfill' fee as well as a trucking fee for the disposal.
During the last decade, the major scrap metal dealers have been buying up the landfills in order to have a home for hazardous waste and to make money in handling it. It may well be that one of the largest scrap metal dealers in the U.S. may have been taking the EAFD to landfills reserved for this material only. If so, this was a very prescient choice.
Initially the new ZincOx facility in Sauget, Illinois, will only be able to produce 30,000 tonnes a year of refined zinc from EAFD. This is only one-tenth of the 310,000 tonnes produced from new scrap in 2005.
The financial potential is enormous and environmentally a winner. The ZincOx facility will enable the Electric Arc Furnace Operating Steel Mills to categorize the currently hazardous waste baghouse dust as a product. They will be able to sell this product rather than have to pay to have it taken away, but since there isn't enough recycling capacity to meet the demand, the new recycler will be by itself in a buyers market. ZincOx will be able to buy all the feed it needs at far below the market price of zinc.
I believe that right at this moment, the largest Midwestern scrap dealers, the landfill operators and all of the EAFD producing mini-mills are trying to make a deal with ZincOx to take the baghouse dust that they produce or collect or already have stored.
The EAF mini mills have the most to gain. A waste becomes a product and a source of revenue instead of a liability and a cost.
ZincOx in the meantime gets to buy zinc 'concentrates' that it can use at a fraction of the market price for zinc and yet sell their output zinc at current market. The makers of galvanized steel get another supplier of zinc and the opportunity to take advantage of Federal regulations that give tax advantages to those that use recycled materials.
There are many interesting possibilities even for OEM automotive companies. They may well want to look into providing their zinc bearing scrap only to mills that recycle the baghouse dust through ZincOx, and then ZincOx supplies back to a designated producer of galvanized steel that sold the material to the carmaker that used it in the first place. In this case the OEM automotive company could choose to own all of the metal content of the scrap and the companies in the chain of recycling it would be processors only. This would give a competitive advantage to the carmaker by reducing transparency in their actual costs of galvanized steel.
I personally believe that environmentalists will prevent ZincOx from ever reopening the primary smelter at Sauget, Illinois, and that ZincOx will enter into a kind of guaranteed off-take agreement either with a large producer of galvanized steel or with a large end user that will enable ZincOx to expand the recycling operation. There is room in this hypothetical for a large scrap dealer or landfill operator to participate also.
I also believe that Glencore would do well to set up a competing operation in Tennessee to ZincOx. I can't think of a better place to store zinc bearing baghouse dust than in an underground zinc mine. I also believe that Glencore is thinking of, or already in the process of, buying or making a long-term deal with Zinifex, Ltd. - today the last operating primary zinc ore smelter in the United States - to create a competing operation with ZincOx.
The United States, which has some of the largest recoverable zinc reserves in the world, has all but stopped smelting domestically and has become a seller's market for zinc bearing hazardous waste and scrap.