Black cloud over world's largest zinc mine

Teck Resources (TCK.B-T) admitted this week that it may be may be forced to halt operations at Alaska 's Red Dog mine, the world's largest zinc mine, after environmental and native groups appealed a permit issued by the U.S. Environmental Protection Agency (EPA).

Red Dog employs 560 people. It also supplies about 80% of the 700,000 metric tons of zinc ore mined in the U.S. With world mine production already down 500,000 tons in 2009, and spot prices up 100% the supply/demand ratio is about to shift.

Zinc is the fourth most common metal in use, trailing only iron, aluminum and copper in annual production.

Zinc is like table salt: it's an obligatory seasoning for a variety of metallic dishes.

Zinc is used to galvanize steel to prevent corrosion, and in common alloys such as brass, nickelled silver, soldering and battery technologies.

The Alaskan villages of Kivalina and Point Hope are claiming that the Red Dog Mine is discharging toxins into a stream used for drinking water. In the next 30 days, the EPA will rule which provisions of the permit are subject to appeal.

In order to maintain efficient production rates, Teck will need to open up a new ore deposit, called Aqqaluk. Any permit delay would sink the transition plan to mine the new ore body. Appealing a negative EPA decision could take 2 years.

"If we're unable to pre-strip and access Aqqaluk," says Teck's general counsel Leonard Manuel, "then the operation could shut down as early as October this year."

This is a significant development for North American zinc producers. But despite the potential opportunity, the zinc picture isn't all rosy. The London Metal Exchange reports unusually large stock piles of zinc. In 2009, global demand fell by 7.1% with drops in most countries except China , where demand increased 17%. Also interesting to note was that, as reported by the International Lead and Zinc Study Group, zinc mine production in 2009 was 2.7% lower than in 2008, with decreases in Australia , Canada , Chile , China , Peru , Poland and the United States .

Nevertheless, the possibility of a shut down at the Red Dog Mine will cause increased interest in junior zinc developers who are close to production. After reviewing the landscape, I've found one company that seems well-positioned to service any excess North American zinc demand.

Donner Metals (DON-TSXv) is a potential near-term zinc producer, joint ventured with Xstrata Zinc at the prolific Matagami zinc-copper camp in central Qu'ebec. Xstrata is already producing zinc at its 2600 tonnes per day mill there.

The joint Donner/Xstrata exploration team have made four discoveries since the agreement was signed in 2006.

The most advanced is the Bracemac-McLeod deposit (NI43-101 Indicated Resource of 3.62 million tonnes grading 11.52% zinc, 1.60% copper, 31.55g/t silver and 0.49g/t gold) located less than 6 kilometres from the mill complex.

This deposit was discovered in 2007 and it is currently under an accelerated feasibility study being conducted by Xstrata Zinc.

Xstrata's current deposit that it's mining at Matagami - Perseverance - will be exhausted in 2012, and Xstrata wants Bracemac-McLeod ready for production by then. A feasibility study is scheduled for completion in June 2010, and - if positive - mine construction will begin immediately.

In terms of technicals, the MACD is rising above the signal line. Volume and money flow are both rising. The next resistance level is about 30% higher but it may break out past this on strengthening demand in the North American zinc market.

The Feb 16, 2010 drill results add confidence to the venture's previously announced McLeod Deep discovery. Assays were returned from a new, deeper, hole on the discovery, grading 10.27% zinc, 3.44% copper, 50.71g/t silver and 1.12g/t gold over 7.50 metres in massive sulphides. The initial discovery hole was a 21.6 metre intercept grading 6.05% zinc, 1.85% copper, 65.5 g/t silver and 1.56 g/t gold.

A total of 8 drills are currently active on the project, three investigating exploration targets and five on feasibility definition drilling at Bracemac-McLeod.

If Red Dog is put down, the economic fundamentals are bound to improve for companies like Donner.

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