Joseph Gallucci of Dundee Capital Markets sees a rosy future for zinc investors. As the large zinc mines shut down, the juniors are stepping forward to meet growing demand for the industrial staple. In this interview with The Mining Report, Gallucci delivers smart tips for base metals investors on where to find opportunity when zinc prices start to climb.
The Mining Report: How are the fundamental challenges facing the global base metals markets likely to play out in 2014?
Joseph Gallucci: There are several long-term issues that impacted copper and the other base metal spaces in 2013, and those long-term issues will persist for the foreseeable future. Allow me to explain the basics via a few examples:
Indonesia recently stopped the export of intermediary products, such as pig iron nickel. The country's leadership is increasingly practicing resource nationalism by restricting mining firms to in-house processing and to shipping only finished products. It is also unsettling that Intrepid Mines Ltd. (IAU:TSX; IAU:ASX) lost control of its project this year to an Indonesian partner!
In terms of supply chain disruptions in 2013, Grasberg and Bingham Canyon were two of the biggest issues, but we are still well below the annual average of a 5% supply disruption. This year has been an anomaly and quite low in that regard. Supply chain disruptions will definitely pick up going forward and they are impossible to predict.
For problems with mining infrastructure, Chile was the hot button. It has port access and infrastructure issues, and there are still no power agreements in place for many of Chile's mining development projects. These types of long-term issues will continue to impact the base metals sector into the future.
TMR: Were declining ore grades an issue in 2013?
JG: The decline of ore grade is a long-term problem. We are now seeing projects with only 0.3% and 0.4% copper being developed. Those are very low-grade ore bodies in massive open pits. The issue going forward is the grades will continue to fall unless there are stellar discoveries—which is certainly possible. Reservoir Minerals Inc. (RMC:TSX.V) (BUY rated at Dundee) has put out some very impressive drill holes in Serbia. And Ivanhoe Mines Ltd. (IVN:TSX) (BUY rated at Dundee) is developing the high-grade Kamoa project in the Democratic Republic of the Congo. But those projects are outliers—the trend is for grades to fall lower as the geography of mineable base metal deposits becomes increasingly remote and difficult to find.
TMR: Given declining grades, is there an exploitable synergy between mining for base metals alongside precious metals in terms of lowering overall costs of production?
JG: It depends upon the nature of the ore body. Unfortunately, the declining grades are not strictly limited to copper. There is a decline across all of the base metals and precious metals. The grades just keep sinking lower and lower. But if a firm is mining a polymetallic ore body and it can make a concentrate, the mining and the processing activities are very similar for polymetallic ore bodies. On the other hand, if a firm is purely focused on producing gold doré bars, there are no synergies with the base metals on the processing side.
Look at the experience of Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT) (BUY rated at Dundee). I just returned from visiting its Bisha operation in Eritrea. Nevsun was mining a gold oxide cap there—putting it through a gold plant and making doré bars. It has changed gears: shutting down the pure gold plant to make a copper and gold concentrate. On the mining side, that process is fairly similar, but on the processing side, producing concentrate is quite different from making gold bars. That is an example of precious metal-base metals synergy. Nevsun has successfully transitioned from being a gold producer to being a base metals producer. The company has a solid balance sheet. It has $300 million ($300M) in cash and pays a 4.5% dividend. It is very rare in the base metals space to see a dividend of any kind, let alone one of that magnitude.