Glencore producing zinc at negative cost

16th December 2016 By: Martin Creamer - Creamer Media Editor

Diversified mining and marketing company Glencore is producing zinc at negative cost.

Towards the end of this year, it has been doing so at –3c/lb and next year it expects to do so at an even better –14c/lb, supported by healthy lead by-product credits.

Zinc, which was one of the last base metal prices to fall, was also one of the first to recover, and so far this year the zinc price has shown a dramatic price appreciation.

Bloomberg reports that zinc is headed for its highest close in more than nine years, while lead is set for its strongest finish since 2011.

Late last year, the London-, Hong Kong- and Johannesburg-listed Glencore cut its own zinc production by 500 000 t as it did not make sense to keep producing zinc at a price where it was not generating sufficient margins. Its latest zinc price expectation for 2017 is 131c/lb.

Now the company is committed to bringing that production back in a manner that does not negatively impact on the zinc market, allowing its smart zinc traders to dictate the timing.

“We’re going to be very careful. The demand has to be there,” Glencore CEO Ivan Glasenberg said in response to Macquarie mining analyst Alon Olsha during an investor day conference call in which Creamer Media’s Mining Weekly took part.

Glasenberg does not see increased zinc supply coming from China and points out that supply from new projects is merely replacing material lost to mine closures.

On the basis of new zinc demand growing by 2% in 2017, 280 000 t of new zinc supply needs to be introduced into what is a 14-million-tonne-a-year market.

“We don’t see where that’s going to come from,” said Glasenberg.

The new Gamsberg zinc project being built by Vedanta subsidiary Zinc International in South Africa’s Northern Cape province is replacing the company’s depleted Lisheen zinc operation, in Ireland, as well as the associated Skorpion, in Nambia, that is coming to the end of its life.

The Dugald River mine coming on stream in Australia also fails to fill the supply gap left by closed Australian zinc mines, notably Century.

Glencore’s own-sourced zinc is produced mainly in Australia and Peru, and the company is guiding lower own zinc production of 1 100 000 t for the year.

The company is projecting $14-billion of earnings before interest, taxes, depreciation and amortisation at current production and capital expenditure costs, with the zinc component of that being $2.9-billion.

Macquarie estimates in a note that Glencore’s 500 000 t of latent zinc capacity could generate $500-million to $600-million in additional cash flow at current prices.