With zinc prices at record highs and expected to remain so as unfulfilled demand increases, Jabiru Metals’ Jaguar base metals project in Western Australia appears set for a bright future.
With zinc prices at record highs and expected to remain so as unfulfilled demand increases, Jabiru Metals’ Jaguar base metals project in Western Australia appears set for a bright future.
Mining and construction of the $56 million predominantly zinc project at Teutonic Bore, 260 kilometres north of Kalgoorlie, will begin this month, with the mine expected to be in production in early 2007.
The project will involve an 18-month decline development to access the high-grade ore from which will come between 20,000 and 25,000 tonnes of zinc in concentrate a year (tpa), between 8,000 and 10,000tpa of copper and 800,000tpa of silver over a five-year mine life.
On just these numbers, a recently completed bankable feasibility study predicts $101 million in earnings before interest and tax, and a cash operating cost for zinc production of just US10c a pound, which puts it among the cheapest zinc mines in the world.
The current zinc price is around US69c/pound, after recently pushing through US70c/pound.
This already bright future gets better, with an annual $5 million exploration program to be run parallel to mine development and construction, aimed at doubling the current 1.6 million tonnes ore reserve – containing nearly 190,000t of zinc and nearly 50,000t of copper – over the next 18 months and before production begins.
Jabiru also has a zinc and copper off-take agreement, originally with Newmont’s Golden Grove operations and subsequently sold to Oxiana, that will result in extra tonnages, marketing opportunities and reduced shipping and port charges.
Given the expected discovery of further resources in the Teutonic Bore/Jaguar mineralised corridor by Jabiru or others, there is further upside in having a centrally located treatment facility with established infrastructure in place.
With the support of major 19.9 per cent stakeholder Consolidated Minerals (ConsMin), Jabiru recently finalised a $53.5 million debt-funding facility with the ANZ Bank.
ConsMin had previously provided a $5 million loan facility to support exploration and pre-development at Jaguar and the broader Teutonic Bore base metals project.
Jabiru managing director Gary Comb said finalisation of the loan facility would enable mining and construction work to begin on site within “the next few weeks”.
An important consequence of the funding facility is that it does not require any metal or currency hedging (locking in an advance price to guarantee the viability of the project), in contrast to normal debt funding arrangements for resource projects.
“The complete avoidance of mandatory hedging is a significant bonus for Jaguar during a time when zinc and copper prices are expected to remain at very high levels because of continued strong demand from China,” Mr Comb said.
Global zinc demand has been growing at more than 4 per cent a year for the past five years, adding around 400,000t to demand each year.
There is also a lack of new zinc projects being developed worldwide.
Mr Comb’s views are supported by the prestigious London-based International Lead Zinc Study Group (ILZSG), which has predicted the zinc deficit will grow to 430,000t next year as global usage rises to 11.12mt and China continues to be a major consumer.
Zinc is used mainly in galvanising steel for protection against corrosion.
ILZSG says zinc demand is likely to grow by 9 per cent in China this calendar year, 9.2 per cent in India and 6.4 per cent in South Korea, offsetting declines in Europe and the US.
Chinese imports of refined zinc exceeded exports this year for the first time since 1988 and the study group said it expected this trend to continue in 2005 and 2006.
London Metal Exchange zinc futures for delivery in three months touched an near-decade high of $US1,566/t recently as speculative investors bought ahead of anticipated stronger prices next year.
From a cyclical low of $US742/t in August 2002, zinc is currently trading around a cash price of $US1,522/t.
The respected London-based Natexis Commodity Markets company is cautious, but far from negative.
It says the market has focused on the likelihood that the reduction in zinc inventories should accelerate next year. The two key drivers are China’s switch from being a large net exporter of zinc to being a net importer and the tightness of supply. Both support the zinc market in 2006.
An additional point raised by other commodity price forecasters is that smelter treatment charges are at record low levels, and are likely to fall even further next year, making the metal cheaper to produce.
Natexis says that while the market may be liable to a correction, “the fundamentals should support an average annual price of $US1,380/t in 2006, rising to $US1,450/t in 2007.
That’s an increase of 4.2 per cent in 2005-2006 and a further 5.1 per cent in 2006-2007.
But the commodities forecaster sees bad times ahead for copper, at least relative to current record price levels of just under $US4,000/t, brought about by strike provoked supply disruptions that have delayed copper’s move into surplus.
The move to surplus is expected to happen next year, and it may only take a small move to the plus side to trigger a large-scale fall in prices.
Given that, Natexis has forecast an average annual copper price of $US2,750/t next year, falling further to $US2,300 in 2007, hefty declines of 22.5 per cent in 2005-2006 and 16.4 per cent the following year.
Jabiru’s share price hit 23 cents at the end of June this year before slipping to 17 cents in early October and recovering to current levels around 19.5 cents.
