When international zinc prices fell below the $2,000 per ton mark in mid-2008, it triggered a sustained wave of production cuts and mine closures worldwide for both lead and zinc. As lead and zinc prices remain persistently low, industry insiders believe that mines will continue to struggle with funding difficulties, and the contraction in concentrate production is likely to persist.
　　 On the other hand, although the difficulties faced by mines have also created opportunities for consolidating resources along the lead-zinc industry chain, lead-zinc smelting companies—whose ambition is to take the lead in controlling these resources—themselves face considerable challenges, making it no easy task to acquire mining assets.
Mine closures may still continue.
　　 Although current data released by the International Lead and Zinc Study Group (ILZSG) show that global production of lead and zinc concentrates in 2008 still increased compared to 2007, the sustained weakness in international lead and zinc prices has shifted financial pressures from smelting companies upstream to concentrate producers. As a result, mine closures and production cuts have become one of the major challenges currently facing the lead-zinc industry chain.
　　 On March 12, at the International Lead and Zinc Industry Summit hosted by Yimao Information in Beijing, How Roberts, Director of the UK’s CHR Metals Research Institute, argued that the current zinc price remains one of the key reasons why many mines are still struggling. “Unless the zinc price recovers significantly,” he said, “we have absolutely no doubt that more mines will continue to shut down.”
As of 5:31 p.m. Beijing time on the 12th, the prices of LME March zinc and lead were US$1,215 per tonne and US$1,230 per tonne, respectively—just 46% and 41% of the prices from the same period last year. The price trends of lead and zinc have consistently influenced investment behavior and production levels in lead-zinc mining. Previously, insufficient investment in mining activities had fueled the sustained rise in lead and zinc prices from 2006 to 2007.
　　 Roberts believes that the same factors are also making current lead-zinc mine capacities highly vulnerable in the face of weak lead-zinc prices. He points out that many of today’s lead-zinc mines were reactivated between 2007 and 2008, when relatively strong lead-zinc prices provided strong incentives for mining activities, and both development financing and the entry of new players became remarkably active.
　　 “But these mining operations only appeared profitable under the lead-zinc price conditions at the time; under today’s price conditions, they’re clearly uneconomical,” he said. “Besides the lead-zinc mines already in operation that have either halted or reduced production due to price factors, several projects currently under construction are also facing stagnation—either because their profit prospects are being questioned or because they’re unable to secure sufficient financing.”
　　 Previously, one of the world’s largest lead-zinc mines—the McArthur River lead-zinc mine in northern Australia, owned by Xstrata Plc—announced its production halt in January of this year. Around the same time, several major lead-zinc mining regions located in Canada and Australia also announced production halts and reductions. According to statistics released last month by the International Lead and Zinc Study Group (ILZSG), global production of lead concentrates and zinc concentrates in 2008 totaled 3.886 million tons (in terms of metal content) and 11.75 million tons, respectively. Meanwhile, according to projections by the CHR Metals Research Institute, global lead concentrate production is expected to remain at around 3.55 million tons in both 2009 and 2010, while zinc concentrate production is forecast to reach 10.7 million tons in 2009 and 11.1 million tons in 2010.
However, it remains uncertain whether such a significant decline in mine production will be enough to spur a future rebound in lead and zinc prices, given that global supply of both metals continues to exceed demand overall. Song Cong, an analyst at Shanghai Zhongqi, believes that reducing mine output is not the most effective way to support zinc prices; rather, the key to a price increase lies in a rebound in demand. Currently, both domestic and international demand are weak. Moreover, the current favorable conditions for zinc imports—both domestically and internationally—are causing inventories to rise in China, the world’s largest consumer of zinc, thereby keeping upward pressure on prices quite strong.
　　 However, How Roberts believes that when lead and zinc prices rise, production from lead-zinc mines can increase rapidly. The reason is that sufficient mine reserves still exist worldwide, and new projects continue to be explored. If prices rebound, these reserves could be developed very quickly. Nevertheless, divesting from mining operations remains no easy task.
　　 For participants in the lead-zinc industry, integrating mining and smelting capacities is one of the most effective pathways for business growth. Currently, the generally poor financial condition of lead-zinc mines seems to be presenting an excellent opportunity for lead-zinc companies to consolidate resources—but actually taking action doesn't appear to be so easy.
　　 Previously, Hongda Shares (600331) acquired a 9% stake in Yunnan Jinding Zinc Industry at a hefty premium of 470%, increasing its equity interest in Jinding Zinc Industry to 60%. In overseas markets, there have also been successive developments in news such as China Minmetals Lingnan (000060) acquiring PEM and the China Minmetals Corporation taking over OZ Minerals. Huang Huang, Chief Representative of the Shanghai Office of the International Zinc Association, told a reporter from China Securities Journal that currently, only large mining groups have the financial capacity to pursue mergers and acquisitions of upstream resources. However, it is the numerous lead-zinc smelters—whose numbers are vast—that truly need to integrate upstream and downstream resources. Yet, these smelters themselves are now facing funding difficulties due to declining processing fees and unfavorable demand, leaving them unable to participate in resource acquisitions. In the end, mines caught in this predicament may still fall into the hands of large mining conglomerates or even companies from industries outside the lead-zinc sector.
　　 On the other hand, How Roberts noted that due to the strength of the U.S. dollar and falling energy prices, mining costs are also declining. As a result, relatively few mines worldwide are actually operating at a loss. Consequently, some analysts believe that mine owners remain cautious about selling their assets at this time. The head of a Sichuan-based smelting company currently seeking lead-zinc ore resources told a reporter from China Securities Journal that although several lead-zinc mine owners have expressed interest in acquisitions, their target price is 15,000 yuan per ton of zinc metal content—while on March 12, the spot price for Shanghai No. 0 zinc was between 10,600 and 10,700 yuan per ton.
　　 In the view of Yue Yukun, Deputy General Manager of the Research Department at BOC International Securities, the problems that previously plagued Chinese companies’ overseas M&A activities still persist in current acquisitions of mineral resources—for instance, a lack of necessary capital management, often resulting in cash-only investments and high project risks; as well as a shortage of overseas acquisition experience, a scientific valuation system, and comprehensive financial support.