Iron ore mine the target
Wednesday, 16th June, 2010
It is no surprise that Perilya has decided to shelve the reopening of its Potosi mine, according to a resource analyst.
James Wilson from DJ Carmichael said with zinc prices at five-year lows, zinc stockpiles at five-year highs and the world economy looking shaky, mining companies were considering their positions.
"Looking at the five-year trend for zinc we are at record lows - around $1100/tonne. Don't forget the price has been as high as $4600, so it's not surprising that they've gone and hedged their bets," Mr Wilson said.
The majority-owned Chinese mining company, Perilya, flagged the shelving of Potosi early this month in a presentation to the UBS Australian Resources Conference.
At that conference Perilya said there were three drivers to the mine going ahead: metal prices, approvals and the resources super profits tax.
It told the conference that the "project does not generate adequate returns at current metal prices".
But Perilya's Broken Hill mine manager Andrew Lord said he could not say at what price zinc would need to be to bring Potosi off the shelf.
"There isn't an easy answer to that - it depends on the exchange rates and the price," he said.
The zinc price has plunged by around 40 per cent this year, placing in doubt emerging zinc prospects, not just in Australia but globally, including the world's largest zinc mine in Alaska.
The price of zinc, which is used for galvanising steel, reached a high this year back in early January when it reached around US$1.20 per pound. It had slumped to about US$0.73 in early June.
Mr Wilson said commodity prices, including zinc prices, were affected by the EU debt crisis, growth in China and slower demand for metals in the United States.
"It's not surprising that zinc prices have come off," he said.
Mr Wilson said an oversupply of zinc was also having a bearing on price.
"We have quite high stockpiles of zinc - it's at five year high," he said.
"There's 617,350 tonnes of ore (currently stockpiled and), yes it's having an effect, oversupply.
"We need to whittle that down before we see better prices."
Meanwhile Mr Lord said two things were saving the local mine in the current climate; silver prices and their human resources.
"Our employees have worked pretty hard and very safely," Mr Lord said.
"Our Chinese majority shareholder has been a great partner and some time ago they were able to help us by providing a loan."
That loan enabled them to buy their way out of a silver contract meaning Perilya could sell their silver on the market.
"We now have full exposure today," Mr Lord said.
He said before the deal Perilya was getting around US$2.40 per ounce of silver whereas now the price was US$18.41 per ounce.
"We don't get all of that .... but we're still along way ahead than before."
Mr Lord said at this stage there will be no changes to Perilya's Broken Hill mining operations.
"At this stage we have no plans to cut back at our operation at Broken Hill," he said.
"But we're not looking at expanding our operations either."
Perilya also said approvals needed to be gained in particular with "respect to ore haulage routes" before Potosi could get off the ground.
The development application associated with that is before City Council and has received around 80 submission, mostly related to the trucking route.
"I'm neither confident nor pessimistic about the approval," Mr Lord said.
"If we don't get the DA approved we cannot go ahead."
The company also said the uncertainty surrounding the resources super profits tax "makes investment decisions difficult".
Mr Lord said he did not know if their Chinese partner, Shenzhen Zhongjin Lingnan Nonfemet, had any concerns over the RSPT but that projects would be put on hold until the outcome of that was certain.
"One only enters into any business for making money for their shareholders," Mr Lord said.
"While that uncertainty is around we and other mining companies are putting projects on hold."