Steel demand galvanizes zinc prices

Junior poised to benefit from Quebec mine expansion

As a general rule, the most successful man in life is the man who has the best information

The global zinc industry is revving back up. China’s net imports of refined zinc was 15,401 tonnes in February. China’s zinc consumption is forecast to rise to 5.4 million metric tonnes this year.

That’s good news for upstream zinc suppliers like Xstrata PLC and OZ Minerals Ltd. – both involved in the development and production of zinc. The main reason zinc is performing well is because it’s the key ingredient in galvanized steel.

Without zinc, steel corrodes.

Galvanizing steel is the main end-use of zinc (40%), followed by brass & bronze (26%), zinc semi-manufactures (12%), zinc alloying (9%), and Chemicals (6%)

This week Xstrata (XTA-LSE) - a $50 billion global mining mammoth - gave a clear signal on how it is going to react to the increased zinc demand.

Xstrata said it is planning to extend the life of its Black Star zinc mine in Australia by four years to 2016 at a cost of $122 million - a fraction of the cost of building a new mine. The Black Star mine will produce about 5 million tonnes of zinc and lead-bearing ore. It is part of a three-mine complex feeding Xstrata’s zinc and lead smelting facilities in northern Queensland State.

The extension will allow Xstrata to maximize the use of a nearby ore concentrator which is currently being modified to increase input from 6.4 million tonnes to 8 million tonnes annually.

What’s interesting here is that Xstrata has an almost identical opportunity to expand its Perseverance Mine in Quebec, Canada which feeds the Matagami Lake mill complex - one of the largest zinc camps in the world.

If that happens this summer the biggest beneficiary might be Donner Metals (TSX: V.DON, Stock Forum), a tiny ($25 million market cap) Canadian base metals exploration company. It has signed a joint venture agreement with Xstrata covering exploration and development within the Matagami Lake mining camp.

Xstrata spent $130 million in 2001 refurbishing their 2,600 tonne per day mill. But their current deposit will be exhausted in 2012 and they need new feed.

Donner and Xstrata have discovered a new deposit - the Bracemac/McLeod (BM) - and Xstrata is now completing an “Accelerated Feasibility Study” on the BM which is due this summer.

Bracemac/McLeod has an NI 43-101 Indicated Resource of 3.62 million tonnes grading 11.52% zinc, 1.60% copper, 31.55g/t silver, 0.49g/t gold and is located only six kilometres from the mill complex.

Xstrata is funding the feasibility study as part of their back-in right under the Matagami Agreement. Will it be positive or negative? Will it go into production? Donner shareholders are wondering what it’s all going to mean for them.

As the Australian example shows, Xstrata’s strategy for meeting increased zinc demand is to expand existing mines - as it is doing with the Black Star zinc mine.

You need zinc to make steel that won’t corrode.

Surging demand from China and Europe is driving the price of zinc higher.

To this author Donner Metals relationship with Xstrata is suddenly looking like more than a casual date.

Richard (Rick) Mills