Very interesting data point on zinc last week. Courtesy of industry consultants CHR Metals.
These analysts calculated the average cost of zinc production across the mining industry. And came up with a conclusion that might surprise many observers.
Namely, that most zinc producers are still quite profitable. Even at today's lower prices.
CHR found that the average cash costs for producing zinc in 2013 amounted to $1,400 per tonne. Or about $0.63 per pound.
That leaves a fairly substantial margin for profit, at current zinc prices of $0.94 per pound.
This analysis flies in the face of conventional wisdom in the zinc market of late. Where many onlookers have been suggesting that low prices will create a shortage of metal. Especially in concert with planned closures of a number of depleted mines globally.
But cash costs alone may not tell the whole story. In order to start new mines, producers need more than just a recovery of their operating costs. They also require payback of capital invested in building new pits and processing facilities.
The bottom line could be that existing mines will solider on. But new projects will be harder to come by.
That indeed seems to be the message from at least one new zinc project: the Perkoa mine in Burkina Faso.
Perkoa was slated to become one of only a few operating zinc mines in Africa. But costs have been stacking up against the project. With its operator, GlencoreXstrata, officially suspending development work in February. Because of "unacceptable" financial results.
That shutdown led to news last week that Perkoa's junior partner, Blackthorn Resources, will permanently exit the project. With Glencore buying out Blackthorn's 27.3% interest for $12 million.
The price tag suggests neither party sees much upside in the project under current market conditions. Signalling that the current zinc price may simply not cover the "all-in" cost for bringing new production online.
It will be critical to watch the fates of other such development projects. To see which way supply (and prices) are headed here.
Here's to covering all the costs,
By Dave Forest