KZL state their future success is tied to exploration, well that might be true if you want a nice looking balance sheet but as far as cashflow is concerned their future is equally if not more importantlly tied to future zinc prices.
Below is a chart by the economist on the future direction of zinc prices until 2016.
This is their updated zinc market forecast.
December 14th 2011
Demand
The momentum behind growth in global apparent consumption of refined zinc has slowed sharply. Although growth has continued in China and Europe, it slowed from the double-digit pace recorded in 2010 to low single digits in 2011, while US and Japanese demand contracted slightly. Part of the slowdown in growth in 2011 to just 3% was the result of the high base of comparison in 2010 (when growth rebounded to 16.3%), which was exaggerated by consumer restocking, whereas destocking was a feature of most of 2011, especially in China. However, lower prices since the sell-off in September appear to have triggered some Chinese bargain hunting, which has made the apparent demand-side fundamentals of the global refined zinc market appear stronger in recent months. However, the Economist Intelligence Unit believes that the driver has been speculative restocking, not real end-usage, as the signals from the galvanised steel sector are not encouraging owing to ongoing steps to prevent the steel-intensive construction sector from overheating. The outlook for China’s export markets is deteriorating too, adding another layer of concern to the shorter-term outlook for demand in the world’s top zinc-consuming economy. We forecast global zinc consumption growth of 3.3% in 2012, as the impact of fiscal tightening in the mature economies takes effect. In 2013 we forecast a modest recovery in global refined zinc consumption, with growth rising to 4.9%.
Supply
The recovery in global demand in 2010 was met by a strong rebound in refined zinc production of 14%, as concentrate availability and prices improved. However, the capacity restarts and ramp-ups primarily responsible for the surge have been completed, so growth rates moderated in 2011. We expect annual growth in global refined output to ease to 2.6% in 2011 before averaging 3.9% in 2012-13, with most facilities operating back at close to capacity. However, growth in refined output could be slower if lower prices following the sell-off in September force a response from marginal producers as margins come under pressure. Some Chinese mines and smelters started to reduce production during October. We previously trimmed our short-term expectations for Chinese production accordingly, but we may need to make a further downward revision if prices fall sharply again. Overall, however, China is still expected to remain the key driver behind future growth in both mine and refined production, as this is where the bulk of new capacity additions are located. The other key feature on the supply side of the zinc market is the capacity constraint outside China, with the notable exception of India, where output has been boosted by the latest in a series of new capacity additions by Hindustan Zinc.
Stocks and prices
Some speculative consumer restocking in China and some price-related production cutbacks, also in China, may have started to rebalance the global zinc market since September. They may even have pushed the market into a rare supply deficit in the fourth quarter of 2011. Steady declines in both LME and SHFE stocks reinforce this view, with the cumulative drawdown amounting to a not insignificant 13,000 tonnes/week during September, October and November. However, we view this apparent tightening of the zinc market as temporary. We believe that production will once again be running ahead of consumption in early 2012 and forecast that this will remain the case going forward, with global reported stocks rising from around five weeks of consumption in 2009-10 to just over seven weeks by the end of 2012. In 2013 a rebound in demand will produce the smallest market surplus since 2008, thus slowing the pace of increase in stock levels, but doing little to drive any significant increase in prices (I disagree - in 2006/7 when this happened, prices shot to $2 a lb).
Volatility has characterised the zinc market for the past year, and this is expected to continue. As with the other base metals, the market remains vulnerable to swings in sentiment regarding macroeconomic and fiscal issues, particularly signs of slowing US economic growth (I disagree as US growth is picking up), the path of the sovereign debt crisis in Europe, changes to China's monetary policy, and to a lesser degree the post-earthquake recovery in the Japanese economy. The late-September sell-off comprehensively broke the bottom of the 95-115 US cents/lb range that had held for the previous 12 months. The LME daily official zinc cash price plunged to a low of under 85 US cents/lb and fell again in October to 79.4 US cents/lb, its lowest level since July 2010. Although prices are likely to recover some of this lost ground, we expect prices to average just 99 US cents/lb in 2011. We believe that 2012 will be a year of consolidation, with increasing stocks leading to some price weakness. However, with the pace of growth in stocks slowing in 2013, some upward pressure on prices will start to return.
KZL Price at posting:
29.0¢ Sentiment: LT Buy Disclosure: Held
