Lack of exploration and qualified personnel is creating a shortage in the world’s supply of zinc that could force the price of the base metal to surpass the historical high of US$1.16 a pound reached in late March. And even though this may be bad news for consumers, it is nothing but good news for the companies that mine the metal.

A number of Canadian companies are poised to profit from the zinc shortage. That, in turn, presents buying opportunities — making the shortage good news for investors, too.

Supply constraints could tip an already tight market into long-term deficit. Although exploration spending for copper and nickel has surpassed the levels reached during the last mining boom of the mid-1990s, spending on the search for zinc deposits is still well below its 1997 peak because zinc was the last to join the bull run that took other metals higher in 2003 and 2004. As a result, there are few zinc deposits in the project pipeline to bolster supply, Andrew Roebuck, senior research analyst at Toronto-based Teck Cominco Ltd. , the largest zinc miner in the world, told miners gathered at the recent Prospectors and Developers Association of Canada convention in Toronto.

The accompanying growing shortage of skilled labour is a result of the double whammy of declining enrolments in mining-related post-secondary programs and increasing competition as the current mining boom continues. In Canada, mining professionals have become the second-highest paid professionals because of their rarity.

“We’ve all heard about equipment shortages and trucks without tires sitting in front yards of mining operations, and now we’re starting to hear about people shortages,” says Roebuck. “All these factors are putting a strain on mining operations, both existing and new.”

That means Teck Cominco’s plan to reopen its idled capacity at the 170,000 tonne-a-year Lennard Shelf mine in Australia, which was closed in 2003 because of low zinc prices, may be delayed by as much as two years as the company and its partner, Toronto-based Falconbridge Ltd., try to recruit contract workers.

These systemic challenges are exacerbated by the threat of mine closures. For example, Switzerland-based Xstrata PLC’s application to exploit the open-pit potential of the McArthur River underground mine in Australia was challenged recently by the regional environment ministry. Xstrata says if the proposal is rejected at the federal level, the company would be forced to close the mine altogether, taking the 170,000 to 180,000 tonnes of zinc the mine produces annually out of the market.

And scheduled closures of larger mines, such as Falconbridge’s Brunswick mine in New Brunswick, suggest the zinc shortage will probably not be a short-term phenomenon.

Labour unrest is another potential disruptor of supply. Upcoming contract negotiations at the huge Antamina copper-zinc mine in Peru, in which Teck Cominco has a 22.5% interest, may mean a strike there as early as June.

“Downward revision to our supply forecasts this month left a market with zero reported stockpiles by the end of 2007,” notes a February report by London-based Standard Bank. “We maintain that the outlook for zinc prices is more bullish than for any other metal” — even though zinc is already trading at a 16-year high.

There are only two major zinc deposits under development worldwide. They are Colorado-based Apex Silver Mines Ltd.’s San Cristobal project in Bolivia, which is expected to come online in 2007, and Toronto-based Aur Resources Inc.’s Duck Pond deposit in Newfoundland, which is expected to begin production by the end of this year.

China has the world’s biggest appetite for zinc. According to Roebuck, this emerging country accounted for 95% of the growth in the metal’s global consumption over the past few years, as it tried to meet an insatiable demand for galvanized steel, of which zinc is a major component.

Traditionally a zinc exporter, China started to import the metal in late 2004 and it will continue to soak up supply as long as its economy remains strong. “Nowhere are the changes that China is experiencing more evident than in the zinc marketplace,” says Roebuck.

As a result, the shortfall in zinc supply grew to 367,000 tonnes last year from 300,000 tonnes in 2004, according to Standard Bank. (Global refined zinc production was 10.3 million tonnes in 2005 and is expected to be 10.5 million tonnes in 2006. Refined consumption was 10.6 million tonnes in 2005 and is expected to be 11 million tonnes this year.)

@page_break@George Pirie, president of Toronto-based Breakwater Resources Ltd. , sees this widening supply/demand gap as an opportunity to reinvest in his company’s existing operations, and to acquire more zinc deposits through exploration or acquisition.

“There has been insufficient investment in exploration, and we will continue to experience the best prices that our generation has ever seen,” he says. “Even at current prices, zinc is only now beginning to look attractive enough for people to sit down to look at all these projects we have known about for years.”

Known about, but the industry hadn’t bothered to exploit them because the price of zinc had been in the doldrums for so long.

Breakwater, which is among the companies that investors should consider because of its leverage to the zinc price and its aggressive exploration plans, owns three operating zinc mines: Myra Falls in British Columbia (copper-zinc); El Mochito in Honduras (zinc-lead-silver); and El Toqui in Chile (zinc-gold). The company is also developing the Langlois copper-zinc deposit in northwestern Quebec.

Breakwater, which is listed on the Toronto Stock Exchange, had net earnings of $14.7 million, or 4¢ a share, in 2005 compared with $2.6 million, or 1¢ a share, in 2004, even though 2005 revenue took a hit from reclamation costs at some of the company’s recently closed mines. Breakwater’s zinc production is expected to be 240.1 million pounds this year.

Here are some other TSX-listed companies with exposure to zinc that are worth considering:

> Inmet Mining Corp. Although this Toronto-based company is becoming primarily a copper producer as it develops new copper mines in Europe, it also produces zinc at the Cayeli mine in Turkey and the Pyhasalmi zinc mine in central Finland. In 2005, Inmet produced 166 million pounds of zinc and 160 million pounds of copper. It expects to produce similar quantities of both these metals this year.

> Aur Resources Inc. This company is constructing the Duck Pond copper-zinc mine in Newfoundland, which is on schedule to begin production in the fourth quarter of 2006. The mine is expected to produce approximately 76 million pounds of zinc and 41 million pounds of copper annually for about seven years. In 2005, Aur’s share of production from mines in Quebec and Chile was 8.8 million pounds of zinc and 240 million pounds of copper.

> Hudbay Minerals Inc. This Winnipeg-based company operates zinc-copper mines and concentrators in northern Manitoba and Saskatchewan, and it is reopening the Balmat zinc mine in New York state. Reserves at the company’s mines total 21.4 million tonnes, of which 5.3% is zinc and 2% is copper, with gold and silver credits. HudBay’s net income for the nine months ended Sept. 30, 2005, was $41.3 million, vs a net loss of $7.1 million for the nine months ended Sept. 30, 2004.

> Wolfden Resources Inc. The Thunder Bay, Ont.-based company is making an aggressive move toward zinc production with the purchase of the Izok Lake deposit in Nunavut from Inmet Mining for about $49.7 million in Wolfden shares. Wolfden will also acquire the nearby Lupin gold mine, including its mill, to process ore from Izok and the nearby Hood and Gondor deposits. Izok Lake was discovered years ago, but never developed because of low zinc prices and its remote locale.

> Yukon Zinc Corp. of Vancouver is advancing the silver-rich Wolverine zinc-copper deposit in the Yukon to the feasibility study stage this year. The study will provide the basis for obtaining permits and engineering and financing plans, and will lead to a production decision by mid-year.

> Agnico-Eagle Mines Ltd. This Toronto-based company’s flagship LaRonde gold mine in northwestern Quebec produces a significant amount of zinc as a byproduct. In 2006, LaRonde is expected to produce about 250,000 ounces of gold, at a total cash cost of $50 an ounce, as well as 5.7 million ounces of silver, 160 million pounds of zinc and 20 million pounds of copper.

Some of the emerging silver producers, most of which are based in Vancouver but have properties worldwide, will also produce significant amounts of zinc as a byproduct. These include Fortuna Silver Mines Inc.’s Cayollma deposit in Peru, which is scheduled for production this summer; Silvercorp Metals Inc.’s Ying project in China; and Capstone Mining Corp., which is expected to produce 16 million pounds of copper, 700,000 ounces of silver and four million pounds of zinc from the Cozamin deposit in Mexico starting in the third quarter of 2006. IE