WHY is Pasminco cloaking the production start-up of the Century zinc-lead mine in Queensland in secrecy? The official reason is that managers are too busy with the commissioning to be sidetracked by interviews. While there may be some justification to this, and companies’ share prices have been known to drift downwards on rumours of commissioning glitches, was a total media ban really necessary? Australia’s Mining Monthly understands that an email to Pasminco staff warned of instant dismissal if anyone communicated with media or broking firms.

The importance of Century to Pasminco has been emphasised many times by senior management, and reiterated by the fact the company has declared its commitment to being a dedicated zinc producer. Century is certainly a huge and innovatively designed development and is even impressive to those analysts who feel the project is not a “slam dunk”. The problem facing Pasminco, according to some analysts, is perhaps the zinc sector itself.

"You spend $1.5 billioon on 500,000 tonnes of zinc per annum and the returns are not blindingly great. It is just the nature of the industry and while it depends what your long term view of zinc is, it (Century) is not a licence to print money." - Peter Mangano, analyst at investment bank Salomon Smith Barney.

 

According to Peter Mangano and Alan Heap, analysts at investment bank Salomon Smith Barney, the lead-zinc business is the most difficult base metals business, traditionally generating the lowest returns. “It always has been and we have little reason to believe anything is going to fundamentally change.”

Notoriously characterised by price spikes and subsequent dips, zinc prices will continue to be affected by structural and cyclical issues, therefore, the metal will not benefit from predicted improvements in other metals, Heap said.

Cyclical issues include “extreme price elasticity” in the fragmented Chinese market which is in a position to rapidly push a lot of zinc into the market should a spike eventuate. At present Chinese smelters are understood to have accumulated concentrate stockpiles as a result of earlier cashflow difficulties. Also, by 2003 nearly 1 million tonnes per annum of further output is expected to come on stream — from Century and other sources including the Irish mine Lisheen. Factors such as no technological breakthroughs of the kind that have revolutionised the nickel cost curve, slow growth in demand and a lot of old capacity “just languishing there” have also impinged on the zinc sector, according to Heap said. “In addition there are high barriers to exit, such as environmental clean-up costs, which tends to cause producers to keep producing regardless.”

Mangano said Century has not intrinsically changed Pasminco’s business. While average cash costs will fall, total costs are unlikely to move significantly. The asset mix will become much more “long” mining but this diminishes as Broken Hill (in New South Wales) winds down. “A simple way of looking at Century is a large injection of sustaining capital has gone into the mining division rather than a huge new development. It has given a new lease of life to the mining division which was slowly eroding. Broken Hill is very much on its last legs and will close in the next five to seven years.”

Another major concern of Mangano’s revolves around return on capital. He said off-balance sheet financing, including cost of acquisition and capitalised interest, meant the actual investment in Century exceeds $1.5 billion.

The Century port, loading, dewatering and storage facility at Karumba in north-east Queensland ... concentrate from the mine is pumped to Karumba via a 304km underground slurry pipeline.

 

“You spend $1.5 billion on 500,000 tonnes of zinc per annum and the returns are not blindingly great. It is just the nature of the industry and while it depends what your long term view of zinc is, it (Century) is not a licence to print money.

“The other aspect of Century that people are yet to focus on is that it is going to chew up a large amount of sustaining capital. Just keeping the pit open is going to require about $100 million a year in mine development capital in addition to the operating costs.”

Pasminco’s management is all too aware that the operation’s economics will need ongoing scrutiny. “Improving the investment return has been a constant theme during the feasibility study and development phases of the project and this focus will continue with the operation,” said the company’s executive general manager, Ian Williams, at a lead-zinc conference in May 1999. Areas that will potentially be targeted are: reducing mine haulage costs through scheduling; reducing ore loss and dilution to improve head grade; and improving metallurgical recovery.

“It is a good project, it was essential to Pasminco, but it is not suddenly going to transform the company into a super profitable business; it’s just the nature of the industry,” Mangano said.

These are perhaps some of the sentiments Pasminco would not like fuelled by nosey resource journalists and brokers. Pulling down the shutters will not stop speculation about Century, nor do much good for the company’s shareholders who want to know how their money is being spent. Especially when dividends look a long way off.