Chairman’s statement from the Strategic Report
The expected resurgence in the resources sector that we discussed this time last year has generally not yet materialised and indeed there have been some areas in which confidence has been badly eroded. These matters have made it very difficult for all junior companies operating in the sector, including our own. The general economic malaise in Europe has now spread somewhat to the US and importantly to China. Whilst there are some areas in which blue sky is appearing the lack of confidence of the investment sector in resources has made raising funding quite difficult.
In order to reduce corporate costs all the directors have demonstrated their commitment to the group by waiving salaries and fees since 1st July 2014 which saved more than £80,000 in the financial year. This waiver is expected to continue until the financial position of the group improves.
Our major effort during the year has been with the Grangesberg project where we began managing operations in May 2014. A successful geotechnical investigation programme followed the production of a compliant ore resource estimate. However the ever more depressed iron ore market forced us to the conclusion that we should not exercise the option over a 51% interest which has now been replaced with a right of first refusal over that interest.
As part of the ongoing arrangements we continue to manage the project albeit subject to certain restrictions. The Grangesberg board will need to keep the future prospects for the iron ore market firmly in view as it looks to future project funding and possible alternative investment strategies.
In Canada the operations of Labrador Iron Mines, in which the company continues to hold a 15% interest, remained suspended during 2014 as iron ore prices declined below a level at which an operating surplus could be made. LIM spent the majority of the year seeking new financing particularly for the development of its flagship Houston deposit.
However with iron ore prices continuing to fall these financing efforts proved to be impossible and after the end of the financial year LIM initiated proceedings for a financial restructuring under the Canadian Companies Creditors Arrangement Act (“CCAA”). LIM has raised some funds through asset sales and has sufficient cash available to continue to operate a limited function until at least the end of the current financial year whilst it seeks new funding and reviews its ongoing business strategy.
LIM owns extensive iron ore resources, processing plants and equipment and rail infrastructure and facilities in its Schefferville Projects but is currently in a challenging financial position. LIM believes that an orderly CCAA process that enables the restructuring of the company’s debts, the restructuring of certain of its operating contracts and securing additional development financing to proceed with the development of the Houston Project is in the best interest of all of stakeholders.
Operations at Parys Mountain were maintained at a low level as a consequence of limited available funding and no additional drilling took place while management focused on studying the optimisation of mine development. We are fortunate to hold freehold title to the majority of the known resource and thus are not subject to onerous annual exploration costs as would be common in many other jurisdictions. Site maintenance costs are also kept to a minimum.
The increase in the zinc price that was forecast this time last year and which will be a key driver in the immediate future economics of Parys Mountain has not yet materialised. However the fundamentals for zinc remain strong with major mines such as Lisheen and Century planned to close during 2015. With little new production coming on stream stocks of zinc metal have continued to fall and it now seems only a matter of time before prices do eventually start to move upwards. We will need to raise funds to update studies on Parys Mountain particularly with regard to what may well now be lower than previous capital costs, so that we will be properly placed when the zinc market begins its long delayed move forward.
The future for commodity prices continues at best to be uncertain. The group has exposure to iron ore both at LIM and at Grangesberg and whilst neither makes a cash draw on Anglesey any upward movement in the iron ore price would significantly benefit both projects and hence the general tenor of the group.
Robust steel production and iron ore demand from China have underpinned the iron ore price over the past ten years. Despite an economic slowdown, it would seem that Chinese steel production continues to increase and China will need to import more iron ore to replace the shutdown of domestic production, which should help iron ore price stability.
The iron ore industry is re-consolidating as small, high cost miners are closing. The larger lower cost miners such as Rio Tinto, BHP Billiton and Vale should continue to take market share as a result. The top four producers are re-asserting their status as an oligopoly in the market and currently control 54% of the supply. This dominant position is forecast to increase to 75% within the next two years and will likely result in more disciplined supply growth and less volatility in iron ore prices.
The group’s Parys Mountain property will benefit from any improvement in the price of zinc. Zinc will form a major part of the projected revenue stream from Parys Mountain, especially in the early years of production, and would be followed by increasing proportions of lead and copper as mine development advances.
Over the past few years there has been a strong argument supporting higher prices for zinc and lead over the long term, as a forecast imbalance between demand and supply is widely expected to have a significant impact. Wood Mackenzie, a global leader in commercial intelligence for the metals and mining industries, has stated that as a result of the industrialisation and urbanisation of China, they expect growth in demand for zinc to average 6% per year until 2020. For the rest of the world, they forecast demand to rise at a rate of 2.2% annually so that on a global basis, zinc demand is expected to increase 4% annually until 2020. This view is also held by most market commentators including CRU which in its 2014 Zinc Market Outlook was forecasting that “enormous deficits are likely in 2017 and 2018” and that “some very high prices are in prospect”.
The demand for zinc and lead is expected to remain robust because of wide spread industrial usage. On the supply side, there has been a lack of investment in recent years in the exploration for, and development of, new zinc and lead projects, which has led to limited new sources of supply. In addition, a number of larger producers, notably the Brunswick mine in Canada, the Lisheen mine in Ireland and the Century mine in Australia, either have closed or are expected to shut down by the end of 2015, all of which should lead to reduced current mine supply of zinc and lead concentrates.
While the US economy continues to show signs of improvement, the global economic outlook remains weak and uncertain. China’s growth continues to decelerate and Europe risks slipping into recession. Near-term growth prospects in both China and Europe now look dependent on further government intervention. There is also concern that as prices rise, some Chinese zinc production will come back on line. While it is possible that Chinese production could increase to fill the gap, much higher prices are needed to sustain these operations. However, on the supply side, the pipeline of large-scale, development-ready, zinc-lead projects remains very thin and the long term outlook for the prices of both zinc and lead remains very favourable.
John F. Kearney
31 July 2015