Zinc
Markets
Zinc
The refined zinc market moved into a global supply deficit in 2004. While global zinc metal production increased by 2.7% to around 10.1 million tonnes, zinc metal consumption, driven by strong growth in China and North America, outpaced increases in supply and rose by 5.4% to 10.3 million tonnes, resulting in a global supply deficit of more than 200,000 tonnes. These improved fundamentals have been particularly supported by domestic demand in China, with the country becoming a net importer of refined zinc during 2004. Until the final quarter of 2004, LME stocks were supported by private stockpiles of zinc delivered into warehouses. During the final quarter, however, stocks fell steadily to around 631,000 tonnes by the end of December, 17% lower than levels at the end of the previous year and the lowest level recorded since September 2002.
Improved market fundamentals and a weaker US dollar assisted zinc prices to recover from the lows of the past two years, rising by 35% to finish the year at $1,270 per tonne. The average LME zinc price increased by 27% in 2004 to $1,048 per tonne, up from $828 per tonne the previous year.
Global production of zinc concentrates in 2004 remained at a similar level to the previous year at 9.6 million tonnes. Lower production from Australia and Peru was only partially compensated for by increased output in China and Namibia, resulting in a further tightening in the supply of zinc concentrates. This led to a reduction in industry negotiated treatment charges (TCs) which fell from an average of $148 per tonne in 2003 to $141 per tonne in 2004.
Lead
Global consumption of refined lead metal rose by 2.8% to 7 million tonnes in 2004. The main driver behind the rise was increased demand from China, up by an estimated 9% in 2004. Production of lead metal remained at 6.7 million tonnes, a similar level to 2003, as increases in refined lead production in China and Kazakhstan compensated for reduced output in Australia, the United Kingdom and the United States.
The tightness in the lead market which began to develop during 2003 continued during 2004. Lead stocks at LME warehouses fell to levels representing less than one week of global consumption, and by the end of 2004 stock levels were as low as 40,500 tonnes, compared to 107,500 tonnes at the start of the year. Backwardation was a key feature of trading throughout the year, reflecting the tight physical market.
Low levels of stock, steady global production rates and increased demand pushed LME prices to 14 year highs, with the cash price for lead breaking the $1,000 per tonne mark on several occasions. At the end of July, the LME lead cash price briefly rose above the quoted zinc price, and consistently traded over $850 per tonne in the second half of 2004. The average cash price for lead in 2004 was $887 per tonne, 72% higher than the average price for 2003.
Operations
During 2004, Xstrata Zinc experienced strong growth in EBIT, which increased from $18 million to $68 million, an increase of almost 300%. Stronger prices for both lead and zinc drove this increase in profits, contributing $110 million to the rise in EBIT. However the positive effect of prices was partially offset by the weaker US dollar against the Euro, Australian dollar and Sterling in 2004, which reduced operating profits by $61 million.
Xstrata Zinc again made excellent progress in achieving cost efficiencies and production synergies across the business, cutting unit costs in real terms by $13 million in 2004.
Zinc Lead Australia
2004 has been a transition year for Xstrata's operations at Mount Isa. The transformation programme put in place since the acquisition of the asset from MIM has achieved greater capacity utilisation and, together with measures taken to extend the operation's life, this has ensured that continued production at Mount Isa is financially viable. Turnover from the Australian zinc and lead operations rose to $251 million, around 51% higher than in 2003, reflecting stronger metal prices and increased production in the second half. EBIT improved to $12 million, from a loss of $27 million in 2003.
Production ramped up in the second half of the year, as the transformation initiatives at Mount Isa started to bear fruit and as mining conditions at George Fisher benefited from the work carried out in the first half on a new mine design, improved mining sequence and increased development rates. Ore hoisted in 2004 was 4% greater than the previous year.
George Fisher achieved ore production of 2.4 million tonnes in 2004, 9% higher than in 2003. Production at the Isa lead mine was 22% lower than in 2003, due to lower production in the first half. Second half production increased by 11% compared to the first half of the year, and the operation achieved a record tonnage of contained zinc metal and lead metal in December 2004, an increase of over 100% against the corresponding month in 2003. This level of production has been maintained into 2005.
Zinc in concentrate production increased by 13% compared to the previous year to 169,400 tonnes, due to higher tonnes milled, together with improved grades and recoveries. Lead in concentrate production was 115,400 tonnes in 2004 compared to 119,200 tonnes the previous year. During the first half, the Mount Isa lead smelter was impacted by lower levels of production from the lead mines and a subsequent lack of concentrate during the first half of the year. However capacity utilisation improved in the second half of the year as the mines ramped up underground production, with ore tonnes milled rising by 16% compared to the first half. As a consequence, production of both lead in concentrate and zinc in concentrate in the second half rose by 14% and 23% respectively, compared to the prior corresponding period. Higher levels of production have continued into 2005.
McArthur River Mine (MRM) production was in line with last year. In an effort to improve the quality of MRM's concentrate, MRM ran numerous trials in the concentrator to achieve a product tailored to specific market requirements, primarily reducing the silica content and increasing the zinc grade. These trials were successful and led to the adoption of a modified flow sheet which increases the grade of the concentrate from 46.5% to 47.1%. However, the trials had a short-term impact on recoveries and this, together with lower zinc and lead grades from the mine, impacted the amount of concentrate produced during the year.
Zinc Europe
The San Juan de Nieva smelter in Spain achieved record zinc production for the sixth consecutive year, producing over 491,000 tonnes of melted cathode and over 472,000 tonnes of saleable zinc, an increase of 2.5% and 2.3% respectively over last year. Production of melted zinc cathode in the smelter is expected to reach 500,000 tonnes in 2005 following the completion of a 7,000 tonne expansion in December 2004. During 2004, the San Juan de Nieva smelter also produced 662,800 tonnes of saleable sulphuric acid. Germanium production decreased to 700 kilograms compared with 7,509 kilograms in 2003, due to lower germanium content in processed concentrates. The Arnao plant produced 16,500 tonnes of zinc oxide and the Hinojedo roaster produced 29,000 tonnes of liquid sulphur dioxide.
At Nordenham, 2004 production again reached record levels of over 154,000 tonnes of melted cathode and over 147,000 tonnes of saleable zinc over 10% higher than the plant's rated production capacity at the time of Xstrata's acquisition. Further increases in production are expected in 2005, from continuing operational improvements, including the use of calcine from Hinojedo to resolve bottlenecking in roasting capacity. Additional external oxidic material will be inputted to allow increased production.
As a result of this strong performance, turnover from the European zinc operations rose to $759 million, a 28% increase on 2003. EBIT also increased by 28% to $46 million, due to strong zinc prices and the successful cost efficiency programme, which partially offset the weakness of the US dollar against the Euro.
Lead Europe
Lead production at the Northfleet refinery fell by 35% compared to 2003, due to the closure of the unprofitable No. 2 and recycling lines during 2003. Despite lower levels of production, turnover remained at a similar level to 2003, at $156 million, due to higher received prices for lead. EBIT improved to $10 million from $9 million the previous year.
Silver production reduced by 19% compared to 2003 due to the lower levels of lead processed, however higher silver content, up 10%, in the crude and improved process efficiencies partially mitigated the lower bullion feedstock.
Developments
Zinc-lead Australia
At Mount Isa, capital expenditure increased to $54 million to increase production capabilities through additional mine development, replacement of mobile mining equipment, and restoring the zinc-lead concentrator to nameplate capacity.
The Black Star Open Cut project has progressed well since it was approved in June 2004 and ore production is anticipated to begin on schedule in the first quarter of 2005. The project is expected to produce approximately 25 million tonnes of ore, at an eventual annualised rate of 2.3 million tonnes per annum, over an eleven year life of mine. Expected levels of production have been increased from 1.5 million tonnes per annum over 9 years previously, following a revised life of mine plan completed in the second half of 2004.
During 2005, the lead smelter is expected to achieve its capacity throughput of 170,000 tonnes per year. A water cooling circuit is being restored to enable this level of production and minimise operating risk, and should be fully installed in July 2005. A pre-feasibility study to examine restarting the ISA smelt lead furnace will also be undertaken during 2005.
McArthur River Mine has improved bulk concentrate quality, reducing the silica content and thereby enhancing the product's commercial appeal. Feasibility studies for both the Open Pit at McArthur River and the associated Albion processing plant continue.
Zinc Europe
A new project to recover silver concentrate from the leach residue has been approved. This will allow the smelter to treat high silver zinc concentrates and secure silver recoveries of over 80%. The project, which has an indicative capital cost of euro12 million ($14 million), comprises the installation of new leaching tanks to improve silver and zinc recovery, a froth flotation step to recover a silver concentrate and new high pressure filters. Project completion is expected by July 2006.
At Nordenham, the current contract with a local power supplier has been prolonged until the end of 2005. Following successful negotiations with several power suppliers, the government of Lower Saxony and the federal government in Berlin, the cost of power will not increase in 2005.
Lead Europe
A pre-feasibility study related to expansion options for the Northfleet refinery was carried out, which showed that Britannia Refined Metals (BRM) could handle at least double the current production levels with minimal capital investment.
As a result of this study and the shortfall in bullion supplies from Mount Isa, a unique opportunity arose to prove the current refinery capacity by closing one of the refinery lines and processing through a single stream. Through focussing on the rate controlling steps and standardising the operation, cycle times have successfully been reduced from 22 hours to less than 14 hours, allowing production levels to be maintained from one single stream. With further continuous improvement and minor capital investment, it is expected that most of next year's budgeted production of 170,000 tonnes will be processed through a single stream.
Environmental improvements will be a major target for the lead business in 2005 to comply with new EU IPPC targets.