Industry Trend Analysis - Lead: Growth To Slow, But Peru A Relative Bright Spot - SEPT 2016


BMI View: Global lead mine production growth will slow due to low lead prices and a weak global project pipeline. Despite this, Peru will be a relative growth bright spot, supported by a strong project pipeline across minerals, in which lead is often mined as a by-product.

Global lead mine production growth will remain weak due to a combination of a low lead price environment and a weak project pipeline in a number of major lead-producing countries. Globally, China, Australia, the US and Peru will account for more than 75% of global lead production over our forecast period to 2020. Of these countries, China and Australia will account for the lion's share of output: 43.6% and 11.4% in 2016, respectively. In light of the above, we have revised down our global lead mine production forecast and expect annual growth to average 0.9% during 2016-2020, down from our previous average of 1.2%. The average is a significant decline, following annual average growth of 5.2% during 2011-2015. In terms of tonnage, output will grow from 5.3mn tonnes (mnt) in 2016 to 5.5mnt by 2020.

Lead Mine Production Forecast
2014 2015 2016f 2017f 2018f 2019f 2020f
e/f = BMI estimate/forecast. Source: USGS, BMI
Global Global Lead Mine Production, '000 tonnes 5,460.0 5,290.6 5,288.9 5,330.0 5,422.3 5,485.1 5,539.7
Global Global Lead Mine Production Volumes, % y-o-y -0.6 -3.1 0.0 0.8 1.7 1.2 1.0
Australia Lead Mine Production, '000 tonnes 728.00 633.00 601.35 589.32 624.68 637.18 643.55
Australia Lead Mine Production Volumes, % y-o-y 2.39 -13.05 -5.00 -2.00 6.00 2.00 1.00
China Lead Mine Production, '000 tonnes 2,400 2,300 2,305 2,316 2,323 2,328 2,330
China Lead Mine Production Volumes, % y-o-y -20.00 -4.17 0.20 0.50 0.30 0.20 0.10
Peru Lead Mine Production, '000 tonnes 278.00 300.00 304.50 308.31 311.39 314.50 317.65
Peru Lead Mine Production Volumes, % y-o-y 4.51 7.91 1.50 1.25 1.00 1.00 1.00
United States Lead Mine Production, '000 tonnes 379.00 385.00 377.30 375.41 369.78 358.69 342.55
United States Lead Mine Production Volumes, % y-o-y 11.47 1.58 -2.00 -0.50 -1.50 -3.00 -4.50
Global Production To Be Modest
Global Lead Mine Production (kt) & Growth (%)
f = BMI forecast. Source: USGS, BMI
China To Remain The Largest Lead Producer
Select Countries – Share Of Global Lead Mine Production (%)
f = BMI forecast. Source: USGS, International Lead & Zinc Study Group, BMI

China

China's lead production growth will remain under pressure over the coming years on the back of low prices and government-led consolidation over environmental concerns. Despite our significant downbeat forecast for lead production growth, we expect China to remain the largest lead producer in the coming years, accounting for an estimated 43.6% of global lead production in 2016.We forecast China's lead production growth to stagnate, averaging an annual growth rate of 0.3% during 2016-2020. This would represent a significant slow-down compared to average annual growth of 6.0% during 2011-2015.

Lead mine production in China will reach 2.3mnt in 2020. According to the International Lead & Zinc Study Group, a relatively sparse pipeline of global lead projects will come online over the coming years. The organisation estimates that only USD3.5bn will be spent on lead mining expansion during 2013-2016, in contrast to USD161bn spent on copper and USD119bn for coal globally.

We highlight increasing downside risks to our production forecast due to China's strengthening environmental regulations. Tightening environmental regulation could deter domestic lead output and new lead mining projects coming online, as lead pollution is particularly harmful to the environment and lead poisoning is one of China's fastest-growing health problems. For instance, Yunnan Jinding Zinc came into the spotlight in 2015 over the release of heavy metals like cadmium and lead, which breached rules regarding the release of such pollutants.

US

The US lead mining industry will see steady declines in production, as low lead prices and tightening environmental regulations weigh on producers' profit margins over the coming years. US lead production growth will continue to contract as low prices and rising production costs erode profit margins, making operation unsustainable. We forecast US lead production to fall from 377 thousand tonnes (kt) in 2016 to 343kt by 2020. High-frequency production and company data supports this view. For instance, over the first four months of 2016, the country's lead sector posted a 14.7% decline in production.

We forecast lead prices to increase from USD1,750/tonne in 2016 to USD1,950/tonne in 2020. While the market will remain in surplus during 2016, lead prices will edge gradually higher from 2017 onwards as the market will shift into deficit. Furthermore, low mine lead prices will force miners to cut capital expenditure and scale back or even halt operations, thus curbing lead mine supply growth. However, high operating costs, driven by a strong US dollar, will place US lead miners increasingly at a disadvantage to cheaper producers such as Mexico, Peru, Australia and China.

We expect US lead miners will contend with rising operating costs stemming from tightening regulations. For instance, in Q116, Teck Resources and Hecla Mining reported average declines in cash flow from operations of -15.9% and -12.5%, respectively. While the US will remain a top producer, the country will lose global production share, falling from 7.1% of global lead output in 2016 to 6.2 % of the global total by 2020.

Growth To Slow
Select Countries - Lead Production Growth (%)
f = BMI forecast. Source: USGS, BMI

Australia

Lead production in Australia will face slow growth over 2016-2020 due to mine closures amid a declining zinc sector. We expect production growth to recover from 2018 onwards on the back of improving lead and zinc prices. We forecast lead production in Australia to register annual average growth of 2.1% during 2016-2020, compared with a 1.1% decline over 2011-2015. Production will increase from 665kt in 2016 to 722kt by 2020. We expect MMG's USD1.4bn Dugald River mine to be the bright spot in lead production over the coming years, as a declining zinc sector will drag down lead production with mine halts. Subsequent increases in zinc and lead prices will create conditions for better output growth from 2018 onwards.

Muted Growth Due To Supply Cuts
Australia - Lead Mine Production
e/f = BMI forecast. Source: USGS, BMI

Peru

Peru's lead sector will experience modest production growth, supported by a strong project pipeline across minerals, in which lead is often mined as a by-product. Output will increase on the back of silver and zinc exploration and development, since the mineral ores are generally found together in geological formations. We forecast Peru's lead production to increase from 304kt in 2016 to 318kt by 2020.

Peruvian firms Cia Minera Milpo and Volcan Cia Minera are the first and second largest lead producers, respectively, in Peru. The former, which operates three mines, reported lead production of 45.0kt in 2015. Volcan produces lead at its Alpamarca open pit and Rio Pallanga underground mines. Trevali Mining Corp, a Canadian miner focused on zinc and silver, will also be a player in the sector. In 2015, the firm reported production of 13.7kt and expects 2016 production between 10.0-11.3kt. Over the first five months of 2016, Peru's lead output increased by 3.2% y-o-y, to 131kt. In the first half of 2016, Minera Milpo, subsidiary of Brazilian firm Votorantim Metais, reported a 7% uptick in lead production, to 25.0kt. However, in the same period, Peru's second largest lead producer, Volcan Cia Minera, reported a 2.4% decline in output, from 28.8kt in H115 to 28.1kt in H116, due to the suspension of operations at the Cerro de Pasco unit in November 2015. The firm expects 2016 production to be between 55.0-60.0kt.

Select Countries - Key Lead Mine Projects
Country Mine Mine Type Primary Company Total Allocation CAPEX (USDmn)
Source: Company announcements, BMI
Australia Bohemia Open Pit Mincor Resources (100%) -
Australia Bonaparte Open Pit Mincor Resources (100%) -
Australia Sunny Corner Open Pit Argent Minerals (51%) -
Australia Paroo Station Open Pit Ivernia (100%) -
Australia Victoria River Downs Open Pit Anglo Australian Resources (100%) -
Australia Lewis Ponds Open Pit TriAusMin (100%) -
Australia Hera Underground Aurelia Metals (100%) -
Australia Reward - Teck Resources (51%) -
Australia Einasleigh - Consolidated Tin Mines Ltd (100%) -
Australia Walford Creek Open Pit Copper Strike Ltd (100%) -
Australia Sorby Hills Open Pit Kimberley Metals (75%) 100.00
Australia Mount Isa Open Pit/ Underground Glencore (100%) -
Australia Woodlawn Underground Heron Resources (100%) 112.00
Australia Kempfield Open Pit Argent Minerals (100%) 100.00
Australia Dugald River Underground Minerals and Metals Group (100%) 1,500.00
Australia Lennard Shelf Underground Meridian Minerals (100%) 75.00
Australia Potosi Underground Perilya (100%) 58.00
Australia Menninnie Open Pit Musgrave Minerals (75%) -
China Liziping Underground China Polymetallic Mining Ltd (90%) -
China Menghu Underground China Polymetallic Mining Ltd (90%) -
China Baiganhu - Hami Jiatai (100%) -
Peru Huampar Open Pit Trevali Mining (100%) -
Peru Hilarion Open Pit Milpo (100%) -
Peru Bongara Open Pit Milpo (70%) -
Peru Accha - Zincore Metals (100%) 300.00
Peru Shalipayco - Milpo (50%) -
United States Ambler Open Pit NovaGold Resources (100%)