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Why Teck may have most to gain if zinc refiners are squeezed

Smelting and processing operations take place at at the Teck plant in Trail, B.C., on July 3, 2008.

Udo Weitz/Bloomberg

Teck Resources Ltd. may stand to gain the most of any mining company should a supply shortfall in zinc force smelters to slash the fees they charge miners to refine the metal.

The Vancouver-based company mines more zinc than it refines, resulting in a net-"long" position in unrefined zinc that's the largest in the world, Teck has said, citing Wood Mackenzie data.

Tight zinc supplies have supported prices, and may push processing fees lower as smelters compete for ore. Global output of refined zinc trailed consumption by 286,000 metric tons in 2016, the International Lead and Zinc Study Group said in a report Feb. 15. Zinc has surged about 50 per cent in the past year, and posted the best return in the Bloomberg Commodity Index of raw materials.

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Noranda Income Fund, which owns the second largest zinc refinery in North America, posted a $73=million impairment for 2016, citing pressure on treatment charges. Its 2017 production guidance has been suspended due to an ongoing strike at its Quebec refinery.

Should the talks between miners and smelters result in lower processing fees, Teck stands to benefit from its surplus in unprocessed ore. That gain would be on top of the tailwind the company is already getting from higher prices for zinc and the other commodities it sells. The company's fourth-quarter profit topped analysts' expectations as metallurgical coal prices soared 189 per cent in 2016 and copper posted double-digit gains.

Teck Chief Executive Officer Don Lindsay has said he is bullish on zinc, noting that supplies of zinc concentrate are so tight that smelters may run out. He said in an interview last week that talks to set benchmark processing fees this year are likely to result in the "largest decrease in treatment charges in modern history."

As a result of the company's net-long position, "we see more benefit from zinc price increases than companies that produce refined zinc, as more of the price exposure accrues to the mine production," Teck spokesman Chris Stannell said in an email Thursday.

The company was the second-best performer in the last 12 months of 23 zinc-ore mining companies tracked by Bloomberg Intelligence. Analysts expect the stock's returns over the next 12 months to top most of its peers.

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