Can Lead and Zinc exploration become the next boom?

December 18, 2017 Ian Wollff Coal Asia publications 0

Can Lead and Zinc exploration become the next boom? (Vol. 84)

Introduction.

My first introduction to lead and zinc geology & mining was a 1960’s school geology trip to Broken Hill (Australia), where the underground caverns of massive ores of galena and sphalerite were awe inspiring. One of my first private excursions in Indonesia was to visit the operating Cikondang underground gold and silver mine in West Java, to be amazed again by the magnificent epithermal breccias of base metals in the lower parts of the mine. Later I participated in the exploration of Riam Kusik base metal veins of West Kalimantan, and visited more mines throughout Indonesia. The ESDM is missing out by not including such lead & zinc mining in its priority commodities.

The lead and zinc exploration has many of the factors to support a boom, but will this be allowed to happen?

Boom Factors.

An exploration and mining boom typically requires several factors, including; –

Geological setting to host target types of mineralization.
Historical reference to many old mines or mineral occurrences to fast track initial exploration targets.
Some leading projects for ease of investors to follow, and so encourage funding.
Commodity price sufficient to give great rate of return on investment.
Skilled workforce and suitable contractors to support exploration and production.
Government permits to support the industry.

Clearly Indonesia has all of the above factors, except the last, wherein some change is needed to allow for suitable Government supporting permits.

Geology of base metals.

Lead (Pb) and Zinc (Zn) are part of the base metals that includes Copper (Cu), Nickel (Ni) and iron (Fe)] that are elements prone to oxidation, or easily dissolved in acid, being different from the noble metals of gold, silver and platinum. Base metal primary ores are typically sulphides emanating from an igneous intrusive or extrusive volcanic source. In Indonesia, such base metals are typically found in the lower portion of epithermal vein gold & silver deposits, due to the differential temperature of crystallization in a thermal system. Base metals are also found as Volcanic Massive Sulphides (VMS) or as skarns where the metalliferous fluids reacted with limestone or marl on the sides of intrusives. Most base metal deposits comprise a mixture of “valuable” metalliferous minerals such as Pb, Zn, Cu etc, along with a variety of “penalty” metals (arsenic, cadmium, bismuth etc) that form as separate minerals or contaminants within the main base metals sought. Such metalliferous minerals typically form alongside other “gangue’ non-metallic minerals, such as quartz, clays, carbonates etc. Each ore body tends to have a unique mineralogy “fingerprint’ that impacts on exploration, mining, mineral processing and finally upon smelting. These geological emplacement factors tend to deliver numerous small and varied deposits. Much larger ore deposits are less common.

Small discoveries by local miners or geological surveys could be turned into bigger deposits with skilled geological work. Exploration for base metals uses a variety of geological skills and tools (geophysics, geochemistry) that can enhance and broaden the sophistication of the exploration industry. Many small mines can adsorb skilled workers out of the terminated laterite mines (raw ore export ban), from closed smaller coal mines, to provide opportunities for new mining graduates, and so strengthen the overall mining industry and its associated multiplier factor.

Adopting a “one size fits all’ policy towards smelting lead and zinc does not adequately consider all of the geological factors, and so diminish the potential for Indonesian base metal ores to provide the maximum benefit for the Indonesian people. The smelting restrictions contribute to a disincentive for exploration, that leads to no mining, and results in no development.

Some of Indonesia’s lead & zinc deposits.

The Dutch identified and mined a number of precious and base metal deposits, some of which were also worked during the Japanese occupation. It was not until the new Contract of Work (COW) era that base metal exploration was reinvigorated. For example the Kelapa Kampit deposit on Billiton were further explored, and the Riam Kusik deposit of West Kalimantan was drilled out. The BreX fraud brought this early exploration boom to a sudden stop, as all exploration funding dried up. Many of these defined base metal deposits languished, while others were quietly mined by local enterprises. In some cases, it is thought the rich galena (Pb sulphide) and sphalerite (Zn sulphide) ore was sold abroad in containers.

The Petromindo.Com 2014-15 Indonesian Minerals Book has a good summary of some of Indonesia’s current identified base metal deposits.

Cikondang Kencana Prima (West Java) is an epithermal vein deposit that was originally a gold and silver mine during the Dutch era, wherein the lower portion contains workable lead / zinc base metals.
Galtam Sumatra Minerals (South Sumatra) is an Volcanic Massive Sulphide (VMS) of mostly lead that was headed to the development phase (2014).
Gemala Borneo Utama (Maluku – Romang Island) is a complex VMS deposit containing gold, silver, lead, zinc, copper and a separate area of manganese. A JORC resource has been defined.
Kilau Borneo is a sediment hosted polymetallic deposit of gold, silver, copper, and lead in the exploration phase.
Nusa Palapa Minerals (West Sumatra) is an exploration prospect for gold, silver and zinc.
Dairi Prima Mineral – DPM (North Sumatra / Aceh). Exploration of this VMS was undertaken in the COW over 8 years. It was first drill 1997 culminating in a definitive feasibility study in 2004. Some $50 million was spent to develop infrastructure and road access. Forestry permits were finally obtained in July 2012, being valid for 8 years with options to extend. According to the DPM web site, the Anjing Hitam underground zinc mine was planned to recover 5.88 million ton of ore with grades around 14.3% zinc sulphide, 8.8% lead sulphide and 11.3 grams/ton silver. The mine life is expected to be about 8 years. The plan was to process the ore into a concentrate of 225,000 tpa zinc sulphide and 105,000 tpa lead sulphide for export. However, the raw ore / concentrate ban contributed to the suspension of development plans. Exploration has identified a number of other potential ore bodies in the tenement.

A quick review of a 2016 C&C list of some 5,982 tenements found 60 companies that specifically mentioned their target commodity as galena and 3 with zinc. This excludes many more companies that may be eligible to exploit galena & zinc as accessory minerals to copper or gold, or for other companies exploring for a broad range of “base metals’ etc. The exploration companies combined area is 163,780 Ha and production combined area is 10,722 ha. Tenements occurred throughout Indonesia, but the largest number (30) were located in Bogor. This indicates that once it is perceived that galena is thought to be a viable product (proposed lead smelter), then exploration is stimulated. Several very large exploration areas of 5,000 to 50,000 ha in various parts of Indonesia suggest there is significant untapped exploration potential for lead (galena) and zinc (sphalerite).

Today there are a select few potential investors “kicking the tires” of various lead and zinc deposits. The most prominent case of such interest is the proposed sale of a large shareholding in the Dairi project. The removal of the smelting requirements, and return to export of concentrate would be encouraging for many investors.

Lead & Zinc Imports & Exports

Import and export data was obtained from the Indonesian Bureau of Statistics (Badan Pusat Statistik – BPS) website. The period sought started in 2013, as the year before the raw ore export ban, and up till 2016, being the recent completed full year of data. The BPS records 70 classifications of zinc products and 68 products of lead products. These vary from lead in crystal glass to slag containing lead or zinc, used batteries, lead for engine oils, zinc coated iron for roofing & nails, lead coating pipes etc. The import and export of several key items was compiled from their monthly data, into annual data, then compiled further into the 4-year period as shown on the accompanying summary table. The impact of the raw ore export ban in January 2014 can be seen on some ore exports being stopped for a few months, presumably until such time new permits were arranged.

Indonesia has imported about US1 billion, and exported about $6 million worth of zinc metal for this 4-year period. Lead metal imports are about $360 million and exports about $34 million for this 4-year period. Ores and concentrates of lead exports ($20 million) and zinc ($29 million) continued to be exported over this 4-year period, wherein the irregular monthly exports probably reflect production fluctuations. This simple table does not take into account the many other lead and zinc products, wherein Indonesia’s consumption of lead and zinc is clearly much more than shown in this table. Note that the value of gross imports ($/Kg) is always higher for imports than exports, perhaps the difference includes cost of shipping to Indonesia? These BPS figures do not include the domestic production from ores, recycling scrap etc.

It is clear there is a significant domestic market for refined lead and zinc metals.

Commodity	BPS HS code	2013-16 Total US$	2013-16 Total Kg	Gross $/Kg
Import – Zinc not alloyed >99.99%	7901110000	749,011,325	344,142,301	2.18
Export – Zinc not alloyed.>99.99%	7901110000	1,137,628	899,487	1.26
Import – Zinc not alloyed <99.99%	7901120000	236,868,249	107,610,424	2.20
Export – Zinc not alloyed <99.99%	7901120000	5,063,236	2,969,365	1.71
Import – Zinc ores & concentrate	2608000000	327,224	27,717	11.81
Export – Zinc ores & concentrates	2608000000	29,254,466	63,519,066	0.46
Import – Unwrought refined lead.	7801100000	361,762,846	167,103,831	2.16
Export – Unwrought refined lead.	7801100000	34,770,175	17,839,054	1.95
Import – Lead ores & concentrates	2607000000	169,267	125,712	1.35
Export – Lead ores & concentrates	2607000000	20,073,584	36,052,765	0.56

Lead and Zinc Ores.

The present small lead-only smelters often rely on a relatively pure single mineral galena (Pb) feed. This feed may be from selective ore shoots, from hand picking or in some cases it may be possible to mechanically separate out the galena from the other minerals. However most of Indonesia’s deposits have a mix of minerals, such that much of Indonesia’s wealth is not developed.

Mining all minerals requires an environmental impact analysis and action plan (AMDAL). Typically, mine waste, and mineral dressing waste are disposed of in a dedicated and remote tailings dam, that can be “contained’ and encapsulated with soil after mining is completed. In the Dairi case, tailings are to be pumped back underground as part of the support for underground mining. Smelters tend to produce a more concentrated, and often toxic, waste in near urban locations. The implementing regulations of the mining law promotes the development of smelters as a desirable way to develop the economy and the Indonesian modern society. The mining law relies upon the ministry of the environment to ensure the working smelters and their waste products do not harm the Indonesian people. I have yet to see studies to evaluate the “nett” value between development and health on the smelter issue. Perhaps sending some metal concentrates offshore for smelting may have an overall nett benefit for the Indonesian people?

It is unrealistic to propose each Prospect, or each Province builds a large lead and zinc smelter. There are two approaches to building a large smelter – the nickel smelters are located near a cheap hydro power plant, and near the bulky ore feed stock. The Freeport copper smelter is built near a reliable power source (Java grid), and near other industries that consume the smelter by products (gypsum etc). In each case there needs to be good shipping infrastructure, human resources and city planning to manage the numerous smelter plant implementation issues. Bauxite studies have shown that smelters placed in isolated locations bring less “added value’ to the community. Perhaps the treatment of the waste disposal in isolated sites may be a leading factor in locating some large smelters.

Lead & Zinc smelters in Indonesia.

The ESDM implementing regulation 1/2014 sets out the minimum content of metal for upgrading through mineral processing and refining. For lead and zinc, the regulation refers to the minerals of galena, sphalerite, Smitsonite and Hemimor and sets the metal content for lead at 90-98%, and Zinc at 90-98%, along with gold and silver each higher than 99%.

Indonesia’s Mines Department (ESDM) 2014 booklet “Dinamika”, identifies only one lead smelter in construction (2013), that of PT. Lumbung Mineral Sentosa, located in the Bogor district of West Java. More recent press releases indicate the smelter is due to be completed in 2015 – 2017, with a capacity to process 20,000 ton of galena (lead mineral) per year.

It is understood a lead blast furnace is in operation by PT. Kapuas Prima Citra near Pangkalanbun, in Central Kalimantan. An IPO on the Jakarta stock exchange is planned for October 2017 to raise Rp 66 – 93 billion for exploration and infrastructure development. The company owns 30% of the lead smelter that has a capacity of 40,000 ton of lead concentrate feed to produce 20,000 tonnes of lead metal annually. The sister company PT. Kobar Lamandau Mineral is planning to build two smelters with lead output of 40,000 tpa and zinc output of 20,000 tpa in Kotawaringan Barat, also in Central Kalimantan. It is understood the PT. Kapuas Prima Coal Tbk prospectus will show a sister company has a JORC compliant report with defined resource & reserves of some 7 million tonnes of 9% combined lead and zinc in a skarn deposit with a 20 year mine life. The smelter is open to receive ores from other sources.

According to various internet reports, PT. BCMG Tani Berkah sought to build a lead smelter by 2016 in Bogor with a capacity of 15,000 tpa. It appears they have some management issues. In 2015 they had court case over the illegal export of some zinc concentrate, and in 2017 a number of their Chinese workers were caught without suitable working permits.

It is understood that at present there are no zinc smelters in Indonesia.

Net Smelter Returns (NSR)

Net Smelter Returns (NSR) is defined as the proceeds from the sale of mineral products after deducting the off-site processing and distribution costs. This figure can be as low as 40% of the gross value of the minerals contained in the ore for lead and zinc deposits. NSR’s are determined not only by ore grades, but also by mineralogy, that affects mill recoveries, concentrate grades, concentrate treatment charges, freight costs, metal prices, and may include overheads of insurance and marketing costs. The mining of a polymetallic ore generally results in more than one concentrate, or a bulk concentrate containing several metallic minerals. A smelter will not pay for all the metals in the concentrates it receives, but only certain “payable” metals. For example, a zinc smelter may recover 93% of the metal, however it is standard practice for the smelter to pay only 85% of contained zinc, with the balance of 8% as considered as part of the smelting fee. Smelter charges are typically not fixed, but are linked to movements in the international metal price. Some small polymetallic orebodies or complex mineralogy ore bodies may be cheaper to ship bulk concentrates and suffer a lower NSR than to install and operate the equipment necessary to provide a cleaner separation for the concentrate.

The AusIMM’s recent publication “We are metallurgist’s, not magicians” includes the paper “Base metals concentrates sales contracts-change Pavlov and the dog” by PD. Munro and SE. Munro. He proposes that in some cases new mineral processing techniques may be undertaken to maximize returns through a number of ways. This includes reducing the smelter penalty costs typically associated with the toxic elements (such as arsenic, lead, mercury, chromium), including the operational safety and environment disposal issues. The paper provides a quick insight to the complexities of the different smelting systems with ore grades, in regard to the various minor elements, and recommends updating smelter contracts.

NSR involve a further complexity for the Government’s royalty calculations, for example how much silver may be recoverable from a combine lead and silver metal exported from local lead smelters? The government is also grappling with setting realistic prices for raw ore (nickel, bauxite) to be sold to local smelters, to avoid price transferring, to ensure a fair price for miners and for the local government receive a fair royalty. It would seem determining a fair price for such lead and zinc minerals, or concentrate, may be more complex.

Leading project ready, but stalled by regulation.

Public presentations on the Romang Island polymetallic deposit provide an example of how the smelting regulations are blocking the development of a well-defined lead and zinc deposit. Significant exploration was undertaken for 9 years (2004 to 2015), including 712 drill holes for 59,000m drilling that resulted in a JORC resource of 80 million ton of “ore” containing 1 million ounces of gold, 68 million ounces of silver and 2 billion pounds (about 900 thousand tonne) of combined lead and zinc. The deposit is considered feasible with a budget of about $200 million to develop the mine and a flotation plant that could sell a bulk concentrate of 45-50% lead and zinc along with 10 g/t gold plus 1,000g/t silver. The ESDM rules do not recognize a “bulk concentrate” and disallow any concentrate export after January 2017.

Several options for building smelters were considered. The zinc (roast – leach- electrowin = RLE) process will recover zinc, silver and gold, but the lead is lost. The lead blast furnace is cheaper technology, with recovery of lead, gold and silver, but zinc is lost. The Imperial Smelting Process (ISP) will recover lead, zinc, gold and silver. But the capital cost of around $800 million for an ISP smelter is far too much for this “small” deposit. There are no suitable smelters in Indonesia to process bulk mineral concentrates, or zinc concentrates. The nature of the smelter, its recovery performance and operational costs is not only dependent upon the main minerals of lead and zinc, but also sensitive to other “interfering” minerals that could be included in the concentrate product, such as arsenic, copper, and some heavy minerals such as cadmium that may also pose toxic waste disposal issues.

It is unlikely a large zinc or ISP smelter will be built in Indonesia, as; – 1) There is not enough feedstock within Indonesia to justify such a large smelter. 2) International competition for feed stock is strong, while smelter margins are thin. 3) The domestic power costs are less competitive than is supplied to existing international smelters. Each ore body is different (eg PT. Dairi Zinc ores and concentrates may match with a RLE smelter, while Romang bulk concentrate is better suited to a ISP smelter).

Test work and modelling of the Romang complex minerology indicates that by sending the bulk concentrate to an offshore ISP smelter, then Romang would aim to recover 78% of the recovered gold content, 99% of silver, 58% of zinc and 95% of lead, allowing some 81% of the total value to be captured in Indonesia. Alternatively, for production of separate lead and zinc concentrates being sold to offshore smelters, the project would recover 88% of gold, 97% of silver, 83% of zinc and 92% lead, allowing 89% of the total value being captured in Indonesia. Note that smelter losses, and the payment systems for metals recovered are complex.

It is understood that the management behind the Romang deposit (GBU) have made a number of technical presentations to the ESDM, and are still seeking technical and administrative solutions to enable this deposit to be developed. The inactivity resulting from January 2014 imposition of the ore / concentrate ban, is; – 1) Hurting the company that has already invested in good faith and with significant effort in exploration, 2) Denying the people of Romang an opportunity to develop, and 3) Stalled further exploration of lead and zinc throughout Indonesia.

ESDM policy on base metal smelters.

The Constitution Article 33/3 essentially states that minerals are given by God for the benefit for the Indonesian people. The ESDM then states it is the appropriate government body to manage the exploration and development of such minerals on behalf of the people of Indonesia. In reality, the ESDM has limited human and financial resources, wherein much of their management is devoted to several main minerals, with presumably less emphases directed at developing the lead and zinc industry. Some time ago I heard a comment that the ESDM would find it easier to focus on a few large responsible mines, rather than try to manage hundreds of less well managed small mines scattered throughout Indonesia. Indeed, this is a reasonable approach for any giant organization, but it does not fit well with the direction of the Constitution that ALL minerals are for the benefit of the Indonesian people. No exploration, no development, no benefit.

The present sever limitation on exports of mineral concentrates impacts negatively on some gold and silver mines. Where parts of their ore are accompanied by excessive amounts of lead and zinc, then extracting the gold requires a different and costly process. The gold and silver ore mixed in with the base metals is often not viable, and so not mined. Such gold and silver is lost to the Indonesian national resource inventory.

An additional barrier facing investors is an undue time limit on the construction of smelters that is not in the base metals industries best interest. Implementing regulation 35/2017, Article 12.4 states that if a smelter has not completed 35% of construction by 12 January 2022, then the “guarantee of sincerity” may be forfeited to the government. This leaves less time to encourage the development of new resources to support the construction of a new smelter.

Emphases on national resilience is changing.

The rational for imposing heavy restrictions on exporting lead and zinc concentrates was to A) support the concept of value adding, and B) that of national resilience in converting resource commodities into end products.

The objective of national production is particularly visible in the bauxite industry, where various studies point to the lack of producing significant aluminium metal for domestic consumption has dramatically diminished the overall value-added component of that smelter industry. Some parts of the Indonesia steel industry have also found the concept of national resilience in domestic production has serious flaws. Krakatoa Steel and Anaka Tambang formed a joint venture to build an iron plan in South Kalimantan to provide feed to the Krakatoa steel mills. However, this $200 million project has apparently failed due to economic and quality control issues. Furthermore, Krakatoa steel is struggling against cheaper and more readily available steel imports. The consumers need many different types of steel product to be readily available, but Krakatoa’s production capacity is limited to a few types of products that are often subject to delay in deliveries due to the batching nature of production.

Recently the minister of Mines and Energy, Ignasius Jonan, put forward the rational that the national oil industry can substitute oil imports for domestic exploration and production. “We can hold our [oil] reserves, if necessary, and take them out once the price is high again, as long as we can still afford to buy [oil] from overseas”. Several commentators have expressed concerns over the practical nature of this new policy. However, the statement marks a clear change in the parallel concept that national resilience in converting metal ores into final consumer metal products is no longer a principal goal. Indeed, all forms of exports may assist Indonesia being able to “afford to buy” imports of metals, oil etc.

Suggested options to move forward.

Before the implementation of the ore export ban, we saw “rushes” for small scale mining of iron ore mining in South Kalimantan, Billiton and other places, along with village scale mining of manganese in Timor etc. Indonesia is blessed with many small lead and zinc deposits spread over many Provinces. The Bogor experience for developing many licensed IUP’s for lead mines reflects the market mechanism of opportunism by the “people”. Perhaps one approach is to develop a manageable system that encourages miners to send their ores to a local or centralized ore-process centre, at a fair price, and there to create a concentrate. The determination of a government supervised fair value, and payment terms, for such local concentrates will be difficult. This concentrate can then be shipped to an Indonesian / foreign smelter designed to take a wider range of ‘dirty” concentrates.

Indonesia imports much of its lead and zinc metals for industrial uses, wherein the import cost is a national trade deficit. Many of the good so made from these metals are for the domestic market. Perhaps if Indonesia could export lead and zinc concentrate, the associated trade benefit could offset the import trade deficit, and so be “of benefit to the people of Indonesia”.

Most Indonesian lead and zinc deposits are quite small. Perhaps a modest geological program of mapping and drilling may be sufficient for small deposits. Perhaps only the larger deposits may persist with the more expensive quality exploration program that may lead to a JORC or KCMI qualified reserve. A large smelter may have difficulty to find finance, unless there is a well-defined ore deposit to feed it, and very few explorers are willing to risk a costly exploration project if the smelter is not available (either domestically or access to international smelters). Perhaps this “chicken and egg’ industrial approach could be broken if the Government builds the smelter first? However, Antam/Krakatoa may not be so interested, after their bad experiences in building, then closing, an iron ore smelter in South Kalimantan.

The Indonesian research institutions, including ESDM & LIPI tend to emphasize searching for cheap small scale industrial options to much larger issues. Perhaps we could see some more government support for smelter research or alternative technologies to extract lead and zinc metals from the ores.

Clearly, the simplest way forward is to readily support the export of mineral concentrate, with realistic government fees and taxes. Many small mines will bring “the greatest benefit to the people” in the scattered remote parts of Indonesia, and develop the Indonesian mining industry. Small mines can grow into big mines, for example the famous Broken Hill lead zinc deposit started out as a few miners transporting sacks of ore on ponies to the distant port. No mines bring no benefits or opportunities for the poor. The negative imposition for high-capital-cost, low-return smelters, and or high taxes on concentrate exports, often create insurmountable barriers to the development of mineral deposits, resulting in no benefit for today’s economy or people.

Conclusion.

Should the government develop a more supportive roll by a change in the regulations which recognizes that “one size does not fit all” in the development of lead and zinc production, and export of concentrate, then there is the opportunity for investors, geologists and miners to grow this industry at a faster rate, so providing the opportunity for a boom.