In April, CRU analyst Helen O’Cleary forecast that enormous deficits of zinc will emerge in 2017 and 2018.
In a presentation at the Sixth International Zinc Conference in Dubai she called “Zinc — The New Copper?” O’Cleary outlined how a combination of little net growth in global production and growing consumption in all major regions “will run ahead of production growth beyond 2015,” causing zinc prices to “spike towards the end of this decade.”
It’s a view shared by many analysts and one that junior exploration companies like Zazu Metals (TSX: ZAZ; US-OTC: ZAZUF) intend to capitalize on as they advance their zinc development projects to production.
“The zinc deficit is real and it’s not that far away,” Zazu’s president, Matthew Ford, says in a telephone interview from his home in San Antonio, Texas. “There are very few zinc properties out there that have a reasonable shot at getting into production any time soon, and we’ve got one of them.”
Zazu Metal’s Lik deposit in northwestern Alaska is a 50/50 joint venture with Teck Resources (TSX: TCK.B; NYSE: TCK), whose Red Dog zinc mine is 22 km from the project.
Zazu has the right to earn another 30% stake in Lik by spending — or getting others to spend — $45 million on the project. Since Zazu acquired its 50% share of the project in 2006, it has spent less than half that amount, or $17 million.
The project is made up of two parts: the shallower and open-pittable Lik South, and the underground part the company calls Lik North.
In March, a preliminary economic assessment of just the open-pit potential of Lik South estimated that it could produce 17.1 million tonnes of ore milled at an average grade of 7.7% zinc, 2.6% lead and 47 grams silver per tonne, which the company claims would rank Lik South as “one of the largest producers of zinc concentrate and one of the largest zinc mines globally.”
The PEA estimates total capital costs of $352 million (including a 20% contingency) for a 2-million-tonne-per-year mine and mill with an initial nine-year mine life.
The development plan in the study envisions a 5,500-tonne-per-day mill that would produce zinc and lead concentrates using crushing and grinding, and sequential flotation methods. Average concentrate grades over the mine life are forecast at 53% for zinc and 61% for lead.
As modelled, Lik South would produce on average 234,000 dry tonnes of zinc concentrate and 55,800 dry tonnes of lead concentrate per year. Operating costs to mine, mill and deliver the concentrates to port are estimated at US63¢ per lb. zinc, net of by-product credits.
At zinc prices of US92¢ per lb. (the metal’s three-year trailing average price), Lik South would yield a 9.7% after-tax internal rate of return and a US$25-million after-tax net present value (at an 8% discount rate).
At US$1.10 per lb. zinc, the IRR would grow to 17.9% and the NPV to US$158 million, and at US$1.20 per lb. zinc to 22.1% and US$233 million.
Lik’s location in Alaska, meanwhile, puts it at a huge advantage over other projects in less friendly mining jurisdictions, Ford maintains.
“The state of Alaska wants to see this thing built,” Ford says. “Alaska is positive on mining in much the same way that Quebec and the Yukon are. They’ve recognized that they’re not going to get the next Disneyland, so they need to support mining and resource-based industries.”
“We’re in a state that likes mining and wants to see mining projects developed, and we’ve got a sophisticated, wealthy local community that is genuinely in support of mining,” he continues.
Ford points to the willingness of the state, through its Alaska Industrial Development and Export Authority, to build infrastructure that supports resource extraction. AIDEA built the haul road and port for Teck’s Red Dog mine, for example. Teck pays a toll fee for the use of the port and road, Ford says, and AIDEA is considering building a 30 km extension of the same road to accommodate the Lik project, if it’s developed into a mine, he says.
“AIDEA is tasked with funding infrastructure for the economic betterment of Alaska,” he explains. “It’s a broad mandate — they own power stations, ports and haul roads, among other things. AIDEA is reviewing multi-user scenarios at the port as part of an agreement with Zazu.”
Ford says that the proposed mine plan at Lik makes a lot of sense because it’s going to look like the Red Dog mine.
“Red Dog has been a blueprint for us for decades and our mine is going to look very, very similar,” he says, adding that that gives the junior advantages because it can be “pretty confident” in its price estimates.
“We don’t have to guess how much it’s going to cost to mine an open-pit in a swamp in Burma, for example,” he says. “We can have a lot of confidence in what we’re doing.”
And if the economics of an underground operation at Lik North look positive, he says, it would add more mine life to the project.
By contrast, he points to many of the new zinc projects that are on drawing boards today, which he says tend to be small, with expected production volumes of less than 100,000 tonnes of concentrate per year.
The indicated resource at the Lik South and Lik North open-pit deposits total 17.29 million tonnes grading 8.09% zinc, 2.70% lead and 50.30 grams silver per tonne. Inferred resources add 2.87 million tonnes grading 8.59% zinc, 2.68% lead and 37.50 grams silver. The resource is calculated at a 5% cut-off grade for both lead and zinc.
The Lik South and Lik North underground parts of the project, meanwhile, have indicated resources of 820,000 tonnes grading 8.18% zinc, 3.12% lead and 48.90 grams silver, with inferred resources of 2.47 million tonnes averaging 8.76% zinc, 2.70% lead and 38.70 grams silver. The resource estimates are calculated at a 7% cut-off grade for zinc and lead.
Regarding the forecasts for zinc deficits in three or four years, Ford says that there will be a lot of smelters crying out for feed. (By some estimates, zinc mine closures between now and the end of 2016 are expected to remove 3.4 billion lb. annual zinc production from the market.)
“There really are only a handful of viable zinc projects around the world today,” he says, and Lik has the advantage of having “clean concentrates that would be attractive to smelters worldwide.”
“We’re in our third round of metallurgy and it looks nice,” he says. “It’s going to be comparable to Red Dog: a clean, attractive concentrate.”
Ford says the company is “on the cusp” of embarking on the permitting process, but needs to complete more geotechnical drilling.
At the end of March, the company had $1.6 million in cash with no debt.
“We own our interest in the property outright; there are no property payments due. And we have a very, very low burn rate,” Ford says.
“One of the things we’re most proud of is that, in the last few years, when things have been pretty tough, we haven’t had to raise money at low prices or dilute the property by selling an interest in it to keep the doors open. We’ve been frugal with money, hence the low number of shares outstanding.”
At press time, Zazu Metals had 48 million shares outstanding and traded at 56¢ per share within a 52-week range of 45¢ to 75¢ per share.
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