Star Mountain Resources (US-OTC: SMRS) is acquiring a past-producing zinc mine and concentrator in New York state, which the company says will catapult it from explorer to producer in less than a year.
The Balmat mine, owned by Hudbay Minerals (TSX: HBM; NYSE: HBM), has been on care and maintenance since 2008, mostly due to poor market conditions, low commodity prices, high operating costs associated with the deposit’s geology and changing business priorities.
Last year, privately held Northern Zinc negotiated an exclusive purchase option with Hudbay to acquire 100% of Balmat, but like many companies in the mining sector, it struggled to follow through with its plans in the current downturn.
“There are bucketfuls of junior explorers who are hanging on by their fingernails — we understand the situation they’re in,” Star Mountain president and COO Mark Osterberg says in a telephone interview. “The acquisition/merger of Northern Zinc into Star Mountain brings both the right to purchase the Balmat mine from Hudbay, and the technical expertise to actually run it.”
Under the deal, Star Mountain will acquire Northern Zinc and assume $1.39 million of its debt in exchange for 10 million shares of Star Mountain’s common stock. It will also pay Hudbay $17 million in cash and 550,000 in shares.
Osterberg says management expects it can rein in operating costs by controlling dilution through modified mining plans, replacing underground equipment and making relatively inexpensive modifications to the concentrator.
“The mining plan will address some continuity issues caused by high-grade metamorphic ductile deformation of carbonate wall rocks and the enclosed sphalerite-bearing mineralized bodies,” he explains. “Smaller-profile underground equipment will allow smaller excavations, lessening the need to handle barren material.”
One of the first priorities is to complete a compliant resource estimate, and confirm earlier estimates of an eight-and-a-half-year mine life. “Hudbay built a resource using 43-101 methodology, but they did not publish or report it, so we’re in the process of meeting the United States Securities and Exchange Commission’s Industry Guide 7, and that should be out in November,” Osterberg says. “We intend to use it as part of the audit stream that has to go with reporting requirements in the U.S.” Industry Guide 7 contains SEC’s basic disclosure policy for mining companies.
According to Star Mountain, average grades at Balmat run 14% zinc, which Osterberg says makes Balmat “the third-highest grade zinc resource available in a developed mine around the world, as far as we know.”
Balmat is a fully permitted and equipped mine, with a 5,000-ton-per-day flotation mill, an office complex and infrastructure. It also has more than 202 sq. km of mineral rights, and the company says there could be a chance to expand mineralization with more surface and underground development and exploration.
As for the physical state of the operation, which also sat on care and maintenance from 2001 to 2005, Osterberg says Hudbay “did a very good job” of keeping the complex in good shape and up to date.
“It’s in outstanding condition for a care and maintenance mine,” he says. “We’re confident we’re going to make it a success.”
As for the outlook for zinc, which is selling at US81¢ per lb., the company’s Arizona-based management says a looming supply deficit — due to the planned closures of several zinc mines, coupled with rising demand for the metal — should lift the price over US$1 per lb., sooner or later.
“The mine plan we have in place right now has cash flow at US$1 to US$1.10 per lb. zinc,” Osterberg says. “At that price, it would give us positive cash flow, after paying back capital investment in 18–24 months from the start of redevelopment, or from the time the acquisition closes. And the zinc price sensitivity analysis in our model indicates solid cash basis profitability, even at current prices. Our modelled break-even point is a price well below the current price. The likely US$1 per lb. price generates outstanding results, not just profits in the black.”
Looking ahead, he says adding key members of the Northern Zinc team will boost the depth and experience of Star Mountain’s board and management, so that Star Mountain “might have an opportunity to build a new company with other assets in addition to Balmat, obtained at relatively low cost during the current mining downturn.”