Arizona Metals tanks on rare negative-value PEA for Kay copper-zinc mine

Arizona Metals (TSX: AMC; US-OTC: AZMCF) shares collapsed to a multi-year low Thursday after a preliminary economic assessment (PEA) for its Kay polymetallic project yielded a negative net present value (NPV) under base case assumptions.

The PEA gives Kay a post-tax NPV (at a 5% discount) of -$6 million and an internal rate of return of 4.9%, with total capital costs of $731 million, according to a company statement Thursday. That case assumes metal prices of $4.70 per lb. copper, $1.27 per lb. zinc, $3,100 per oz. gold and $38 per oz. silver.

“We view the PEA update as negative,” Scotia Capital mining analyst Eric Winmill said in a note, citing “high capital intensity and limited initial project scale. As such, we see Kay representing future optionality under a higher metals pricing scenario.”

Arizona Metals shares plunged 46% to 29¢ apiece on Thursday morning in Toronto, their lowest level in six years. The company has a market capitalization of C$41 million ($30 million).

Broader opportunity exists

Kay’s value rises with higher prices in a spot case – but it would still cost more to build the underground mine, with an estimated post-tax NPV of $445 million and an IRR of 14.9%. That scenario puts copper at $6.05 per lb., zinc at $1.57 per lb., gold at $4,745 per oz. and silver at $77.48 per ounce. 

“The PEA captures only a portion of the broader opportunity we see at the Kay mine project, and the spot case sensitivity demonstrates the meaningful upside available under more supportive commodity price assumptions,” Arizona Metals CEO Duncan Middlemiss said in release.

The PEA is based on 71% of Kay’s total indicated resource of 9.28 million tonnes and none of its inferred resources, leaving the rest for future studies.

“Their addition would be a key step in enhancing the economics of the base case,” Middlemiss noted, adding that the company is looking into alternate processing methods that along with better commodity prices could improve Kay’s returns.

The average mill throughput is estimated at 1,918 tonnes per day.

‘Likely shocking results’

“The headline results are likely to be a bit shocking to a number of investors on consensus pricing,” BMO Capital Markets analyst Rene Cartier said in a note. “Additional work will be required, focused on bringing in more tonnes, improving the mining rate, and considering different technologies/trade-offs. A near-term consideration is also likely regarding future funding, which could weigh on the shares.”

Located about 70 km north of Phoenix, on a brownfield site that has been mined intermittently since it was discovered in the 19th century, Kay lies amid numerous current and past-producing mines in the leading U.S. copper-producing state.

Operators including Black Canyon Copper, Shattuck-Denn Mining and Republic Metals produced about 2,730 tonnes between 1949 and 1956, when a cave-in closed the mine. No one has mined Kay since. 

PEA mirrors resource

The PEA’s release follows a similarly marginal initial resource for Kay published last June, which also saw company shares plummet. Grades were better than expected but tonnages disappointed.

Kay could deliver 127 million lb. copper, 293 million lb. zinc, 258,000 oz. gold and 4.7 million oz. silver of payable production over a 10-year life.

The project hosts 9.28 million indicated tonnes grading 1.39 grams gold per tonne, 27.6 grams silver, 0.97% copper, 0.33% lead and 2.39% zinc. Contained metal totals 415,000 oz. gold, 8.25 million oz. silver, 197.9 million lb. copper, 67.3 million lb. lead and 490.1 million lb. of zinc.

In the inferred category, Kay holds 860,000 tonnes grading 1.06 grams gold, 15.4 grams silver, 0.87% copper, 0.2% lead and 1.68% zinc at a base-case cut-off grade of 1% copper equivalents. That amounts to 29,000 oz. gold of contained metal, 423,000 oz. silver, 16.4 million lb. copper 3.8 million lb. lead and 31.8 million lb. zinc.