Arizona Mining (TSX: AZ) shares slightly recovered on promising assays from the Taylor zinc-lead sulphide deposit at its Hermosa property, following a sharp decline after a mining publication raised concerns about the marketability of Taylor’s zinc concentrates, before sliding again.
Located 10 km from the town of Patagonia and 80 km southeast of Tucson, Ariz., the high-grade zinc deposit contains 28.3 million indicated tonnes grading 10.9% zinc equivalent and 75 million inferred tonnes at 11.1% zinc equivalent, using a 4% zinc equivalent cut-off grade. Exploration success at Taylor this year coupled with higher zinc prices have skyrocketed the company’s shares.
On Dec. 7, the stock touched a 52-week high of $3.49, up 947% from its 2015 close of 32.5¢. A day earlier the company had closed a $36-million bought deal with underwriters led by Scotia Capital, National Bank Financial, RBC Capital Markets, TD Securities and Raymond James. It sold 11.8 million shares at $3.05 apiece.
Arizona shares, however, spiralled downward after the Global Mining Observer (GMO) claimed Taylor’s zinc concentrates contained too much manganese — possibly making them unsalable. The Dec. 11 article compared the deposit to the infamous Bre-X Minerals scandal, likely causing some investors to sell. The stock lost 20% over three days.
The company — led by Jim Gowans, formerly co-president of Barrick Gold (TSX: ABX; NYSE: ABX) — fired back the next day. Arizona called the article that GMO has since retracted “misleading.” It said the article implied that Hermosa’s Taylor and Central manganese-silver oxide deposits were the same deposit.
Arizona said initial metallurgical work completed on different types of ore found at the Taylor deposit concluded the project could produce “marketable-grade lead and zinc concentrates.”
The results — contained in the March 2016 technical report — indicate the Taylor deposit could generate two concentrates: a lead concentrate containing 0.1% manganese, and a zinc concentrate containing 1.3% manganese.
Arizona says the smelter penalties for zinc concentrate contain 1.3% manganese at US$12 per tonne. Given that zinc concentrate costs over US$1,100 per tonne, Arizona says the penalty is “immaterial.”
On Dec. 14, GMO published a follow-up article suggesting that Arizona would again run into trouble with smelter penalties. The company shot back the same day. It reiterated it should have no problem selling the Taylor zinc concentrate to smelters, adding that smelters have already expressed interest in the project’s future supply of zinc concentrate.
Since the first GMO article, Arizona shares plunged 65¢ over three trading days to close Dec. 14 at $2.66 per share.
“Reasonable questions about the metallurgy of the Taylor deposit have, in some cases, devolved into unfounded speculation due to unsourced generalizations about base metal processing that prey on investors’ unfamiliarity with relatively complex science and engineering practices,” Scotiabank analyst Trevor Turnbull notes.
The manganese content varies throughout the Taylor orebody, which helps Arizona lower the manganese level by blending ore from different areas. This could allow the firm to lower the US$12-per-tonne penalty, Turnbull says.
As part of the work required for Taylor’s preliminary economic assessment (PEA) due at the end of March 2017, Arizona is refining the metallurgical work. It is also evaluating the possibility of adding froth washing to the zinc cleaners.
“The biggest challenge is not the metallurgy, but rather overcoming the anti-mining lobby that will stage from the nearby community of Patagonia,” John Kaiser, author of Kaiser Research Online, said in an email.
“With regard to the manganese level, according to Jim Gowans, this is not a fatal flaw — simply an issue that has to be dealt with in the smelter arrangements for the concentrate,” Kaiser says. “Ironically, both issues become less important the bigger the project becomes. The key to becoming big is securing the ability to ramp into the deposit rather than rely on a shaft to hoist the ore.” If the company can do this, Kaiser says Taylor could become of “strategic importance to the metal supply future of the United States.”
On Dec. 15, the company published another three exploration holes from its drill program at Taylor. The best result was from a step-out hole drilled 335 metres northwest of the boundary of the current resource. The hole cut several high-grade zinc-lead-silver veins, including a 10-metre interval returning 22.8% zinc, 20.2% lead and 381 grams per tonne silver. (The true thickness is still unknown.)
So far, Arizona has published 37 holes from the drill program. It has 14 drill rigs infilling and expanding the Taylor deposit, which is open in all directions.
Shane Nagel, an analyst at National Bank, writes that the results since the October 2016 resource update have “averaged 3.7 metres grading 20.4% zinc-equivalent,” which is well above the resource’s current zinc equivalent grade.
He models average annual production of 340 million lb. zinc at all-in sustaining costs of US20¢ per lb., net of by-product credits, over a 20-year mine life, starting in 2022. Nagel pegs initial capital at US$850 million. He expects Arizona will fund this through debt, equity and a silver-stream financing.
The analyst adds the upcoming PEA should confirm his operating assumptions and provide more details on the proposed permitting timeline. Nagel models three years for permitting.
According to the amended November 2016 technical report, it takes on average four years for the U.S. Forest Service to prepare an environmental impact statement. Arizona expects it can obtain its other permits during the same time.
Arizona’s CEO Gowans was unavailable for comment.
The latest drill results sent Arizona shares up 10¢ to $2.76 on Dec. 15, before closing the next day at $2.67. Year-to-date, the stock is up an astonishing 722%.
Editor’s note: an earlier version of this story included a comment refuting the “anti-mining” presence in Patagonia.