South32 (LON: S32) is acquiring a 15% stake in Arizona Mining (TSX: AZ) at a 30% premium to the junior’s share price in a move analysts say is a ringing endorsement of the company and its Taylor zinc-lead-silver sulphide deposit, 80 km southeast of Tucson, Arizona.
The globally diversified metals and mining company has signed a binding private placement agreement with Arizona Mining for 45 million common shares in the company at a price of $2.45 per share for gross proceeds of $110.3 million (US$81 million). South32 also gets a seat on the board and a pre-emptive right to participate in future equity financings to keep its 15% ownership.
Arizona Mining will use the funds to advance its Taylor deposit to the feasibility and permitting stage, and add drill rigs to test new targets at the property, including the Taylor Deeps zone and the Trench Vein system. The Taylor deposit and surrounding targets are part of the company’s Hermosa project.
Don Taylor, Arizona Mining’s chief operating officer and the geologist who led the team that discovered the sulphide deposit at Taylor, says many companies have looked at the project since 2015, but South32 is a “preferred stakeholder,” and has many of the skills the company will need to develop the project.
“We’ve had quite a bit of interest from some of the more established companies,” he says. “It’s a great resource and it’s a commodity mix that’s pretty hot right now, in terms of zinc and silver-lead. South32 has shown more interest than many of the other groups.”
Taylor notes that South32 understands the zinc-lead-silver business very well and has gained a lot of experience at its own Cannington underground mine in Australia, one of the world’s largest silver and lead producers.
He also notes that South32, the world’s largest publicly listed manganese producer, is interested in Arizona Mining’s other deposit on the Hermosa property, called Central, a silver-manganese manto oxide project updip from Taylor.
“There is no value currently put on that deposit when you look at the share price today, but it’s something [South32] is keenly aware of … [they] have their eye on that ball.”
Central has a measured and indicated resource of 181.7 million short tons (164.8 million tonnes) grading 1.3 oz. per ton silver (36.85 grams silver per tonne) and 3.1% manganese, and an inferred resource of 45.2 million short tons (50 million tonnes) grading 1 oz. per ton silver (28.35 grams silver per tonne) and 1.8% manganese.
Some of the proceeds from the private placement will be used for Central. The company is revising the process flow sheet for the oxide deposit, and plans to run a pilot-scale test on that new process flow sheet in the mid- to latter part of this year.
Taylor describes the deal with South32 as “wonderful.”
“First, they are miners, and bring a lot of skills to the table, from the commercial aspects of buying and selling of concentrates, as well as the experience they bring on the manganese side. At some point we will develop the Central deposit, and South32 has a lot of background and experience to help us understand those markets and associated products.”
Last month, Arizona Mining completed a preliminary economic assessment of the Taylor sulphide deposit, which envisions an underground mine with initial production beginning in 2020 and ramping up to 10,000 tonnes per day in 2023.
Based on a 19-year mine life, the study outlines an after-tax net present value of US$1.3 billion at an 8% discount rate, a 42% internal rate of return and a 1.7-year payback period.
The Taylor deposit contains measured and indicated resources of 72.5 million short tons (65.7 million tonnes) grading 4.3% zinc, 4.4% lead, 1.7 oz. per ton silver (48.19 grams silver per tonne) and 0.1% copper, based on a 4% zinc-equivalent cut-off grade. Inferred resources add 38.6 million short tons (35.05 million tonnes) grading 4.4% zinc, 4.2% lead, 3.1 oz. per ton silver (87.88 grams silver per tonne) and 0.1% copper.
What led to the discovery of the main zone at Taylor in 2015 was a re-interpretation of the geology combined with the alteration halo, or alteration minerals, Don Taylor says. Also supporting the re-interpretation was the magnetic data from a geophysical survey flown in 2012.
“This data highlighted an area that just said ‘drill here,’ and we did,” Taylor says. “And all five holes encountered significant intercepts of massive sulphide zinc-lead-silver.
“It was pretty special — it was an exciting time,” Taylor adds. “It was a time when money was tight and our chairman, Richard Warke, stepped up with his own money and put pressure on us to deliver.”
The company has focused on the Taylor sulphide zone for mine-planning purposes, but also recognizes the potential of both the Trench Vein System and the Taylor Deeps zone at the Hermosa project. Now that it has completed the PEA on Taylor, it plans to turn its attention to these zones to determine their size and extent.
The company has an aggressive program for the rest of the year, including more exploration and permitting work. One of the main exploration targets is a series of high-angled veins that were mined historically in the district.
On the Trench property, some veins can be traced for a mile (1.6 km) along strike, Taylor says, and the company has intersected them in its drilling to depths in excess of 3,500 feet (1,067 metres).
Most of the drilling has been vertical, making it hard for the company to evaluate the near-vertical veins, Taylor says. Now the company has three drill rigs that will evaluate the veins by drilling low-angle holes.
“Some of the veins are significant, with thicknesses over 50 feet (15 metres) and very good zinc-lead-silver grades,” he says. “It is important to evaluate these veins, as they extend to the surface and could have an impact on the early mine plan.”
The other exploration target is Taylor Deeps, a zone discovered earlier this year. Taylor Deeps is interpreted as a mineralized carbonates zone below a sequence of older volcanic rocks and a thrust fault that separates it from current sulphide resources.
The latest batch of assay results from Taylor Deeps include those from hole 435, an angled hole (-82 degrees), which intersected a robust mineralized sulphide interval and extended the zone 457 metres east. The hole cut 18.6 metres at 16.5% zinc, 13.8% lead and 9.84 oz. silver per ton, including a 9.5-metre zone that returned 27.3% zinc, 22.4% lead and 14.85 oz. silver per ton.
“We’ve just announced a series of drill holes from this zone that had outstanding grades and have significantly expanded the footprint of the nearly horizontal zone,” Taylor says. “The recent drilling has more than doubled the footprint of the Deeps used to calculate the resource.”
Alex Terentiew, an analyst in Toronto who covers Arizona Mining at BMO Capital Markets, says South32’s backing “gives a strong endorsement by the global diversified miner, reflecting the potential of one of the very few early-stage, large and highly prospective zinc deposits in the world, and provides Arizona Mining with an experienced strategic partner.”
After announcing the deal, Terentiew raised his target price on Arizona Mining to $4 per share from $3.75.
News of the investment sent the junior’s shares up 12.7%, or 24¢, to $2.13 per share.
The junior has traded in a 52-week range of $1.08 per share (May 4, 2016) and $3.49 per share (Dec. 7, 2016).
For its part, the investment “continues South32’s strategy of fostering project generation through investing in junior mining and exploration companies, although this is the most cash deployed to date,” says London-based analyst Edward Sterck, who covers the company for BMO.
Last month, South32 signed an option agreement to form a fifty-fifty joint venture with Trilogy Metals (TSX: TMQ; NYSE: TMQ) on the junior’s Alaskan assets, known collectively as the Upper Kobuk mineral projects.
Last year, South32 signed an option agreement to form a fifty-fifty joint venture with Northern Shield Resources (TSXV: NRN) on the junior’s Huckleberry copper-nickel-platinum group metals project, in the Labrador Trough of northern Quebec.