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 Mon Jul 28, 2014
Spec Value Hunter Comment: InZinc ready to track breakout in zinc
    Publisher: Kaiser Research Online
    Author: Copyright 2014 John A Kaiser

 
InZinc Mining Ltd (IZN-V: $0.17)
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Spec Value Hunter Comment - July 28, 2014: InZinc ready to track breakout in zinc

The zinc mountain in the LME warehouse in recent weeks dropped to a level that triggered the long-awaited rise in the price of zinc, which almost hit $1.10 per lb last week, a level that has proved a peak for zinc several times since its price crash during the 2008 financial crisis. Zinc's multiple failure to break out beyond $1.10 may explain why among the 13 members of our KRO 2014 Junior Zinc Index only the sole producer, Trevali Mining Corp, has positively tracked the zinc price uptrend. But there are subtle signs that the market is starting to take seriously the prognosis that this time is different, this time zinc is not only going to develop a sustainable uptrend, but one that will outperform all the other base metals. Spec Value Hunters who have been on the sidelines as far as InZinc Mining Ltd is concerned should take a second look, for the selling by TD Securities, which has unloaded 2.7 million shares at an average $0.18 since April 1, 2014 when InZinc announced its updated PEA (see KRO Comment: April 2, 2014), seems to be drying up. InZinc took a crew of Canadian analysts on a site visit in June which has not yet translated into any serious corporate finance overtures, but, judging by the emergence of neutral "watch" recommendations, some of the analysts stuck behind the Chinese Walls that separate them from their firms' client capital are getting a bit twitchy. Their corporate finance departments are looking for a zinc breakout above $1.10 per lb to confirm that bankrolling advanced zinc projects is the path to redemption rather than eternal damnation. For those of you who need a refresher as to why I think a bet on advanced zinc juniors this year will flourish even in the event of a senior equity market sell-off this fall when the taper is complete I suggest KRO Comment: February 11, 2014. And for good measure, make sure you have read KRO Blog Comment: Understanding the Junior Resource Sector Bear Market.

Among the least subtle signs has been a $15 million bought deal for Canadian Zinc Corp led by Dundee, whose head Ned Goodman has always had a fondness for zinc, that most unloved of base metals. Canadian Zinc has spent the past five years battling its way through Canada's permitting thicket to get the zinc-lead-silver Prairie Creek deposit in the Northwest Territories approved for a 1,000 tpd underground mining operation at an extra cost of $193 million (the Hunt brothers built the core infrastructure during the 1980 silver squeeze). Late last year Canadian Zinc beefed up its zinc credentials by adding various Newfoundland VMS deposits to its roster through the sad euthanasia of Peter Tallman's Messina Minerals Inc.

Peeyush Varshney's Canada Zinc Metals Corp also enjoyed a price pop last week which cannot be explained by subsequent news that Teck has a target generation program planned for the Kechika Trough prospects it has optioned 70%, nor by news that delineation drilling on the Cardiac Creek deposit on the 100% owned Akie project did not disappoint. Cardiac Creek has the misfortune of being a steeply dipping body that requires an underground program which facilitates resource definition drilling at a reasonable cost and furnishes a better understanding of what it will take to safely mine ore hosted by the Gunsteel Shale formation so that Canada Zinc can finally produce a PEA. Producing a PEA is also the mountain Rathdowney Resources Ltd must climb for its Olza zinc deposit in Poland where this Hunter Dickinson junior must solve ground stability issues and demonstrate that Poland's post-Communist bureaucracy is navigable. Rathdowney has been a bottom-fish watch in the $0.20-$0.29 range since January 3, 2014 on the assumption that higher sustainable zinc prices will overcome these obstacles.

Another bottom-fish watch in the $0.20-$0.29 range is Karmin Exploration Inc which has a 30% interest carried through a BFS in the Aripuana VMS deposit in Brazil. Karmin's partner is Votorantim, the private Brazilian conglomerate whose ownership of zinc smelters raises the likelihood that Aripuana will eventually be put into production, with Karmin bought out along the way, provided Brazil carries through with its $750 million highway program that will connect the local town with the means to transport concentrates to Votorantim's zinc smelters. That seems likely since a 261 MW hydroelectric power plant with capacity well exceeding local needs has already been built within 20 km of Karmin's zinc deposit. Karmin, whose major shareholders are the Ciccarelli family of Sarnia hockey fame and the Peruvian Arias family of Colossal Oopsdom, is a waiting game. Votorantim has spent $35 million to produce an internal PFS indicating a 3,300 tpd underground mine at a CapEx of $250 million, but will eventually have to produce a 43-101 version as part of any buyout proposal. A similar situation faces another bottom-fish watch, Solitario Exploration & Royalty Corp, which nets 30% in the Bongara zinc deposit in Peru after Votorantim funds production. Solitario's real focus is to develop the Mt Hamilton gold deposit in Nevada whose CapEx it hopes to secure through a deal that shifts Bongara into Votorantim's hands.

My top junior zinc pick as an all out development play with a possible future buyout by a major zinc producer is InZinc Mining Ltd because based on its updated 2014 PEA the West Desert project is viable even at a zinc price in the $0.90-$1.00 per lb range. My updated cash flow model based on the PEA's ore schedule indicates that at $1.09 per lb zinc, with copper-indium-magnetite-gold-silver byproducts at base case prices which happen to conform with spot prices, West Desert has an after-tax IRR of 28% and NPV at 10% of USD $257 million, which translates into $4.19 per share assuming a 1.10 CAD per USD exchange rate, and 67.5 million shares diluted. Even if we assume a doubling of fully diluted to fund West Desert through a BFS, we still have a target above $2 per share. Unless the iceberg sell order of TD Securities remains sizable, a market looking for a position in InZinc will have to reach into the $0.20-$0.30 range. Should such a move coincide with a zinc price breakout beyond $1.10, bigger players on the sidelines looking for a stake in a zinc junior with physical value expansion potential, and a location and deposit style that favors rapid development and mine approval, will be banging on InZinc's door for part of the $3-$5 million financing Chris Staargaard feels is needed to put West Desert into striking range of a PFS completion during 2015, though that stage will require a followup $10 million plus financing.


*JK owns shares in InZinc Mining Ltd

 
 

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