 Think ZINC: Or the Next Big Thing
Bob Moriarty
Archives
Feb 18, 2008
I spent an exciting two weeks
in South America recently where I saw some of the best projects
I have seen in a long time. First I visited Lima where I toured
a silver-zinc-lead project that blew my socks off and I think
it will interest you.
Astute readers (are there any
others visiting 321gold?) may well remember that I have been
warning of a slowdown in base metals for almost a year. But
if that's what I believe, why am I in love with a silver-zinc-lead
project?
I'm a contrarian. It's my job
to measure the temperature of the herd as best I can and figure
out where the next stampede is headed. Too many people were in
love with zinc, the price rocketed to $2.10 in December of 2006.
Soon thereafter, lead shot up to $1.80 by October of 2007. I've
been to China several times in the last couple of years. I know
what importance they are putting into their Coming of Age Party,
the Olympics. You can backtrack and figure that they pretty much
bought every ounce of lead and zinc a year in advance. So a slowdown
in Chinese production wasn't brain surgery.
We've had our slowdown; zinc
dropped to $.98 a couple of weeks ago and lead dropped to $1.10
in December. I was uncomfortable with zinc above $2 and with
lead nearby but I'm comfortable at these prices with both. Now
is a wonderful time to be buying a near-term producer.
The Santander silver-lead-zinc
mine began production some 50 years ago under St Joseph Minerals.
The company started production on a silver-lead-zinc carbonate
hosted replacement system about 200 kilometers Northeast of Lima,
Peru in the high Andes. The project is located at 4600 meters
or 15,200 feet.
Peru used to have some silly
assed rules about business. St Jo mined the property for a few
years then sold it to the contractors. In 50 years, some 8 million
tons of about 10% combined lead-zinc with 2 ounce silver ore
was mined. But the country required the company to sell the product
internationally and to remit the funds to the government. If
the product sold for 3 soles, the government would credit them
1.5 soles or a NSR of 50%. It doesn't matter how rich a mine
is, you can't make money when the government is literally stealing
50% of what you sell for. And their expenses were all in the
higher 3 soles exchange rate. The mine was never profitable.
As a result, short cuts were taken on maintenance and it shows.
15 years ago, the project,
now under local ownership, went into bankruptcy. There is an
existing 1000 TPD mill and facilities for 1000 workers. A stupid-wild-assed-guess
would put the value of the plant and equipment at maybe $100
million. Best of all, the project comes with it's own hydroelectric
power plant located some 17 KM away. I figure that's easily worth
$20 million. It produces 2 MW now but management has plans to
upgrade the facility to 8 MW in order to sell 3 MW and use 5
MW in an upgraded 4000 TPD mill planned down the road.
Trevali Resources (CNQ:ZINC) announced
the assumption of the project [pdf] a couple of months
ago. Terms are fairly simple. They issued 2 million shares
and agreed to pay the debts of the bankrupt company and are paying
$100,000 in a lease payment monthly for a 50 year lease with
an automatic 50 year extension and payment of a 3.5% NSR. So
far they have spent about $5 million buying down 91% of the debt.
It's a great deal for both companies, the bankrupt company and
for ZINC.
Carlos Ballon, also director and VP of Cardero Resources,
is Chairman and CEO of Trevali. Mark Cruise, Cardero Resources
VP of Exploration, is the President. For now, each is actually
operating one level lower than his pay grade. I drove to the
power plant with Carlos at 2600 meters elevation where we spent
the night. The next day we continued to 4600 meters to the plant
and mine.
The nicest thing I can say
about Carlos is that he is a slave driver cracking the whip over
his entire crew. Everyone involved is 1st class and is hustling.
Mark Cruise is supervising a massive drill program to define
a major ore body. As the project comes on stream, they will revert
to a more managerial role but for now I fully approve. Crack
the whip.
The plan is for Mark to outline
5-6 million tons of maybe 13% combined lead-zinc, with maybe
4 ounce silver ready for immediate production. The goal is maybe
10 million tons in total in a year. The system is a carbonate
replacement system. These systems typically occur in clusters.
Carlos wants the plant in production
in June. The refurb cost to bring the mill to professional standards
at 1000 TPD is $3 million. It's very ambitious but all of the
people I saw at Santander were motivated. Carlos is setting a
very high bar right from the gitgo. Everyone wears and uses safety
equipment and undergoes a physical examination to make sure they
can take the 15,000-foot elevation before they are allowed on
site. He makes it clear that safety is paramount. I was impressed.
The immediate plan is to begin
processing the tailings that grade about 3% lead-zinc and 15-gram
silver. I've put a chart below to give readers an idea of the
gross metal value of such rock. Remember, this stuff has already
been crushed and ground so he can be processing and still upgrading
his crushing circuit. The rock is worth about $87 per ton today.
That doesn't mean they will recover $87, the real figure will
be much less. But they are expecting $8 to $10 cost of production
per ton so even from the first; cash flow is going to be nice.
As Carlos is getting the plant
ready, Mark is working on the mining side with Les Oldham. They
have an aggressive drill program in progress. I saw core from
the Magistral Norte area, one of four already identified drill
targets. The intercepts are very high grade and quite wide. Trevali
has finished 18 holes; mineralization appears to be increasing
with depth. A back of the envelope calculation showed me they
have already identified over 3 million tons of high-grade ore.
As the crushing circuit is brought to speed, ZINC will begin
to add high-grade ore to the tailings ore. A glance at the chart
below shows what's going to happen to cash flow as the plant
comes up to full speed.
We can only guess where prices
will be for metals a year from now when Carlos and Mark believe
they will be in full production at 1000 TPD but my rough figures
show $60 million a year in cash flow. If I am right on my prediction
of where metals prices are headed and what Bernanke is going
to do to the dollar, at 4000 TPD, the figures go off the charts.
This is going to be a big deal and a profitable deal.
Carlos doesn't have a firm
date on the 4000 TPD production target. Much of it depends on
how fast Mark and Les can define ore. They are presently drilling
only the first of four very significant high-grade bodies that
come right to the surface. Given that the old Santander pipe
was mined to 500 meters depth and remains open to depth, it's
clear that the project has tremendous upside exploration potential.
Two diamond core drill rigs are on site turning and a third will
be added by the time you read this. They have also completed
a detailed geophysical survey of the 4455-hectare property and
have identified 6 additional look-alike anomalies. Odds are that
some will turn into ore bodies, remember, carbonate replacement
systems come in clusters. The total cost to get it up to 4000
TPD looks to be in the $4.5 to $5.5 million-dollar area. That's
not a problem; the company has over $8 million in the bank today.
In any business, managers always
seek to create some kind of competitive advantage. You have to
be better than the competition at something or they will control
your business. Part of this project that I think is ultra-important
is the power station. It's located at an elevation of 8500 feet
or 2600 meters. The river there runs 12 months a year. The drop
is steep so the water is fast. Previous operators put in a Pelton
Wheel driven power station now capable of delivering 2MW. The
plant is located some 17km from the mine. Trevali will have to
increase the flow of water to the station, install more Pelton
Wheels and generators and upgrade the line going to the mine.
When that is complete, they will not just have free power, it
will have a negative cost as they will be selling about 40% of
what they generate and the income will pay all of the expense
of power generation.
I don't want anyone believing
this is going to simply be another Silvercorp [TSX-SVM],
rocketing from $.30 to $10 in three years. No, not at all. Silvercorp
has about 1.25 million tons of high-grade ore averaging 45-ounce
silver and 35% combined lead-zinc. Silvercorp has 7 times the
silver grade and almost three times the lead-zinc grade. No,
Silvercorp has far better ore. Of course it looks as if ZINC
has 8 times the total amount of rock and that number could easily
grow. This is going to be a lot better than Silvercorp.
Silvercorp wants to quadruple
output to 3000 tons per day in a year when Trevali could be producing
4000 tpd soon thereafter. There may well be a period where Trevali
produces more metal than Silvercorp. Today SVM has a $1.4 billion
dollar market cap and ZINC has about a $50 million dollar market
cap.
Carlos had a consultant do
a research study on the value of similar Peruvian mining companies.
I think the numbers were a little biased against the local companies
because a Canadian listed company is going to get a higher capitalization
than a Lima listed company. The results showed that companies
got between $800 and $900 per ton of zinc equalivant. If Mark
Cruise and Les Oldham can scratch up 10 million tons of ore grading
13% zinc and 6 ounce silver, that would be similar to 17% zinc.
10 million metric tons at $900 a ton of zinc at 17% would be
a market cap of $1.5 billion. It's perfectly reasonable.
There are a number of companies
loosely associated in the Cardero-Henk Van Alphen fold. Athlone
Energy (ATH-V), Wealth Minerals (WML-V), International Tower
Hill (ITH-V) and of course Cardero Resources (CDU-V). Each of
these companies have great projects and just can't seem to raise
traction. A good part of the problem is communication and I have
spent a lot of time beating their IR people over the head in
an effort to get them to do a better job of communication.
I suspect that with all the
activity at Santander, Carlos Ballon and Mark Cruise are going
to force the rest of the crew into increasing their speed of
action. It takes a high energy level to put a mine and mill back
into production and you not only need to act now, you need to
communicate now. For example, ATH is producing 630 barrels of
oil a day. That should be worth $50,000 in market cap per barrel.
The price of oil says ATH should be worth $31.5 million. But
the market only values ATH at $15 million. A large part of the
reason is because they refuse to communicate. Basically if you
don't communicate your story, you don't have a story.
Cardero is doing a long overdue
scoping study on their Pampa de Pongo Iron Deposit in Peru. Iron
ore should be worth about $2 a ton in market cap. PDP has a 953
million ton resource. That implies a $1.8 billion dollar cap
for Cardero if the market understood what they have. The market
does not and the current market cap is about $55 million.
By getting Santander into production
in record time, the management team of Trevali is not only going
to lift their market value, they are going to focus very positive
attention on the rest of the stable. And I suspect this is going
to be one of the big market hits where a lot of people make a
lot of money.
If Carlos needs someone to
polish his bull whip or iron it or do whatever you do with a
bull whip in between beatings, I'll be happy to do it. I want
to see the entire group do what I have believed all along they
could do.
As you can reasonably surmise,
I am a shareholder in ZINC. They are soon to be an advertiser
and I am as biased as I can be. They have a lot of work ahead
of them to accomplish their goals but it's all reasonable and
possible. As negative as I am on the future of the economy in
the US, I am positive for the rest of the world. There will be
demand for silver as money and for lead-zinc as commodities.
If the American consumer is tapped out, I'm sure some of those
wonderful 1.3 billion Chinese who save almost 50% of their incomes
will step in and do some consumption of their own.
Trevali Resources Corp
CNQ:ZINC $2.40 Canadian (Feb 15, 2008)
OTCBB:TREVF
28.8 million shares
Trevali Resources Corp website
###
Feb 18, 2008
Bob Moriarty
President: 321gold
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