Levon Resources and the Zinc Renaissance – Right Time, Right Place
Fans of Zinc, like myself, have been regarded by the mainstream mining sector as something akin to Holy Fools over recent years. We roamed the wilderness preaching to dwindling crowds of the virtues of a metal that seemingly was permanently stuck trading below $1 per pound. While many would also acknowledge that there was potentially (though we felt certain of it) a looming supply crisis, very few were prepared to direct their investment portfolios towards the great day in which justification would be ours.
Seemingly (and that word is obligatory with regards to zinc) the tide has turned.. In the space of a few months the metal that suffered from chronic narcolepsy has awoken from its slumbers and risen from the low 90cts range to over $1.06 per lb in recent trading. We would reiterate it is our view that when zinc moves, it will move fast. Thus we would expect $1.20 by year end and would not be surprised to see it top $1.50 in 2015. This is heady stuff indeed. The interesting thing is that while many may have regarded our enthusiasm as misdirected in the dark times, zinc is a metal that now has few naysayers. There is nobody out there (that I have encountered, or heard of) who would claim that there is a tsunami of zinc production or vast hidden stocks that will appear out of nowhere to mug us. Everyone is in accord that the dark tunnel we have been through has denuded the production timetable of projects scheduled for production. This means (to mix a Biblical metaphor) that we have spent a long time in the wilderness and (hopefully) the Promised Land is in sight.
Levon – Emerging in Traditional lead/Zinc/Silver Terrain
The company’s Cordero deposit in Mexico is a very sizeable porphyry target for silver, gold, zinc and lead. Its concession extends to over 200 square kilometres. Additionally, Cordero hosts at least eight large-scale targets on two distinct porphyry belts and a third mineralized volcanic center.
The Cordero deposit is situated within the same emerging Chihuahua-Zacatecas silver-gold belt in northern Mexico that also hosts bulk-tonnage silver deposits such as Penasquito (Goldcorp), Camino Rojo (Goldcorp) and Pitarilla (Silver Standard).
The current indicated and inferred resources according to Levon’s NI43-101 resource, dating from June 2012, estimates:
- Silver: 364M oz indicated, 91.2M oz inferred
- Gold: 945,000 oz indicated, 152,000 oz inferred
- Zinc: 6.1B lbs indicated, 0.7B lbs inferred
- Lead: 3.3B lbs indicated, 1.2B lbs inferred
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The tonnage and grade details are based on a Net Smelter Return cut-off of US$6.00 per tonne. I have found in the past that investors do not understand the concept of NSR cut/offs. Essentially it is a value based on the NSR from an average tonne of the mixed economic minerals in the output ore (described technically as an “open pit geometry generated by a floating cone algorithm”) at a set of price ranges decided at the time with recovery rates in the mix. Investors used to simplistic cut-offs based upon easy-to-grasp gold or silver g/t number find this a challenge.
In the case of Levon’s resource the NSR’s components use the following metal prices and recoveries: Lead, $1.00/lb and 70% recovery; Zinc, $1.00/lb and 70% recovery; Silver, $25.00/oz with 60% recovery to a lead concentrate and 15% recovery to a zinc concentrate.
The current resource is open to expansion on strike and at depth beyond the gigantic 2.8km x 2km conceptual open pit.
Levon’s main concern, after financing, is that its Cordero project is widely perceived as a low grade, bulk tonnage deposit, which will need favorable metal recoveries, metal prices and low operating costs to be developed. Then again, our response to that is “doesn’t everyone need those three things to be viable?”.
The PEA’s main metrics (dating from May 2013) are:
- Silver Price of US$25.15
- Internal Rate of Return of 14.8%
- Mine Life of 15 years (to complete four stages of a planned eight-stage open pit)
- Mill Capacity: 40,000 tpd
- Strip Ratio: 1.2/1
- Payback period of 5.1 years
The Zinc scenario we laid out earlier now comes into play. The silver price that is used in the resource calculation (and the PEA) is now ancient history, as the price has been largely around $20 per oz for a long while now. However the zinc price (and the lead price in its wake) is now trending higher. The company has a very low strip ratio in its favour and a low grade in the lead/zinc playing against it..
Once again we come back to the truism of “right-sizing” a project. The PEA’s 40K per day throughput is rather ritzy. Talk of getting this up to 80K per day is now clearly historic. Levon are well-positioned to “make hay while the sun shines” if they can come up with a production plan that gets product out of the ground in very short order to capitalise upon higher prices for the base metal components of this deposit.
Recently I read some pundit opining that until Zinc gets to $1.13 there will not be any great reactivation of interest. Frankly there is no capacity to be revived. Zinc has suffered from being in a sweet spot for other metals and a sour spot for itself. If silver had been $7 per ounce and zinc had been 70 cts per lb, there would have been a mass shutdown of the zinc/lead/silver mining complexes around the world. However silver at around $20 per oz, cross-subsidised the base metals production from those mines that were making small losses or merely breaking even on the lead-zinc part of their output. That means that there are not a flock of mothballed mines (as there are in nickel) ready to be pulled back on-line when the zinc prices passes some mythical point at which it all becomes worth it. Mines have been gradually expiring, as the chart below shows:
Instead what we have is big time gap between financing future projects now and when they might get into production. This, according to the most authoritative source on the industry, the International Lead & Zinc Study Group, predict that there has been a supply deficit since 2013 and into 2014.
While there are a lot of projects on the drawing boards, we should recall that many of these are monster projects. My belief is that these will NOT be dusted off until zinc is a lot higher (north of $1.20) and for a sustained period of time (at least a year). The major players on the production front will thus play a game of chicken with the market that none of them can lose. If they have current zinc production they will make out very well from a tight situation and a spiking price. They will not have to face the uphill struggle of financing but rather just cash checks. It is not a given that every upturn in a commodity’s price must produce a heedless (headless?) rush into building more capacity.
The Canadian market, once a great happy-hunting ground for zinc plays, has been seriously denuded. Our favorite play had been Donner Metals until it was subject to one of the foulest manouevres in recent times at the hands of Glencore, the 800lb gorilla in the zinc trading space. Then there was the interesting asset that Tamerlane Ventures had until it fell afoul of the atrocious markets. Now our attention is on names like Levon and Canadian Zinc in the up and comers.
While we would have said last year that all portfolios should contain a zinc junior, we would have been a voice crying in the wilderness. Now the tide has turned and we suspect few would argue that most should have at least some exposure to this resurgent metal..
Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>