The “Gran Madre” of Zinc Deposits — Chesapeake Gold
We have long held that Zinc was going to be one of the top metals of the decade and in just a year of recovery it has gone from being lodged perpetually in the doghouse to being the go-go metal of the day, certainly leaving the precious metals floundering in the dust. Zinc’s move has been one, at least for me, of thresholds. The first one, as it rose from its nadir around 66 cents per lb was when its price surpassed that of Lead. This was always regarded as a prime bullish signal by myself. The 90 cent mark was the next key trigger, then with some trepidation it breached the $1 mark and dallied around that area threatening a pullback. Then it moved on to the key $1.10 level which it has bounced off so many times in the past. The Zinc “glass ceiling”, so to speak.
Passing $1.10 did not seem to be so troublesome after all, which in itself is a very bullish signal, and in recent days the price looked poised to make a run at $1.20. In the past I have spoken of this at the price above which Zinc must remain for many months before serious investment decisions will be made on advancing projects that have been stuck on the drawing board for so long. It would also be the trigger for de novo listings of primarily Zinc oriented plays. Stablised above $1.20 most mothballed mines would return to production.
The rapidly shifting Zinc price is making havoc (in a good way) with what some developers think is the real gem in their deposits. The severe underinvestment in Zinc exploration and even less on development since the highs of 2006-7 have left the pipeline dry. This means that large scale Zinc projects are somewhat serendipitous, or maybe I should say coincidental, as they are the offspring of other types of projects.
In trawling around in search of the “next big thing” in Zinc, I keep circling back to Chesapeake Gold Corp.’s (TSXV: CKG | OTCQX: CHPGF) Metates project in Mexico. Its sheer size in Zinc reserves makes even primary Zinc-Lead projects pale into insignificance. And yet as Zinc has gone from strength to strength, the price of CKG has slipped back substantially from its mid-year highs. Certainly gold has gone off the boil and silver has retreated somewhat, but Zinc has continued to surge.
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However a glance at Reserve statement for Metates shows a truly massive Zinc component of nearly four billion pounds. At a Zinc price of $1.20 then that is an in situ Zinc value of nearly $4.8bn.
Then if one looks at the Zinc metal flows a projected in the revised PFS from earlier this year one sees an impressive flow by any measure that will make a meaningful contribution to world production of Zinc. Moreover the deposit kicks out a very strong Zinc performance right from its early years after a steep escalation.
In a market that is crying out for major new Zinc projects to fill the pipeline into the 2020s, the Metates deposit is the 800lb gorilla that might just be the solution to the problem. Having such an abundance of the sexy base metal of the moment is not enough if the development also needs the gold price to come to the party but as we can see from the price scenarios outlined below the company wasn’t factoring in the current Zinc surge when setting its “high case” (below) when it shot for $1.12 being the Zinc high. It is far more likely we feel that we will see Zinc at $1.50 before we see gold at $1,400 so there is a case here for an announcement on how they might impact revenues with base metals (there is copper here too) being a larger part of the revenue mix.
The model above has been confounded by circumstances because we have Silver trading at lower than the low case, Gold slightly below the base case and Zinc now above the high case.
Potential acquirers of Chesapeake are probably of the school of thought that gold is going higher anyway. Having the added extra of Zinc having stabilised its price after such a long period of weakness should be a major consideration. It also adds some extra underpinning if the Zinc production can be forward sold (to a trader) rather than the gold or silver (to a streamer).
Those out there in the investment community hunting for the next major primary Zinc mine might be in a fruitless search for a unicorn of their own imagining. The next best thing… and a truly massive thing ..is the Metates project. Its potential to be one of the largest Zinc contributors coming down the pike cannot be ignored.
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>