Fireweed Zinc:
Lined Up To Lever Zinc's Next Move | | |
If you are a Maven Letter subscriber, you've already heard why I like Fireweed Zinc. If you aren't, here's a stock I think is poised to provided strong leverage to zinc's likely price gains early in the New Year.
Zinc Poised To Run
Zinc demand is outstripping supply. The price has already doubled but there are more gains on the horizon. | | |
Stockpiles have fallen so much that stores can now satisfy just 6.7 days of global demand. In previous zinc cycles, stocks only had to fall below 10 days of demand before prices spiked.
This time around, stocks slipped below 10 days almost unnoticed – and kept falling. It happened in the last quarter of the year, which helps explain the apathy. Mining markets all but shut down in November and December because metal prices reliably slide and investors turn their attention elsewhere.
That all changes with the New Year. Gold almost always goes on a run in the first few months of the year. That recharges interest in the sector; explorers, developers, and miners see good gains.
And the gains apply across the metals spectrum. Commodities as a whole perform well in the first quarter of the year.
Given that zinc stockpiles are near historic lows and new supplies are limited, zinc is positioned to be the outperformer of the entire group. Less than a week’s supply of the metal that galvanizes steel is simply not enough. Users are going to get antsy and rising demand is going to push prices higher.
There’s an investment opportunity here, but how should investors play?
Here’s what I look for.
- A zinc project with a sizeable resource. Exploration is great, but the way to play leverage to a rising metal price is through defined pounds in the ground.
- Strong news flow. A rising zinc price will benefit most zinc players but a company that manages to put out good news into the rising tide will stand out.
- Advanced asset. Zinc prices are rising because the market is short on supply. The answer is new mines, though decades of low prices mean there’s a dearth of build-ready zinc projects. The first few good projects to get to the build-ready line will generate the biggest rewards in this zinc market because they will get taken out.
- Tight share structure. As zinc prices strengthen, a zinc project is worth more. The resulting increase in price-per-share depends on the number of shares: the lower the count, the more the gains.
There are lots of other factors you can consider, but in selecting a stock for the best leverage to zinc during the strong commodity market in the first quarter those are my key considerations.
And (you probably guessed where I’m going with this) I have a stock that I think fits the bill ideally.
Fireweed Zinc (TSXV: FWZ) has a large, high-grade zinc deposit. The team just announced final results from their summer drill program, including the widest high-grade mineralization of the year. Overall, drilling this summer returned good grades from several areas outside the known zone while infill drilling confirmed – and in places upgraded – known grades.
Now Fireweed is plugging all the new drill data into an updated resource estimate, due out in early 2018. With that resource in hand Fireweed will wrap economics around this asset for the first time, in the form of a PEA due out in March or April.
The PEA should demonstrate to the market that the MacMillan Pass project already has what it takes to become a successful mine. Then drills will start turning again, to further grow the resource and test nearby targets.
So Fireweed has a large defined resource, strong news flow in the first quarter, and an asset about to demonstrate its mine-ability. To boot, FWZ has a very tight share structure: only 17.7 million shares outstanding should mean good price gains if zinc goes on a run.
That’s the overview. Let me take you through the details.
The MacMillan Pass Backstory
MacMillan Pass is a zinc-lead project in eastern Yukon with a long history.
The Tom deposit was found first, back in 1951, shortly after the Canol Road made the area accessible. HudBay discovered the zinc-lead deposit and the company held it consistently for the next 65 years, which says something. HudBay kept going back to Tom, completing an underground adit and bulk sample in 1970, an initial feasibility study in 1986, and many programs of drilling, geophysics, and mapping.
A separate group discovered Jason in 1971. It also saw a series of programs over the next 40 years, but the two adjacent deposits were not united under one owner – HudBay – until 2007. That’s when a combined resource estimate was completed.
In 2011 HudBay built a serious exploration camp at Tom-Jason, in preparation for a big exploration effort in 2012. But then the mining bull market ended and Hudbay officially turned away from zinc.
Over the next five years Hudbay geologists refuted many approaches from parties interested in buying Tom-Jason. The geos loved the project and wanted to keep it in the company until Hudbay turned back to zinc. Before that could happen, though, Fireweed founder Richard Hajdukiewicz managed to convince HudBay to let it go.
For Hudbay to have held this asset for 60 years and built a large new exploration camp in 2011 says they saw significant potential. Now Fireweed gets to explore that potential (Hudbay’s 15% stake in Fireweed, which is will get once FWZ vests its project earn-in, gives the major ongoing exposure to the upside.)
What Is Tom-Jason?
The project sits in the Selwyn Basin, an established zinc-lead belt that runs from Yukon just into BC. The basin has two claims to fame:
- The Anvil district, which produced from 1969 to 1998. At its peak it churned out 15% of the world’s zinc.
- Howard’s Pass, which is the world’s largest undeveloped zinc-lead project. It was discovered and advanced by a series of Canadian companies before being bought by the Chinese, who are working to develop a mine.
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The deposits of the Selwyn Basin are SEDEX deposits. Sedimentary exhalative deposits are rich and large, which is why they are responsible for half of the world’s zinc and lead production.
And the term SEDEX came from this property. Rob Carne, a famous Yukon geologist, studied Tom-Jason for his Masters degree. In his dissertation he called coined the term SEDEX to describe the kind of mineralization, which forms when hot, mineral rich fluids came up through structures into the ocean and quickly cooled, causing the minerals to precipitate out. SEDEX deposits generally carry zinc as sphalerite and lead as galena, often alongside silver.
Tom-Jason certainly fits that bill. The historic resource sits at
6.4 million indicated tonnes grading 6.33% zinc, 5.05% lead, and 56.6 g/t silver
24.5 million inferred tonnes grading 6.7% zinc, 3.48% lead, and 33.9 g/t silver
It’s a good resource. 30 million tonnes is a nice size, big enough already to support a mine. Zinc grading better than 6% is worthy of attention, a combined grade of some 10% zinc equivalent bodes well for economics, and the silver component is higher than in many SEDEX situations.
The deposits – Tom West, Tom East, and Jason – are steeply dipping lenses of mineralization that range from 5 to 40 meters in width. That’s a fine layout in terms of mining, as the widths are enough for bulk underground methods and the dip is steep enough that gravity is your friend.
The resource sits in a few irregularly shaped pods that offer some obvious expansion opportunity, like inlier gaps due to lack of drilling. There are also a few places with hot holes just outside the resource; successful hits into such gaps could bring those old holes into the count and expand the deposit.
That’s what Fireweed knew going into this year’s drilling. After an 11-hole program, there are some strong successes to report.
On improving the resource from within: this has gone very well. Several holes within Tom East, Tom West, and Jason returned better grades than expected, which suggests the resource grade could improve.
Fireweed also drilled a few holes that hit right into inlier gaps. The standout came in the final set of drill results, which included 38 metres grading 8.73% zinc, 7.62% lead, and 129 g/t silver from Tom East. This hole filled an 80-metre gap in the middle of the zone where it had been assumed the deposit narrowed. In fact, according to the resource model this hole should have returned only 14 metres of mineralization. The fact that it returned 38 metres true width pushes out the zone in this area and so should add tonnage in the next resource.
On expanding the resource: several step-out holes returned good mineralization. For example, a 100-metre stepout at Tom West returned 29 metres of 5.27% zinc and 0.7% lead, extending that deposit at depth. Again, successes like these bode well for higher tonnage in the new estimate. | | |
All told: the drill program was highly successful, so much so that I think the new resource will increase both the tonnage and grade of the resource at Tom-Jason. That’s quite the feat, considering it was a small drill program and the resource is already high grade.
Why Today
Fireweed is still not a well-known story. The company only listed in May, which means they’ve had less than seven months to mobilize to their new project for the first time, drill, arrange metallurgical work, develop relations with the local First Nations, and wrap their heads around all the new information flowing from the project. That hasn’t left a lot of time for marketing!
It was also a decision: focus first on drilling to update the resource. Then, with a solid new number in hand, go out and tell the story.
Part two will get underway in the New Year. You can tell it hasn’t happened yet by looking at valuation. Fireweed currently carries a market cap of $15 million. That is low relative to other zinc developers with large resources.
Marketing, a new resource showing a large and high-grade project, a pending PEA, and a tight share count – Fireweed is lined up to lever zinc’s price gains. If you agree that 6.7 days of zinc supply is not enough, that commodities do well in the first quarter, that mining stocks provide leverage to commodity gains, and that standout stocks provide the best leverage of all, Fireweed is one to own. | | |
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