TD on AZ: Concerns Over Manganese Levels Remain an Overhang Event
In light of all the speculation and concern over the past few days on the manganese
levels identified in the zinc concentrate at Arizona Mining's Taylor project, we have
provided an update on what we have learned from industry experts.
Impact: NEUTRAL
As a reminder, based on initial test work outlined in the October 2016 Technical
Report for Taylor, manganese levels of 1.3% were identified in the zinc concentrate
(~0.1% Mn in the lead concentrate). Results were based on drill results collected up
to October 2015, and do not include the high-grade drill results from the 2016 drill
program.
Based on discussions with several industry experts, manganese serves a useful
purpose in the zinc smelting and electrowinning process up to ~0.5% by protecting
the anodes from certain corrosive effects. However, at manganese levels above
0.5% it becomes a waste product and can foul up the recovery process. Smelters
therefore generally prefer to add manganese oxide to their process and purchase
concentrates that are very low in manganese.
Our understanding based on discussions with industry specialists is that penalties
for manganese typically apply above the 0.5% threshold, at a rate of approximately
$1.50 per dry metric tonne for each 0.1% Mn. This is consistent with Arizona Mining's
view that the penalties for zinc containing 1.3% manganese are estimated to be $12/
DMT or approximately 1% of the anticipated concentrate value at Taylor assuming
$1.00/lb zinc price.
While some zinc smelters may not accept a 1.3% Mn in their concentrate purchases,
we believe that many smelters or traders would be willing to accept the concentrate
for blending assuming the application of penalties.
The company expects to undertake comprehensive metallurgical testing of as part
of its preliminary economic assessment (PEA) planned for the end of Q1/17 to
determine the distribution of manganese within its deposit and potential treatment
options. We expect the issue of manganese may continue to weigh on the stock price
until further information is available. We are maintaining our SPECULATIVE BUY
rating and $4.00 target.