Arizona Mining (TSX: AZ) shares slightly recovered on promising assays from the Taylor zinc-lead sulphide deposit at its Hermosa property, following a sharp decline after a mining publication raised concerns about the marketability of Taylor’s zinc concentrates, before sliding again.
Located 10 km from the town of Patagonia and 80 km southeast of Tucson, Arizona, the high-grade zinc deposit contains 28.3 million indicated tonnes grading 10.9% zinc-equivalent and 75 million inferred tonnes at 11.1% zinc-equivalent, using a 4% zinc-equivalent cutoff grade. Exploration success at Taylor this year, coupled with higher zinc prices, have sent the company’s shares skyrocketing.
On Dec. 7, the stock touched a 52-week high of $3.49, up 947% from its 2015 close of 32.5¢. The day earlier the company closed a $36 million bought deal with underwriters led by Scotia Capital, National Bank Financial, RBC Capital Markets, TD Securities and Raymond James. It sold 11.8 million shares at $3.05 apiece.
Arizona shares, however, spiraled downward after the Global Mining Observer (GMO) claimed Taylor’s zinc concentrates contained too much manganese, possibly making them unsaleable. The Dec. 11 article compared the deposit to the infamous Bre-X scandal, likely causing some investors to sell. The stock lost 20% over three days.
The company, led by Jim Gowans, formerly co-president of Barrick Gold (TSX: ABX; NYSE: ABX), fired back the next day. Arizona called the article that GMO has since retracted “misleading.” It explained the article implied Hermosa’s two deposits: the Taylor and the Central manganese-silver oxide deposit were the same deposit.
More importantly, Arizona stated initial metallurgical work completed on different types of ore found at the Taylor deposit concluded the project could produce “marketable grade lead and zinc concentrates.”
The results — contained in the March 2016 technical report — indicate the Taylor deposit could generate two concentrates: a lead concentrate containing 0.1% manganese and a zinc concentrate containing 1.3% manganese.
Arizona estimates the smelter penalties for zinc concentrate containing 1.3% manganese at US$12 per tonne. Given the price of zinc concentrate is over US$1,100 per tonne, Arizona says the penalty is “immaterial.”
A worker at Arizona Mining’s Taylor zinc-lead-silver deposit, 80 km southeast of Tucson, Arizona. Credit: Arizona Mining.
On Dec. 14, GMO published a follow-up article suggesting Arizona will again run into trouble with smelter penalties. The company shot back the same day. It reiterated it should have no problem selling the Taylor zinc concentrate to smelters, adding some smelters have already expressed interest in the project’s future supply of zinc concentrate.
Since the first GMO article, Arizona shares plunged 65¢ over three trading days to close Dec. 14 at $2.66 per share.
“Reasonable questions about the metallurgy of the Taylor deposit have, in some cases, devolved into unfounded speculation due to unsourced generalizations about base metal processing that prey on investors’ unfamiliarity with relatively complex science and engineering practices,” notes Scotiabank’s analyst Trevor Turnbull.
The manganese content varies throughout the Taylor orebody, allowing Arizona to reduce the manganese level by blending ore from different areas. This could potentially allow the firm to lower the US$12 per tonne penalty, Turnbull says.
As part of the work required for Taylor’s preliminary economic assessment (PEA) due at the end of March 2017, Arizona is refining the metallurgical work. It is also evaluating the possibility of adding froth washing on the final stage of the zinc cleaners to improve results.
“The biggest challenge is not the metallurgy but rather overcoming the anti-mining lobby which will stage from the nearby community of Patagonia,” John Kaiser, author of Kaiser Research Online, said in an email.
“With regard to the manganese level, according to Jim Gowans this is not a fatal flaw, simply an issue that has to be dealt with in the smelter arrangements for the concentrate,” Kaiser continues. “Ironically, both issues become less important the bigger the project becomes. The key to becoming so big is securing the ability to ramp into the deposit rather than rely on a shaft to hoist the ore.” If the company can do this, Kaiser believes Taylor could become of “strategic importance to the metal supply future of the United States.”
Turnball, who has been to Patagonia, says he’s “not aware of any significant or by any means organized groups concerned about the project. So, it seems not only a stretch, but a mischaracterization to refer to an anti-mining lobby.”
On Dec. 15, the company published another three exploration holes from its current drill program at Taylor. The best result was from a step-out hole drilled 335 metres northwest of the boundary of the current resource. The hole cut several high-grade zinc-lead-silver veins, including a 10-metre interval returning 22.8% zinc, 20.2% lead and 381 grams per tonne silver. (The true thickness is still unknown.)
So far, Arizona has released 37 holes from the drill program. It has 14 drill rigs currently infilling and expanding the Taylor deposit, which remains open in all directions.
Shane Nagel, an analyst at National Bank, writes that the results received since the October 2016 resource update have “averaged 3.7 metres grading 20.35% zinc-equivalent,” which is well above the resource’s current zinc equivalent grade.
He continues to model average annual production of 340 million lb. zinc at all-in sustaining costs of US20¢ per lb., net of byproduct credits, over a 20-year mine life, starting in 2022. Nagel pegs initial capital at US$850 million. He expects Arizona will fund that through debt, equity and a silver stream financing.
The analyst adds the upcoming PEA should confirm his operating assumptions and provide more details on the proposed permitting timeline. Nagel is currently modelling three years for permitting.
According to the amended November 2016 technical report, it takes on average four years for the U.S. Forest Service to prepare an environmental impact statement. Arizona expects it can obtain its other permits during the same time.
Arizona’s CEO Gowans was unavailable to comment for the story.
The latest drill results sent Arizona shares up 10¢ to $2.76 on Dec. 15, before closing the following day at $2.67. Year-to-date, the stock is up an astonishing 722%.