Mining investors know that zinc is on a tear. Many analysts are looking for further gains ahead.
The price of zinc hit a 10-year high on Wednesday as the industrial metal continues its steep climb following supply cuts from mining companies and continued strong demand out of China.
[chart used courtesy of InfoMine.com]
As a commodity, investors cannot go out and simply load up on zinc. This means that those investors looking to take advantage of the current bull market conditions for zinc need to look to the mining companies.
In Canada, large-cap producers exist, like Hudbay Minerals Inc. But most Canadian mining investors prefer to focus their investing on small-cap companies – which continue to offer the most upside potential. Suddenly, the selection of Canadian-based opportunities dwindles.
Many polymetallic mines produce zinc as one of the metals yielded from such ore. For investors looking for a pure, Canadian, small-cap zinc play, one of the names that stands out is: Ascendant Resources Inc. (TSX: ASND, OTCQB: ASDRF, Forum).
ASND is a zinc producer with its operations based in Honduras. Its flagship project is the El Mochito Mine, a mine which has now been in operation for over 70 years. The Mine is a recent acquisition for Ascendant (December 2016), meaning that the Company is still in the process of ramping up production.
Stockhouse recently had the opportunity to touch base with the Company’s President and CEO, Chris Buncic, to learn more about the zinc market and the El Mochito Mine.
- Please introduce Ascendant Resources for the benefit of newer investors.
Ascendant Resources operates the El Mochito zinc mine in Honduras which has been in operation for over 70 years. Ascendant acquired the El Mochito mine in December from Nyrstar, and since then we have increased throughput by more than 30%, restarted exploration activities which have already had success, and have now achieved positive EBITDA as of July. At the mine, we produce zinc, lead and silver in concentrates, and given that zinc has hit a fresh 10-year high, we present a great opportunity for investors to benefit directly from the current bullish trend in zinc and lead.
- The El Mochito Mine has been a long-term producer of zinc. Could you provide a brief history of this mine? How did the opportunity arise to acquire this operational mine and what were the terms of that transaction?
The El Mochito mine has been in continuous operation since 1948. Originally a fly-in-fly-out camp, over time the town of Las Vegas has grown up around it, now with a population of 37,000 people. The El Mochito mine began as an open pit silver mine and over time became an underground operation focused on zinc and lead extraction as the grades changes with depth. In the 1990s, Breakwater Resources (BWR) acquired the mine and had great success with its operation – in 2006, free cash flow from El Mochito was in excess of $76 million. Breakwater was acquired by Nyrstar BV in 2011 during a string of acquisitions. Following several years of operations, Nystar made a strategic decision to exit its mining operations per its October 2015 press release. Ascendant acquired the mine from Nyrstar this past December and has been operating El Mochito for just over three months. El Mochito produces zinc and lead concentrates that are also high in silver which are trucked daily to the Port of Cortez on the north coast of Honduras. Ascendant has a ten-year offtake agreements with Nyrstar for its products with standard commercial terms tied to international benchmarks and LME commodity pricing.
- Since acquiring the mine last December, what has the Company been able to achieve from an operational standpoint?
We acquired the El Mochito mine having already identified a number of opportunities to improve the operation, focusing on increasing throughput, increasing mine head grade and lowering costs. Our first step was to change the standard practices underground making the team more productive – pushing time studies to change behaviours, and an augmented shift schedule that included a fourth 8-hour shift for truck drivers, both helping us increase our productive hours from 15 to 22 hours per day. You can imagine that there have been many tweaks necessary to drive overall change, and as examples, we have repaired the strained relationship between the company and its employees, made some key changes to the mine site management team, and instituted concrete plans for the mine for growth such as a mine plan and budget, both of which had been deficient.
In March, we ordered new equipment to replace some of the aging fleet, and as of mid-July, we have commissioned two trucks and two scoops which are in operation. With the changes we have made so far, we have been able to drastically increase throughput at the mine. As per our recently released second quarter financials press release on Monday August 14th, the El Mochito Mine milled 57,458 tonnes of ore averaging 1,853 tonnes per day in July, an increase from 1,693 tonnes per day in June, and during the second quarter, the mine averaged of 1,733 tpd. July results are reflecting the benefit of the introduction of new mining equipment to operations, and during the last week of July, the mine recorded average daily production of 1,992 tpd, and production continues to improve in August.
- How are these mining results currently translating to the bottom line?
Ascendant is a turnaround story, and I am happy to say that we believe we can see the light at the end of the tunnel. In July, we produced a positive adjusted EBITDA of approximately US$700,000, as announced in our Monday August 14th press release. This was no small feat given where the mine had been when we took it over. With our focus on pushing throughput higher from the current level, on improving our overall head grade as we blend with higher-grade sections of the mine that are already in the mine plan this year, and by focusing on reducing our costs, we are targeting to be free cash flow positive within the next few quarters.
- Management sees more upside with the El Mochito Mine beyond rising production. Please talk about the exploration picture for this project.
In late June, Ascendant released results of 29 diamond drill holes (7,447m) as part of its ongoing 33,200m underground exploration and definition drilling program at the El Mochito Mine. Frankly, the grades and intercepts were very good, likely the envy of many zinc-focused exploration companies, and I encourage your readers to review that press release HERE.
The drilling results were split between step-out and in-fill drill holes, targeting the extensions of four ore bodies, namely Palmar Dyke, Santa Elena, Victoria and Esperanza. Three areas are very close to existing workings and could be accessed within a short time frame, contributing to a stronger head grade as I mentioned. The fourth, the Esperanza orebody, is already being mined on its western edge but the current drilling represents a further extension to the East.
As for highlights, the step-out drilling at Palmer Dyke intercepted 17.6 metres at 5.3% zinc, 3.8% lead and 83 grams silver per tonne, while at Victoria, drilling cut 17 metres of 5% zinc, 2% lead and 53 grams silver. Santa Elena returned 35.4 metres of 5.6 zinc, 2.0% lead and 31 grams silver, and Esperanza cut 17.5 metres of 6.2% zinc, 2.2% lead and 41 grams silver at Esperanza. These are well above current our current mining grades, which speaks to the El Mochito’s untapped potential due to years of under-exploration.
- Can investors expect any news on the resource front in upcoming months?
The exploration program is on-going and I would anticipate further results to come sometime in September. The June release accounted for approximately 25% of the program. Our plan is to complete this drill program and have a NI 43-101 reserve report prepared for Q2/18.
- Beyond the strong operational fundamentals for El Mochito, the Company is currently participating in a strong rally in the zinc market. As a producer, what do you see as the present drivers for the price of zinc? Can this rally continue? If so, for how much longer?
Ascendant is different from the other zinc-focused stocks in the market now. With Trevali, we are one of only two pure play zinc stocks in Canada currently, and with Trevali’s recent asset purchase from Glencore and its subsequent equity raise, we are the only small cap pure play zinc producer in Canada.
In addition, the companies to which we are compared have unbuilt (and in most cases, unfunded) projects that will take several years to put into production. This is a component of the investment thesis that purports the zinc price should remain at elevated levels for the next several years – with the closure of several mines like Lisheen in Ireland and Century in Australia, few new mines have come in to replace the supply, and with zinc inventories under 11 days of consumption, this supply squeeze is driving the price of zinc higher. The projects proposed by these developers will take several years to put into production and could very well likely miss the current cycle of strong zinc prices. Sustained higher price levels will of course depend on how quickly new production can come on to address current demand as well as new global growth in demand, but I’m comfortable that we will have several years at these higher levels. Ascendant has offtake agreements in place that are tied to LME prices for zinc, lead and silver, and we are benefitting from higher prices right now.
- Over the longer term, please outline your vision for Ascendant Resources.
Our immediate goal is first and foremost to return El Mochito to a position of strong free cash flow. As per our second quarter financial results which we released on August 14, we are making continuous strides towards achieving that goal, including increasing our overall head grade. We also intend to continue investing in exploration because we recognise that there are a great number of targets accessible from within the mine. Growing current reserves and resources to a sufficient size through exploration, we will be able to expand the operation to produce at a greater rate. Longer-term, we have some incredible potential within our 11,000 hectare land package.
ascendantresources.com
FULL DISCLOSURE: Ascendant Resources Inc is a paid client of Stockhouse Publishing.