Thursday, July 05, 2007

Looking at Lead - ADA, BN, BWR, TAM, Zinifex

Lead has reached an all time high, about 6 times its low since the start of this bull run. It is a strong price, but it isn’t as strong as say molybdenum which peaked about 18 times its low, or nickel, which peaked at around 12 times its low, or uranium which is about 15 times its low. Strong lead prices will mean unexpected profits for lead producers.

The market is tight for lead Lead Rises to Record for Third Day in London.

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Lead deposits tend to exist with zinc deposits, this post looks at 5 companies that have some lead, Acadian Mining, Blue Note, Breakwater, Tamerlane and the Australian Zinifex. Metal prices are highly volatile and many calculations giving metal values are done here. They are intended to give a relative magnitude for comparison purposes--how good are grades relative to each other; how big are deposits relative to market cap; how much gross income can they bring in relative to each other. Higher grades and larger deposits tend to be more profitable. I have given valuations for metals in the ground at today's prices. In general, I believe that is a poor way to assess the value of a mining company and I look at it purely for a relative valuation. Prices used for metal values per ton calculated are $650/oz for gold, $12.40/oz for silver, $1.50/lb for zinc, $3.50/lb for copper and $1.20/lb for lead.


Zinifex is the largest of the companies and it produced about 5% of the world's 2006 zinc supply, 1.4 billion pounds of zinc, and about 230 million pounds of lead. As with the Australian mining practice, they maintain about a 6-year life-of-mine, and they have one mine has had a six-year LOF since 1893.

Few mines have a higher resource grade than their Rosebery mine, with an average resource of 15.3% zinc, 4.7% lead, 180 g/ton silver, 2.5 g/ton gold and 0.5% copper for an amazing $800/ton in metal values. They have 7.1 million tons of measured, indicated and inferred reserves for close to $5.6 billion in metal values at this grade. The reserves they are currently mining have about $610/ton in metal values.

Their other big property is their Century mine. The resources averages 12.7% zinc, 1.4% lead and 34 g/ton silver, for $470/ton metal values and with 60 million tonnes that’s $28 billion in metal values. Their reserves suggest metal value currently being mined are about $420/ton.

Zinifex’s properties are exceptional and they have further development prospects with their recently acquired Wolfden in Canada’s north, which has properties with metal values per ton of $250-700. They also have Dugald River and South Hercules for development.

In Australian dollars, last year the revenues were over $3 billion and of that $1.1 billion was profit, making $2.20 per share and shares are currently priced at about $19, for a P/E of about 8.6. Zinc prices peaked during this reporting period and have declined, but lead prices are up.

In the US, under the ticker ZFEXF.PK, it trades at $15.90/share and with 488 million shares, it has a US market cap of about $7.7 billion. At $1.50/lb zinc and $1.20/lb lead 1.4 billion pounds of zinc and 230 million pounds of lead would fetch $2.4 billion US gross revenue, or $2.9 billion Australian. Gross revenue potential is close to 1/3rd of market cap. Relatively speaking, with lead production potential of 230 million pounds their leverage to lead is not high; they are about six time more leveraged to zinc, but there is no question that lead’s ascent will be contributing nicely to their bottom line.


Tamerlane is a junior explorer with a fully diluted market cap of about $67 million. Their prize property is the old northern Pine Point Mine, which historical records show they mined 64 million tonnes from 52 deposits with an average grade of 3.1% lead and 7% zinc, or about $310/ton metal values at today’s prices. Currently they have 34 known deposits from non-compliant historical data indicating 70 million tonnes of ore with 4.19% zinc and 1.59% lead, or about $180/ton of metal values at today’s prices. The grades and sizes of the deposits vary greatly.

Their flagship deposit, R190, has grades of 6.3% lead and 12.1% zinc for about $570/ton metal values and there are about 1 million tonnes of ore in this deposit, or about $570 million in metal values.

Tamerlane has plans to start building the mine in Q4/07 and to be in full operation for Q1 2009 and to mine the 240 million pounds of zinc and 120 million pounds of lead from R190 in 12-15 months, or half a billion at today's prices. Six of the 34 deposits are close by and have metal values/ton about $290/ton, so without milling upgrades their second year of production rates would be about half what they get with the R190 deposit.

Financing the mill construction has not been arranged. They are looking to forward sell some of their production to prevent further dilution, and appear to be looking at issuing 30 million in equity and 100 million in financing to move the project forward. They have already run into obstacle in terms of implementing their plan as in April 2006 the plan was to start building in January 07 and be producing in December 07 of this year.

Tamerlane was closed down due to declining metal prices and increased costs due to flooding, and the high cost of maintaining a town for workers in the north. They plan to deal with the flooding by implementing freezing technology around the deposits. As the size of a deposit decreases the relative cost of the freezing technology increases exponentially, just as a ratio of surface area to volume increases as the volume decreases. The economics of each deposit will be highly variable.

Breakwater Resources

Breakwater Resources has a fully diluted share capitalization of 460 million shares for a market cap of $1.5 billion. Their 2007 production forecast is 268 million pounds zinc, 18 million pounds copper, 28 million pounds lead, 2 million ounces silver and 43,000 oz gold or total metal values of $550 million. They also have an interest in Blue Note, which can be taken as shares or as 20% interest of their Caribou mine. At current metal prices that interest could bring an additional $30 million in gross revenue for 2007. Gross revenue has the potential to be around 40% of market cap.

Their Langlois property starting production this year and has a reserve with 10.1% zinc, 0.8% copper and 49g/ton silver, for metal values of $410/ton, for about $1.5 billion in metal values. The resource has comparable metal values/ton and is about twice as big as the reserve for a combined total of about $4.5 billion. The goal for this property is 62 million pounds of zinc, 3 million pounds of copper and 12,000 oz of silver. Metal values per ton mined in Q1 were about $250/ton.

El Toqui has 8.9% zinc and 1.3g/ton of gold for $320/ton in metal values and is also projected to start production for 2007 with a goal of 61 million pounds of zinc, 6 million pounds of lead, 10,000 oz of silver and 2,600 oz of gold. Metal values per ton mined Q1 were about $300/ton. Total reserve/resources is about $4.5 billion.

El Mochito has 6.7% zinc, 2.8% lead, and 97 g/ton silver for $330/ton in metal values. It is projected to produce 60 million pounds of zinc, 20 million pounds of lead and 1.1 million ounces of silver. Actual grades mined in Q1 had metal values of $300/ton. This property holds about $3 billion in metal values.

Myra Falls has resource with 7.2% zinc, 1.2% copper, 55g/ton silver, 0.6% lead and 1.7g/ton gold for metal values of $400/ton and has about $7 billion in reserves/resource. It is projected to produce 84 million pounds of zinc, 15 million pounds of copper, 2 million pounds of lead, 660,000 oz of silver, and 17,000 oz of gold. Actual grades mined in Q1 had metal values of $220/ton.

For Q1 prices Breakwater obtained in $US were $1.56/lb for zinc, $2.70/lb for copper, $0.81/lb for lead, $647/oz for gold and $13.03/oz for silver. Earnings on $78 million of gross revenue were $15 million. They are about 9-10 times more leveraged to zinc than to lead.

Blue Note

Blue Note is an almost producer, currently in the start-up phase of their newly refurbished/built Caribou mine that Breakwater has an 20% interest in. Figuring out their “true” fully diluted market cap is more complicated than for other companies because of the Breakwater interest, which gives Breakwater choices about how they cash in on their interest, either 20% of Caribou or about 42 million shares, and there are hidden shares with debentures that are easily missed. Breakwater must make a decision within one year providing Blue Note does $1.5 million in further exploration on the Caribou property. Fully diluted excluding Breakwater’s interest Blue Note has a market cap of about $172 million. As shares Breakwater’s interest adds an addition $22 million to the market cap.

For 2007 projected production is 68 million pounds of zinc, 35 million pounds of lead, 0.8 million pounds of copper and 850,000 oz of silver, for total metal values of $157 million of which 80% is $126 million or about 3/4rds of the market cap excluding Breakwater. For 2008, with full production, the projection is 104 million pounds of zinc, 57 million pounds of lead, 1.3 million pounds of copper and 1.3 million ounces of silver for $245 million, of which 80% is $196 million and exceeds the market cap.

Metal values per ton in the Caribou/Restigouche reserves are about $370/ton with a total reserve value of about $1.8 billion at today’s prices and the resource, where the life-of-the mine is extended beyond 5 years from, has about $380/ton in resource metal values and about $1.4 billion at today's prices. There is no measure for copper values in the resource, which is 0.34% in the reserves. The cut-off grade used was a profitable 9% combined lead and zinc.

Breakwater previously had problems with poor recovery rates and poor metal prices. Metal prices were low when they decided to sell. Blue Note has installed a milling process shown to dramatically improve recovery rates developed in the last 15 years by Xstrata. Xstrata has used the technology long enough to prove it works and Blue Note has a contract with Xstrata to buy half its zinc concentrate and all of its lead concentrate. Blue Note is still very much priced as a junior explorer. It is in start-up operations currently testing their milling process and will soon be a producer eligible to move to the Toronto exchange. As a new start-up it runs the risks that things will not go as management plans and there are no operational financial reports to review and evaluate.

Blue Note has several exploration properties in the vicinity of the Caribou mine including Armstrong, California Lake, McMaster, Orvan Brook, Rio Road and Woodside Brook.

Blue Note’s relative leverage to metal prices means that every 2c change in lead price has about the same effect as 1c change in zinc price.

Acadian Mining

Acadian Mining is a small new producer with 159 million shares fully diluted as of May 31, 2007, giving it a fully diluted market cap of $191 million. They have two main projects of interest, Scotia Zinc and Scotia Goldfields, and they own about half of Royal Roads, which owns about half of Buchans River.

Scotia Zinc has a 2007 production target of 23 million pounds of zinc and 8 million pounds of lead and a 2008 production target of 45 million pounds of zinc and 19 million pounds of lead, for $44 million of gross revenue in 2007, 1/4 of market cap and $90 million for 2008, almost half of market. The reserves have a zinc grade 3.6% zinc and 1.7% lead, for $160/ton metal values. Total reserves are about $750 million to be mined over 7.5 years. As a new start-up it runs the risks that things will not go as management plans and there are no operational financial reports to review and evaluate.

Goldfields has several properties with about 1.35 million ounces of gold contained in resources that have metal values ranging from about $60/ton with the Beaver Dam property which has about 600,000 oz of gold, to about $350/ton with Goldenville with about 265,000 oz. The metal values may be worth about $900 million, but low grades spread out in several deposits means high extraction costs.

The Royal Roads holding has given them an interest in the Tulks North property. It currently has inferred resources with metal values of about $530/ton, or about $900 million in metal values. With the 1% zinc cut off instead of a 2% zinc there is 2.5 times as many tons of ore, but metal values per ton of ore decline to about $250/ton. This only adds $100 million in metal values to the deposit for an extra 2.5 million tonnes of ore that would need to be processed. This extra could quite possibly cost more to mine and process than the value of the recoverable metals. Acadian's interest is about half of this deposit.

How do they compare?

Zinifex by far has the best grades and looking at their financial data, you can see that about 1/3 of the gross sales ended up as earnings. Contrast that to Breakwater's lower grades and about 20% of their sales ended up as earnings, although Breakwater's earnings were pulled down by Myra Falls' lower grade during the quarter and will likely increase to more like 25% of gross revenue. Zinifex's higher grades and endless deposits justify a higher P/E than Breakwater, but both are nice looking companies. With strong prices there is always more downside risk that prices will decline, so commodity companies in this market commodity companies should never be priced the way a company like Pepsi might be priced, with an expectation the prices will generally always increase. So, 5% earnings might be great for Pepsi, but is a good way to potentially lose your capital with commodity companies. Zinifex currently has earnings of about 11%, which has a safety margin built in and gives them cash flow to fund future growth and exploration.

Breakwater has lower grade and is priced lower relative to market cap. Earnings for Q1 were low, about 5%, but should improve, most likely doubling when their new production that has started shows up in the financial reports. Also, Myra Falls contribution to operational earnings was relatively small as the grade they actually mined for the quarter was much lower than the overall grade their reserves/resources indicate they hold. Breakwater has a safety margin built in and they have good cash flow to fund future growth and exploration.

Tamerlane has a beauty deposit with that R190 deposit but they have a lot of steps to go through to actually get that deposit producing and any revenue possibility is about two years out. The economics of the R190 deposit at today's prices are nice, but it is a minimum of two year out and the further out you go, the more likely projections on everything are going to be wrong.

Blue Note has high grade to mine, an exceptionally high gross revenue potential relative to market cap and good reserves/resources relative to market cap. On this basis it is currently priced at about 1/3rd to 1/2 of the valuation given to Zinifex or Breakwater. The metal values per ton are very comparable to Breakwater's grade, so the simplest projection on earnings by contrasting is that they will be about 20-25% of gross revenue. Octagon has an estimate of 15c/share, or about 30% for this year, and 25c next year, for about 50%, or a P/E of about 2.

Acadian Mining has the lowest start-up production relative to market cap and the lowest grades, less than half that of the other companies profiled. Blue Note has combined open pit and underground mining operation, as does Acadian. In general high grade is what makes a company profitable and low grade is what limits profitability. For Acadian the gold deposits also tend to be low grade and/or small deposits, both of which rarely make money. It has a grade that with a large operation and economies of scale can make money but from reviewing many financial reports of other operations my conclusions are that its small size makes it questionable as to whether it can make money. This one I'd definitely want to see proof of earnings because of the lower grades.

Other details I picked up from looking at the relative deposit size is that Acadian's information indicates that they expect to recover about 90% of their deposit in 7.5 years. Blue Note's numbers indicated about 60% of their deposit will be recovered in 5 years. It is strictly a perception it gives me that there is not much room for error built into Acadian's numbers. Blue Note uses a 9% zinc-lead equivalent cut off which builds in a safety margin for investors in their evaluation. The 1% zinc cut off used for Royal Roads does not.

Note: I am not an investment adviser and I write about investments to help me to evaluate my own investments or potential investments or to better understand investments as a whole. For this post, because I own Blue Note, it was time for me to re-assess it's valuation relative to other companies in the sector. If you've seen something of interest you need to do your own due diligence. Current prices, Blue Note 53c, Acadian $1.20, Breakwater $3.19, Tamerlane $1.62.


Duzi Guide said...

Great post, I always enjoy your viewpoints.

Deborah said...

Thanks. I certainly had good timing on writing this post. I started working on the post on the weekend and finished it on Thursday and then Blue Note took off by about 15% on Friday.

From what I understand Blue Note is testing their new milling process right now. For one of the commodity shows I was watching the analyst was saying he is visiting the mill in about 2 weeks. It should be interesting.

Looking at the fundamentals in the zinc and lead sector I was far more impressed with these stocks as a whole than the stocks in the "hot" sectors and I definitely felt that the downside risk was more limited.

Gold has already given back quite a bit in the past year. It seems to me that gold stocks are starting to take off again because people perceive that they've come down too much rather than looking at the fundamental reasons why they came down. They've tended given back in the sector as a whole rather than based on their individual fundamentals. I suspect there will be more corrections as their individual fundamentals become more apparent in the financial reports over the next year.

Molybdenum has become a sector that I think has some fairly premium priced stocks now, so it requires more stringent checking stocks out.

I haven't found a uranium stock I like. Some have doubled since I first looked at them and had my first good shudder over them. Seriously, I forget who I was talking to about six months ago, but they said uranium was in a "safe" bubble for now and that the fundamentals for the shorter term were such that the price of uranium would continue up and the basic greed of the market would continue to push the stock up irregardless of whether any of them could ever actually make any money or justify their current market cap. That's just not my type of investing.

Nickel will be interesting and I will be watching that sector. I think it is pretty scary to have pricing based on a $21/lb US and now the price is about $16/lb US and the US currency has declined so much. The currency decline to the Canadian dollar is effectively a 10% price drop. A business that operates in the US and pays costs in US dollars will notice much less of an effect than say a company that pays expenses in Canadian and gets revenue in US.

Duzi Guide said...

As a quick follow up. I have owned a great deal of Playfair mining (tungsten) during its ride up and have been shedding it. I was hoping that you could shed some light on what you thought of Tungsten, Cobalt, and other base metals stocks whenever you get the chance. Keep up the good work.

Gaston said...

Hi Dwothers I've been following your blog for a couple of months now, and I must say I find your posts well written and very insightful.

I've been following BN since early May since you and seeking alpha featured it, I decided not to take the plunge because I had already invested in Acadian. I wish I had your conviction though as BN has really gone on a run.

My question to you is whether you think BN represents good value at current levels. I already bought into BN @ 0.72 cents and I'm looking to add more on a pull back. Or do you think I should add more at 0.72 cents? I'm very bullish on zinc and lead and like BNs leverage to both materials so even considering the run BN has made it still looks like good value.

Thanks for your comments Dwothers, I've also made a post on the Smart Investment forums if you'd like to swing by and give your opinion there.

Deborah said...

I am not a financial adviser and you do need to make your own assessment on this.

My conviction was based on the math and for me, unlike many things around us, math tells a truth long before we recognize it.

Certainly I would agree that the math says that Blue Note is still a good value, but it is based on the assumptions that the mill will operate successfully and commodity prices will remain strong.

I was liking Blue Note very much at $1.40 zinc and $0.80 lead.

What I think is not wise is over allocation of resources to a single stock or sector. And math isn't going to correct for some unforeseen circumstances, say a serious accident.

Rumor has it that starting this week the mine will be visited by 4 analysts and they've started test runs on the new mill. I saw one analyst on TV say he was visiting the mill this week. I can't predict if there will be a pull back or not.