New Carola South discovery could be a game changer
In December 2016, CZL released its maiden resource estimate for the Plomosas zinc project in northern Mexico. The resource has the highest zinc and combined zinc and lead grade of any of its ASX-listed peers at 568,000 tonnes at 16.9% Zn+Pb. We then stated that the requirement was to lift the size of the resource towards 1.0 - 1.5 million tonnes to place CZL on a development footing. This month CZL announced initiation of a scoping study on a small-scale production scenario based on the current resource. However, our view is that the recent discoveries, particularly at Carola South, have the potential to eclipse a small-scale production scenario. We maintain our Speculative Buy on CZL.
- Scoping Study underway: CZL announced that it has embarked on a Scoping Study for Plomosas with the aim of establishing the metrics of a small-scale operation using the current resource as a basis on which to establish a mining schedule. The study is to be finished by Q2 2017 with mining a distinct possibility by Q4 2017 or early Q1 2018. CZL are therefore likely to be in production to take advantage of the robust zinc high price over the next few years.
- New zones could rapidly add resource tonnes: CZL has also announced the discovery of additional areas of mineralisation not yet included in the resource that are proximal to existing infrastructure. The first area to be drilled will be at Tres Amigos North. The second, and perhaps more important, is at Carola South. This area lies 300m to the south of the existing resource envelope but has already been confirmed along a strike length of 522m by mapping and sampling of an historic exploration drive.
- Looking towards a doubling of the resource: CZL’s current strategy is to establish a small-scale operation to fund exploration and development drilling for a larger resource. However, we believe CZL could double its resource base within the next 9 months to c. +1.0Mt. This could potentially alter CZL’s shorter term focus on a small-scale operation. In any event, metallurgical testwork and mining studies performed during the Scoping Study will be required for a larger development scenario anyway.
- Grade continue to be world class: Sampling from within the Carola South exploration drive averaged 20.7% Zn+Pb, higher than the current resource grade, with a peak value of 53% combined Zn+Pb. If grades at Carola South are as good as this in drilling, the overall grade of the resource could lift still further, making Plomosas amongst the highest grade zinc/lead resources in the world.
- Speculative Buy recommendation maintained: We re-iterate our Speculative Buy recommendation on CZL and believe that the new targets have the potential to realise the tonnage required to place CZL on a development footing with a superior grade to peers.
Scoping Study underway
- In December 2016, CZL published the maiden JORC 2012 resource for the Plomosas deposit at 568,000 tonnes at 16.9% Zn+Pb. At the end of February 2017, CZL announced the initiation of a Scoping Study at Plomosas, aimed at determining the metrics of a small-scale mining operation that involved accessing ore proximal to existing underground development and a refurbishment of the existing small-scale processing facility on site.
- The Scoping Study will involve the fast-tracking of production from the recently drilled Level 7 area containing high-grade, semi-oxidised ore requiring minimal underground development. RungePincockMinarco are managing the study and metallurgical testing is being undertaken by BatteryLimits Pty Ltd.
- CZL aim to expand and refurbish the existing plant, currently rated at 75ktpa, to 100ktpa. If the Scoping Study is successful, CZL could be in production by late 2017 or early 2018, depending on approval timeframes. Results of the study are due in Q2 2017 with an emphasis on metallurgical testwork and optimal plant design.
Discovery of new zones beyond the resource limits
- CZL has recently discovered two new zones of mineralisation proximal to existing underground infrastructure. The closest of these is the Tres Amigos North area, adjacent and to the north of the existing Tres Amigos part of the resource. This lies between Level 2 and Level 5. Drill testing of the Tres Amigos North area will begin almost immediately from Level 5, following up on previous intersections of a high-grade lode 2 to 3 metres wide.
- A new zone, Carola South, located 300m south of the existing resource, is confirmed over a strike length of 522m in a drive mapped and sampled in early March. Grades from sampling along the strike of the drive returned assays as high as 53.6% combined zinc and lead with the median assay of 20.7% Zn+Pb from 40 samples.
- Carola South is the south extension of the mineralisation mined by Asarco up to 1974. The new zone extends the mineralisation 800m to the south where it is exposed in an exploration drive. No large-scale mining has ever occurred in this area and the drive does not intersect the footwall or hangingwall contacts of the Mina Vieja Manto, which historically hosts most of the mineralisation.
- Secondary copper staining observed in some areas may indicate that this location is closer to a heat source, or that the deposit is now exhibiting a metal zonation. New imaging of the magnetics suggests the presence of an intrusive body approximately 1km south of Plomosas and at a depth of c. 700m. It is worth noting that other base metal mines in the region can have considerable depth extents, well beyond the current 260m maximum depth at Plomosas.
Potential for rapid tonnage addition
- Successful drilling of the new zones could render a small-scale development study obsolete in our view. CZL took a relatively long time to achieve its maiden resource of 568Kt but success at Carola South could generate resource tonnes far more quickly. This could shift the focus away from a small-scale development if tonnes can be added expeditiously.
- If we assume that over the next 12 months the size of the resource can grow to beyond 1.0Mt, a larger operation may be feasible requiring a larger processing.
- CZL will however always have the option of small-scale development to generate cashflows to pay for exploration to define a larger resource and therefore a larger, more meaningful development.
Where to from here?
- CZL need resource growth. We envisage that the company will embark on a concerted resource growth drill-out from the new zones, and in parallel, high priority targets derived from the regional exploration program.
- We expect to see one, possibly two, resource upgrades this year as additional drilling is added to the database. We now see that resource growth could happen more quickly than we had envisaged late last year and believe that a +1.0Mt resource could be reached within 9 months.
- Success in the regional program has the potential to open up a new deposit with the possibility of a step change in resource size. This in our view would be a major catalyst for the company.
- It should be stressed that all of the resource defined thus far is in close proximity to existing underground infrastructure and is readily accessible. Capital expenditure required to mine the material would be minimal and a refurbishment of the small processing facility and associated peripheral infrastructure the only real capital requirement. The hurdle rate to get into production therefore is much less than most of its ASX-listed peers.
Peer group comparison
The ASX is limited with respect to companies that have a zinc focus. Figure 3 below show the market value for companies within our zinc universe that have defined resources. Terramin (TZN-AU), Red River Resources (RVR-AU), Aurelia Metals (AMI-AU) and Herron Resources (HRR-AU) are companies currently either in production (AMI, although primarily a gold orebody), or are in late stage project financing (HRR) or are gearing up for production post successful DFS (RVR, TZN).
The Plomosas resource grade has the highest zinc and the highest combined zinc and lead grade in our ASX zinc universe and would be in the highest decile (10%) of deposits globally. The high grade indicated resource defined separately at Level 7 deeps, at 28% combined Zn and Pb, would be in the top 1% of global deposits.
The average grade in our ASX-listed zinc deposit universe is 5%. The average combined zinc and lead grade is 7.0% and silver grades average 46.3 g/t. Figure 4 below shows how anomalous the Plomosas deposit is amongst its peers. The size of the bubble shows the contained metal and shows that this is where CZL need to maintain focus.
The requirement now for CZL to lift the tonnage to between 1.0 and 1.5Mt overall to derive a standout project amongst its ASX listed peers and indeed, globally for its grade.
The tenor of base metal mineralisation at Plomosas is very high. Second only to Herron Resources’ (HRR-AU) Woodlawn underground polymetallic resource on a zinc equivalent basis. HRR’s Woodlawn deposit contains additional copper and gold credits not seen in the Plomosas mineralisation.
Zinc continues its strong price performance
Zinc continues to hold its recent strong price rise. Forecasts for the next two years remain robust at around US$2500 owing to the closure of major mines through resource exhaustion and closure due to low prices in late 2015. Stockpiles continue to shrink.