Zazu Metals: Shallow, High-Grade Zinc Potential

Joseph Gallucci has approximately 10 years experience in equity research. In 2012, Joseph joined Dundee Capital Markets as a Senior Mining Research Analyst. Joseph’s main focus is on base metals and bulk commodities on a global scale. Mr. Gallucci holds a Bachelor of Commerce degree from Concordia University. Mr. Gallucci also holds an MBA in investment management from the Goodman Institute of Investment Management.

RIN: Since we last spoke, there has been a shift in the positive outlook for zinc prices, with many analysts torn between a rise or fall in the coming months. In your opinion, where are zinc prices headed in the next six months? 12 months and beyond?

Joseph Gallucci: Zinc has been in surplus since about 2011, with supply peaking earlier this year. But if you watched inventories, they’ve been slowly starting to come down. And they’re going to continue to decline due to the fact that new supply will be constrained.

Zinc hasn’t been performing tremendously well lately; it’s been pretty flat. But in the next six to 12 months, I think we’re going to see a couple of things: 1) stability in the price, and 2) a potential increase later on. This is due in part to supply constraints and because inventories on the LME won’t be available.

We believe that 2015 is the year when the market expects a deficit in zinc. Dundee Capital Markets has zinc forecasts for 2015 at a $1.00/lb; where consensus prices are about $1.05 per pound. There are some outliers who are calling $1.30, $1.40/lb. It appears in any case that 2015 is the year where there could be a run on the zinc price.

Just to give you an idea of what our price outlook looks like for zinc at the moment, we have zinc going to $0.90/lb for calendar year 2014. We have it going to $1.00 in 2015, which is, as I mentioned, the year when the actual deficit really kicks in. And then long term, which is 2018 and onwards, is $0.90/lb.

RIN: So with this deficit looming in the coming years, what kind of supply gap is the market looking at?

JG: We are looking at about 10 percent of supply just disappearing from the market and not coming back.  Between now and 2015, we will lose about another 1.2 million tons of zinc. There are no big projects to replace it. With all these mines closing, and no big mines to come in and replace them, we’re going to have to start looking more downstream, at the smaller producers.

The first of the shutdowns was Brunswick, which happened this year. But apart from Brunswick, there’s Minmetals’ Century mine in Australia, which is going to close. There’s Vedanta’s Lisheen mine in Ireland, and Scorpion mine in Namibia.

It’s interesting the way the zinc market is structured. You see, about 30 to 40 percent of zinc production comes from junior mining companies, and will continue to do so. In the copper market, only 5 to 10 percent comes from junior miners.

RIN: Zazu Metal’s (TSXV:ZAZ) president, Matthew Ford, recently said that the company’s Lik property in Alaska “checks all the boxes for a property to become a mine.” Can you help our readers understand what he might mean by that?

JG: I think Lik does tick several boxes, maybe not all of them. Lik is very large; it’s shallow and high grade. You don’t really find a lot of bulk-tonnage zinc deposits, so that’s a definite plus.

It’s in a friendly mining area because Teck’s Red Dog mine is right there. Furthermore, Alaska, at least that part of it, is considered to be very mining friendly. And you know, it will make permitting a little bit easier. But before any of this even starts, Zazu has to develop a framework and collect some environmental data, which is what they’re focused on at the moment.

The big key with this project is that it’s not permitted at the moment. It’s a long process to do that. So on the mining side, yes, it ticks a lot of the boxes – location, grade, tonnage – absolutely. But the fact is they’re not permitted and still have to go through this process, and have to get an agreement with AIDEA – one of the government bodies in Alaska– to use the access road to get to the port.

So Lik is definitely great on the mining side, but on the permitting side, still a lot of work to be done.

RIN: Despite being at such an early stage in its development, Lik does have some positive things going for it in terms of grade and tonnage. How does that benefit Lik and how likely is it that the project will be developed?

JG: Zazu benefits from a couple of things. First, you’re absolutely right that the grade is much higher than some of the competition that we see. Also, the fact that it’s next to Red Dog, which is one of the largest and highest grade zinc mines in the world.

I think at some point, Teck could possible consider developing Lik. However, their Red Dog  mining camp at the moment still has a very long mine life, 20 years or so. But if they were to expand that camp, Zazu’s deposit would be something that they would consider and look at. Hence Teck’s agreement with Zazu currently. It is noteworthy that Teck has recently announced that they are reopening the Pend Oreille zinc mine in Washington State, so they do have a positive outlook for zinc.

RIN: We’ve mentioned Teck and the Red Dog mine up in Alaska a few times, and I think it’s important to look at how Lik is a 50/50 JV between Zazu and Teck. How does Zazu benefit from this partnership?

JG: Infrastructure. It’s all about infrastructure. Teck has been mining in that area for many years, so Zazu has access to roads and port facilities that are not owned by Teck, but at the moment are currently being used by Teck. And that’s a connection people always make, that Teck owns that port; they don’t. AIDEA owns the port.

For Zazu being adjacent to Red Dog fuels speculations that at some point Zazu could be taken out if Teck wants to consolidate that whole region. However, this is not something we expect in the imminent future.

But the main thing is, being in such a remote region like Alaska, the fact that you have access to infrastructure, like a haul road, a port facility, is big capital cost savings. And obviously reduces initial capex to get a mine up and running.

RIN: Has Zazu been meeting its expenditure targets in order to complete the acquisition of 80 percent of the Lik property?

JG: Not yet. If Zazu wants to acquire the remaining 30 percent, they are going to have to spend another $25 million, that’s pre-inflation. Which, if you look at the inflation-adjusted number, is probably $45 million by 2018.

And Zazu definitely wants to exercise that. Just looking at the economics of spending that money up front for what you can actually get out of this project later on, makes it definitely the right choice from the company’s perspective.

They’ve still got a few years to do this, but at the moment, they haven’t spent enough to earn that extra 30 percent. But that is their goal, to take the 80% ownership percent of the project, absolutely. Currently they’ve got less than $5 million in the bank.

RIN: In a recent news release, Zazu clarified that it will be putting out an updated PEA in the coming quarter. What will investors see in the update?

JG: The update is not going to be very different from what we’ve already seen. The main changes will be that it will have an up-to-date assessment on Lik that will be 43-101 compliant.

And then they’re going to update the study to include after-tax numbers, which was another detail that the BC Commission had an issue with.

It’s not anything to be concerned about. It’s simply an update.

RIN: We’ve touched a little on how Zazu is currently working towards permitting, which you said could take a while. Can you just elaborate on that a little bit? What do they need to get in place at this point?

JG: So Lik is definitely great on the mining side, but on the permitting side there is still work to be completed. That said, Zazu has already completed a significant amount of work and collected lots of data in this regard. What remains is the bureaucratic US permitting process.

And, you know, permitting in the United States can be very long and drawn out, and a very bureaucratic process. But given the fact that it’s in a mining area already and there’s a large mine operating right next to it, you have to think that unless something goes extremely wrong, they should actually have a better chance to get their permits.

RIN: How does Alaska rank as a mining jurisdiction?

JG: I think it depends on where you are in Alaska, as well. One of the bigger issues in Alaska is the Pebble project; it’s having a lot of permitting issues, and doesn’t look like it will be permitted any time soon. The main issue there is that it’s near a lot of salmon spawning lakes.

But the fact that Red Dog is operating literally right next to Lik — fewer than 30 kilometers away — you have to think that that’s more of a likely place to put a mine.

So I think on that front Alaska will be a lot easier for them to work with, given the fact that Teck’s already been working there for years.

RIN: That’s great. What do you see as the main catalysts or risks for Zazu going forward?

JG: Permitting, of course, as you know, we keep coming back to that. They’re not permitted, but they are in a friendly jurisdiction of Alaska.

Metallurgical results, they’ve got to do more work on the metallurgical side to better establish their recoveries.

And then, obviously, the funding. They don’t have the funds to develop this kind of a project. So, how they go from here? A funding plan would obviously be key if they are actually going to be the company that puts it into production.

RIN: Okay. Do you think it’s going to be difficult for them to get funding?

JG:  Absolutely, and that’s not a firm-specific comment. That’s not just Zazu’s problem, it’s every junior mining company’s issue at the moment. Access to capital is very difficult. You’ve got equity markets that are very selective in term of companies that are willing to finance. There are other vehicles for them to use like offtake markets or precious metal deals and things like that.

But it will be a tremendous challenge for Zazu to raise between $2 00-$300 million to put this into production (we model, currently $260 million. That’s for 80 percent of the project.) We assume that Zazu will bring their interest to 80% and Teck will be their 20% partner.

RIN: Yes, so that’s not just their challenge, that’s the nature of the game.

JG: Correct. Very tough markets.

RIN: Okay. Well, it’s good to know, and to get some good insight. Thanks so much.

JG: No problem. Think zinc!

Securities Disclosure: Joseph Gallucci beneficially owns, has a financial interest in, or exercises investment discretion or control over, companies mentioned in this interview:  none. 

Dundee Capital Markets and its affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by, mentioned in this interview:  none.

Dundee Capital Markets has provided investment banking services to companies mentioned in this interview in the past 12 months:  none.

All disclosures and disclaimers are available on the Internet at www.dundeecapitalmarkets.com. Please refer to formal published research reports for all disclosures and disclaimers pertaining to companies under coverage and Dundee Capital Markets.  The policy of Dundee Capital Markets with respect to Research reports is available on the Internet at www.dundeecapitalmarkets.com.

 Editorial Disclosure: Zazu Metals is an advertising client of the Investing News Network. This interview was conducted as part of Zazu’s advertising campaign.