I have been involved in the zinc business for a couple of decades. For much of that time pundits have told us that a price spike is imminent. People say, for example, LME stocks are low, we are running out of zinc. That is not so. LME warehouse stocks are influenced by a number of variables, the least of which is a shortage of zinc.

Today, the pundits are saying two mine closures (Century in Australia and Lisheen in Ireland) will put upward pressure on the zinc price. Except that the zinc price has been falling since April. And there is no clear trend over the past five years.

 

1yr_Zn

5yr_Zn

Charts Courtesy Kitco

In a presentation last week, the MD of Atherton Resources Ltd, Anthony James, also predicted a rising zinc price. And he has used a higher than current zinc price in his scoping study on the King Vol zinc deposit.

Atherton (previously Mungana Goldmines Ltd) acquired the Chillagoe area assets of Kagara Ltd. Kagara is a failed zinc miner that has been in liquidation since 2013. As a consequence, Atherton’s largest shareholder is the liquidator, with 72%. This is a significant overhang, as, inevitably, the liquidator will want cash not shares. If only to pay those fees. But against that, waiting would almost surely give the liquidator (or buyer of Kagara) a better return.

Atherton has a small resource, King Vol, of 3mt @ 11.9% zinc, 0.8% copper, 0.6% lead and 29.9g/t silver. This is small and deep. It extends to 800 metres below surface. The company plans to construct a mine and processing plant (already part complete) to treat this resource. My initial two thoughts are:

  • Small, and therefore high risk
  • What will the concentrates sell for

With regard to the above, small deposits are risky because mistakes or difficulties can kill the project’s profitability. Secondly, understanding the value of concentrates is an arcane art. For example, silver reporting to a zinc concentrate is a significant penalty. You not only don’t get paid for the silver, you have a zinc penalty as well. Read a couple of very popular posts on concentrates here, and here. In my opinion, Atherton should first establish, through pilot plant test work, just what its proposed concentrates may be worth. Before proceeding with development.

Now – what I really like about the Chillagoe project.

In broad terms, the project is a large porphyry copper-gold project with associated skarn mineralisation, such as King Vol. Atherton has entered into a joint venture with Newcrest Mining Ltd, whereby Newcrest may spend up to AUD20 million to earn a 70% interest in the project. This excludes the King Vol and related skarn resources. This is a great deal. Congrats to Anthony.

It is the porphyry potential that offers the real upside. King Vol, and other small skarn deposits, may be profitable, but unlikely to be company makers. But a giant porphyry copper gold deposit, even if low grade, is something else again. And if anyone knows how to make profits from low grades, it is Newcrest.

Conclusion

The big picture is great, the small scale processing option not so much. However, in defence of the company, the exploration potential for more small-high grade skarn deposits does look good. The share overhang is also a concern. But if Newcrest is successful, the sky is the limit.

 

NOTE

My “Worth Watching” series is a brief review of companies that appeal to me. They are not based on in-depth research and are in no way a recommendation to buy or sell shares. The reader is advised to do their own research and/or consult with their broker.

 

 

21 August 2015 Companies