Vale SA

Dundee Securities adds Rathdowney Resources, Tirex Resources to watch list; highlights top producer


Dundee Securities issued earlier this week a report on the zinc market, believing that zinc mine shutdowns and structural issues in the mining industry support a shift upward in the metal's price levels. It started coverage on several early stage zinc plays, and highlighted its top picks in terms of producers. 

The broker cites structural issues such as  capital cost escalation, resource nationalism and environmental challenges, believing the industry will require a "new reality" of higher prices in order to keep margins positive. 

"With median capital costs of around $3,000/tonne ($1.36/lb) of zinc and operating costs averaging roughly $1,200/tonne ($0.54/lb); we believe that potential producers would be hesitant to bring on new supply at current prices. We estimate that producers will need a minimum zinc price of $1.10/lb or $2,400/tonne to bring on new supply."

The analysts also project that over the next 5 years, roughly 2.1 million tonnes of zinc production

will be shutdown, representing about 15% of global supply. Important mine shutdowns include Xstrata's BrunswickMine in New Brunswick in 2013, Minmetal's Century Mine in Australia in 2014, and Vedanta's Lisheen and Skorpion Mines in Ireland and Namibia, respectively in 2014. 

"We estimate that 2013 and 2014 will be important years for zinc shutdowns with a total of roughly 1.2mm tonnes of zinc coming off line, or just under 10% of global supply; eventually leading to a zinc deficit by 2015," they note. 

Given the positive outlook, supported by its prediction that a zinc balance in 2013 will turn into a deficit in 2014, Dundee highlighted a number of producers that it believes offer the best zinc leverage, including its top pick, Trevali Mining (TSE:TV), on which it has a buy rating, and price target of 2.80. The zinc company, which has Glencore and Xstrata as offtake partners, is making the transition from developer to producer this quarter from its Santander mine, and Dundee highlights it as being the "only pure-play zinc developer with imminent production and available infrastructure that operates in politically friendly jurisdictions".

In terms of early stage zinc plays, the analysts initiated coverage on Rathdowney Resources (CVE:RTH), Tirex Resources (CVE:TXX), Canadian Zinc Corp (CVE:CZN) and Zazu Metals (TSE:ZAZ), saying they all have the desired characteristics of favorable location and asset quality. All of these junior plays were added to Dundee's watch list, with buy rating and no target prices. 

Of note, the Dundee analysts say Rathdowney holds highly prospective land positions in "world-class" zinc mining jurisdictions in Poland and Ireland. 

"The company's prospects are supported by substantial nearby infrastructure and easy access to smelting facilities," they take note, adding that Rathdowney also has a partnership with Teck Resources (TSE:TCK.B), which recently invested in the junior zinc play through a non-brokered private placement. The companies had been cooperating in exploration efforts in Ireland. 

Vancouver-based Rathdowney, which is associated with the Hunter Dickinson Group, has its main focus on its Olza project - a 150 square kilometre property in Poland.  Olza is located within 20 km from the ZGH Boleslaw smelter complex, which hosts a concentrator and tailings facilities with additional capacity that Rathdowney could potentially benefit from.

The report also highlights that the Pomorzany Mine - the only major feed-source for Boleslaw - is scheduled to shut down in 2014, meaning that the refinery needs feed. The junior explorer could also benefit from the workforce that will be available when Pomorzany comes offline. 

"Historic work in the area shows significant potential for a noteworthy lead-zinc discovery as the region has a long history of production from shallow sulfide deposits," Dundee says. 

"Given that past production has been carried out using antiquated soviet-style methods, we believe that there exists a strong possibility for modern exploration and mining techniques to unlock considerable value."

Currently, Olza boasts an inferred resources of 21.2 million tonnes grading 5.88% and 1.54% lead, for a total of 2.75 billion pounds of zinc and 720 million pounds of lead. Rathdowney holds three exploration permits, on the Zawiercie, Rokitno, and Chelcho. 

"We believe that this estimate is only a preliminary representation of the potential that RTH could realize at Olza," the analysts write, adding that the company last November released drilling results from Poland that were "impressive", with "some of the best grades and widths experienced to date". 

Dundee estimates that the company has roughly $8 million at its disposal, after current obligations are accounted for, and given Olza's capital requirements, the broker believes that Rathdowney will continue to raise funds as they are needed to progress exploration activities in Poland. 

Goals for 2013 include about 20,000 metres of drilling to increase the confidence in the resource base for mine planning, and preliminary metallurgical testwork. Further environmental and feasibility work will also be a priority.

Also of note on the junior zinc front is Tirex Resources, which holds six mining permit areas, covering 1,930 hectares within a highly prospective historical mining district in Albania. Historic production on Tirex property amounted to approximately 3.8 million tonnes. 

"Multiple VMS deposits are situated on Tirex's claims have the potential to host VMS deposits and we believe that the company is well positioned to develop them. 

"With a toll milling agreement with Ekin Maden (a private Turkish company) in hand, Tirex can quickly take advantage of their position in Albania, at a low cost, while funding their exploration efforts."

The company plans to fast track historical operations into production through the tolling agreement, and the cash flows generated to finance the exploration for large VMS deposits though to lie in the district. 

The analysts explain that this was a similar strategy used by FNX Mining via its agreement with Vale Inco, noting that any new discovery by Tirex made outside of the six mining areas does not fall under the current tolling agreement. 

According to Dundee, many of the sites' underground infrastructure and production-ready systems remain in place, allowing for the potential to quickly restart production, as the deposits were not depleted at the time of initial operation due to forced closure by the communist Albanian government. 

Under the toll milling agreement with Ekin Maden, the two companies will form an operating entity that will jointly mine the deposits and process the ores, with the profit to be split 50/50. The arrangement means the company does not have to take on the additional overhead and technical risk involved with operating a processing facility, and gives Tirex cash flow - "a huge advantage over its peer group". 

"We believe that this arrangement could also provide Tirex with a strong partner down the road should the company require additional funds, technical expertise or regional knowledge."

Meanwhile, the exploration area of focus outside of the six specific mining areas consists of roughly 7,000 hectares, funds for which Tirex raised at the end of last year. "The Mirdita District has the potential to host a significant VMS discovery," the analysts emphasize. 

Dundee's report is based on the belief that demand for base metals, including zinc, should continue to remain strong. With zinc's main uses concentrated toward heavy industry and manufacturing, the metal, like copper, provides a bellwether for the global economy and demand fluctuates with trends in industrial production. 

Most recently, China's urbanization and infrastructure development programs have provided the impetus in consumption growth for all base metals, and zinc is no exception, the report affirms. 

"We see the country's dominant influence continuing, and although China's growth may be slowing, subsequent growth will be off a much larger base."

Major zinc producers that Dundee highlights include Hudbay Minerals (TSE:HBM), its other top pick Lundin Mining(TSE:LUN), and Teck Resources (TSE:TCK.B). 

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