Darnley
Bay Resources Ltd. (DBL:TSX.B) acquired a past-producing zinc asset in
receivership and will publish a new PEA within the next few months.
Pine Point produced almost 10 billion pounds of zinc, and it hasn't
been mined out
In October of last year, Darnley Bay entered into an agreement with the
court-appointed receiver of Tamerlane Ventures to take possession of the Pine
Point zinc project, located less than 50 kilometers east of the Hay River in
the Northwest Territories.
The project isn't just one big zinc zone, but actually consists of in
excess of 40 zinc-lead deposits over a total strike length of almost 70
kilometers. Of these deposits, ten have been the subject of an NI-43-101
report, compiled for Tamerlane Ventures, which owned the asset before going
into receivership.
The acquisition terms are actually very straightforward�the receiver
probably really wanted to get it off its books and recoup a part of the
losses. Using a valuation of CA$0.20 per share, which is where Darnley Bay
priced its most recent hard dollar private placement, Darnley Bay paid a
total consideration of approximately CA$8M to acquire 100% of the asset in a
mix of cash and stock.
Pine Point is a historic producer, and the district has been known for its
zinc and lead assets for almost 100 years when Cominco started to explore the
tenements before the Second World War and started to sink a shaft. The
company discovered almost 100 different zinc-lead deposits, but it took until
1964 before large-scale production started after Cominco completed a resource
estimate with 21.5 million tonnes of 11.2% ZnPb. And that's a really good
average grade!
As said, the project isn't just one large pit, but Cominco actually
started to mine 46 separate open pits, as well as two underground deposits,
over a 35-kilometer long trend. In the 23 years after starting to mine in
1964, Cominco mined and processed a total of 64 million tonnes at an average
grade of 7% zinc and just over 3% lead for a total zinc production of almost
10 billion pounds.
The Tamerlane PEA is outdated, but gives a good first impression
In 2014, Tamerlane Ventures commissioned an updated technical report on the
Pine Point project that included a mine plan based on one underground and
nine additional open-pit zones. The original plan was to truck a
preconcentrated lead-zinc product from all these pits to the mill on the
proposed processing site.
Cominco had drilled a total of 1.31 million (!) meters in almost 20,000
drill holes, so Tamerlane (and now Darnley Bay) have access to approximately
$150M worth of drilling, which would have cost hundreds of millions of
dollars in today's world. This gives Darnley Bay a head start as it will now
also be able to analyze the historical data searching for potential new pits
that could now be economic at current zinc and lead prices.
Using a zinc price of $0.95/lb and a lead price of $1/lb, the after-tax
NPV8% of the property, based on an 1,800-tonnes-per-day operating plan and a
payability of 85% for the zinc and 95% for lead, came in at CA$112M.
Another important feature of Pine Point is the excellent quality of the
zinc and lead concentrates. The 2014 study indicated the average lead grade
in the lead concentrate would reach up to 72%, while the average zinc content
in the zinc concentrate would be 62%. This would be absolutely fantastic,
considering the accepted zinc levels for "clean" concentrates are
48�52%.
Delivering a 62% concentrate could result in a premium pricing, as it
would allow the zinc smelters to blend the high-quality concentrate from Pine
Point with lower value concentrates. For instance, Nevsun
Resources Ltd. (NSU:TSX; NSU:NYSE.MKT) is still having issues to produce
a generally accepted zinc concentrate, which sent its share price much lower.
This really emphasizes how important it is to produce a quality zinc
concentrate, and an end product with a 62% zinc grade would be highly sought
after.
The main contributor to a higher net present value in the upcoming
preliminary economic assessment (PEA) will be the cheaper Canadian dollar.
Back in 2014, Tamerlane's consultants used an USD/CAD exchange rate of 1.00
to calculate the economics of the property. With a current exchange rate of
1.30, some of the local costs will be much lower than in the 2014, while the
recalculated NPV�keeping all other parameters unchanged�would increase from
CA$112M to CA$145M.
Darnley Bay has a plan to control the potential water inflows
The main issue associated with the Pine Point deposits is the water inflow.
The project is located just 10 kilometers from the Great Slave Lake, and
Tamerlane researched several options to make sure the pits and underground
mines don't flood. Tamerlane has also drilled wells at several locations to
test the groundwater flow, and engineering firm Thyssen confirmed to the
company it should be able to control the water inflow.
Although Tamerlane originally planned to use a ground freezing technology,
it changed that plan, and a plan to use grout technology is being
investigated. This technology has improved rather substantially in the past
decade and could be a huge help for Darnley Bay.
But in order to avoid the initial capital expenditures associated with
using grout or ground freezing, Darnley Bay will very likely focus on the
open pits. Not only will that be a cheaper path toward a meaningful production
rate, it will also allow the company to start developing the underground
deposits by using internally generated cash flow from the open-pit mining.
Also keep in mind the planning and interpretation of the water flows has also
greatly improved since mining started more than 50 years ago, and we would
expect any strategy to control water flows to be much more efficient now.
The timeline from here on
It's really important to know the R-190 underground deposit, as well as the
mill, infrastructure and tailings area, has already been permitted, and this
will allow Darnley Bay to hit the ground running.
The company has engaged JDS Engineering to complete a PEA, which should be
ready within the next few weeks. This PEA will give us a first
"tangible" overview of the up-to-date economics on the property.
The company has started to build a strong technical team, and has hired
several key people. CEO Jamie Levy basically had to build the company from
scratch and while we are sure this caused some headaches at the beginning, it
allowed him to hire the people who could really help the project forward,
rather than having to deal with "legacy management."
The fresh start and clean slate also attracted Rob McEwen and Lukas Lundin
to the story, who invested several million dollars into Darnley Bay
Resources.
We would also expect the company to conduct some more drilling on the
property and we're looking forward to seeing the exploration plans for 2017.
Darnley Bay raised CA$5M in flow-through funds in the December�January
financing, and this cash will have to be spent on the ground this year. This
should further boost the confidence in Pine Point as an asset, and pave the
way to complete a feasibility study.
Conclusion
JDS Engineering is working hard to complete an updated preliminary economic
assessment on the Pine Point zinc project. This new PEA will be completely
different from the 2014 technical report due to the weaker Canadian dollar,
the higher lead and zinc prices, as well as the extra deposits that could/will
be added to the mine plan. According to the old PEA, the after-tax NPV8% at
$1.15 zinc and $0.95 lead was estimated at US$194M, which would be in excess
of CA$250M using today's USD/CAD exchange rate.
That's also the first target we would be aiming for, and should the
updated PEA reveal an after-tax NPV8% of less than CA$250M (US$195M), we
would be quite disappointed.
The PEA will be just the first step, and from then on it's up to Jamie
Levy and his team to create more value for Darnley Bay shareholders. With in
excess of CA$5M in the bank, Darnley Bay remains well capitalized and should
be able to make tremendous progress at Pine Point in 2017.
Thibaut Lepouttre is the editor of the Caesars
Report, a newsletter and mining portal based in Belgium that covers
several junior mining companies with a special focus on precious metals and
base metals. Lepouttre has a Bachelor of Law degree and two economics masters
degrees that have forged his analytical approach to the mining sector.
Considered a number cruncher, Lepouttre focuses on the valuations of
companies and is consistently on the lookout for the next undervalued mining
company.
Disclosure:
1) Thibaut Lepouttre: I, or members of my immediate household or family, own
shares of the following companies mentioned in this article: Darnley Bay
Resources. I personally am, or members of my immediate household or family
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company has a financial relationship with the following companies mentioned
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