Source: The Critical Investor for Streetwise Reports 11/17/2017
The Critical Investor profiles a company exploring a high-grade zinc property, and explains why he believes the upcoming PEA could surprise markets.
Ayawilca project; drilling location
1. Introduction
It is a busy and exciting time for top zinc junior Tinka Resources. Drill results are rolling in all year now, Tinka is the talk of the town at many conferences, the team got a much deserved accolade by receiving the Mining Journal “Explorer of the year 2017” award, and the company got listed on the Peruvian stock exchange (Lima Stock Exchange or BVL). I liked this move, as it made the company less dependent on for example Canadian brokers/banks to raise money in the future.
Being one of the major zinc juniors of 2017, the recent resource update of November 8th was highly anticipated by a number of newsletter writers, among them no less then Joe Mazumdar and Brent Cook of Exploration Insights, and of course yours truly. There seemed to be a widespread consensus about a 30-33Mt target, which turned out to be a 42.7Mt resource in the end, but this needs a bit more explanation as the newsletter writers used the higher cut-offs from the first resource estimate, in order to compare apples with apples
As the zinc price staged a decisive upswing for the last year as the long-time deficit theory finally played out, Tinka management felt it was fitting to use a higher zinc price, which in turn meant a lower Net Smelter Return (NSR) value, equal to a lower cut-off ZnEq grade, and this usually generates higher tonnage compared to higher cut-offs, as almost always more mineralization (at lower grade) is eligible to be included. In this article I will explain the actual increase of the resource, the implications of different cut-offs and I will venture into economic analysis of peer projects in order to project estimated valuations and price targets for Tinka Resources.
All presented tables are my own material, unless stated otherwise.
All pictures are company material, unless stated otherwise.
All currencies are in US Dollars, unless stated otherwise.
Please note: the views, opinions, estimates or forecasts regarding Tinka’s performance are those of the author alone and do not represent opinions, forecasts or predictions of Tinka or Tinka’s management. Tinka has not in any way endorsed the information, conclusions or recommendations provided by the author.
2. Rehashing some basics
Before I delve further into the story, let’s quickly rehash/update some basic information on share structure and financials first, and some additional background info on zinc for interested readers. Tinka Resources has 212.23M shares outstanding. The fully diluted share count stands at 249.49M shares, as there are 10.14M options, 0.5M shares reserved, and 26.5M warrants (all comfortably in the money: and most of the 12.6M warrants @C$0.30 expiring Nov 2017 will be exercised in the last two weeks of November according to management)
Large institutional shareholders are Sentient (25%) and IFC (9%), and management is holding about 2%. The company is lead by CEO Graham Carman (PhD Geo). Recently director David Henstridge, one of the founders, retired from his position, and according to Carman this had nothing to do with freeing up a board seat for eventual new strategic investors, this was just for personal reasons. Coverage by analysts is developing at the moment, as Tinka now has three parties tracking proceedings (GMP, Industrial Alliance and Beacon). The current cash position is estimated by management at C$5M, with no debt, and management expects to have about C$7M in the treasury by year end. This should be enough to do more drilling, metallurgic test work (in short “met work”) and complete the Preliminary Economic Assessment (PEA) during H1 2018. The current share price is C$0.70, resulting in a current and fully diluted market cap of C$174.6M (which is realistic as all warrants are well in the money).
Share price; 1 year time frame
Despite the rising zinc price, the Tinka share was sideranging for a while, as the markets were hoping on a second big discovery following the South Zone, besides the successful delineation of this first new target for this year’s drill program. Fortunately, the resource update and the anticipation of investors leading up to it has caused a breakout, printing a C$0.87 all time high on the day of the update. It dropped off again to C$0.78 that day, which probably indicated some profit taking. The share price consolidated in the low seventies this week, which could very well be new support, as the company is fast-tracking towards the Preliminary Economic Assessment (PEA) in Q2 2018) which I expect to be impressive as mining costs in Peru are low. More on this later.
I expect more institutional interest after this resource update, and hopefully positive step out drill results to contribute to a higher trending share price for the foreseeable future, depending on overall stock market sentiment and metal prices of course. Carman has been flying all over the world since the resource update to present the story to interested parties, so I’m curious what comes out of this in due time.
But first let’s have a look at the primary metal Tinka is looking for, the base metal zinc.
3. Zinc
A chronic shortage of supply of zinc is being forecasted. The coincidental closure of major zinc mines (Brunswick, Perseverance, Century, Lisheen, Skorpion) through depletion, taking 500kt per annum off the table, and this, coupled with a very limited number of new zinc mines in the near-term development pipeline set to come online, is expected to lead to a robust zinc price for the next few years. The price of zinc already ran up from US$0.67 to US$1.47/lb, and is forecasted to go up even more:
The zinc market has been in deficit for a long time (since 2012), but only since the end of 2015 did the zinc price start to appreciate, probably due to covert stockpiles which finally seem to be depleted. So, despite the current modest correction, the long-term zinc case looks pretty convincing in my view, and playing into the hands of Tinka Resources.
Here is a chart from Kitco.com, indicating long-term weakness in LME inventories, but only since the end of 2015 coinciding with factors like production going off line:
It seems like the stocks are heading for new lows. Following up on supply constraints, cutbacks like the ones announced by Glencore, as well as decreases expected for Kazakhstan and Peru, have tightened supply further and deepened the concentrate deficit. Interestingly, China had also shut down 26 mines in August 2016 due to safety and environmental concerns, which was a serious gesture.
Analysts believe that the zinc price could appreciate further, to $2.00/lb levels or more, as a new critical deficit could be looming for 2018. Biggest risk factor in all this remains main producer and consumer China (like it is with almost every other metal).
On a side note: an interesting phenomenon in zinc production are the treatment charges (TC). These are the charges paid by zinc miners to the smelters, for refining their zinc concentrates into zinc ingots. These TCs are often quite substantial, often to the amount of $200/t Zn for long-term contracts. Besides LT contracts there are also spot TCs for smaller quantities, and those have gone down a lot lately, going from $100-120/t to $40/t, as smelters are having a hard time getting zinc concentrates to process. As this chart shows, the interesting part of this is that spot TCs go down first as an indicator, before zinc prices start rising:
