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 Fri Mar 31, 2017
SVH Tracker: Retirement of OV:1000007-JK (Oct 31, 2016) for Hermosa-Taylor
    Publisher: Kaiser Research Online
    Author: Copyright 2017 John A. Kaiser

 
Outcome Visualization Project as of Mar 31, 2017: Arizona Mining - Hermosa-Taylor
Project:Hermosa-TaylorLocation:United StatesStage:5-PEA & Metallurgy
Net Interest:100% WIUncapped NSR:3.0%Target Metals:Zinc Lead Silver Copper
OV Project ID:1000007OVP Posted:2/29/2016OVP Retired:
Current OV ID:1000045Current OV Confirmed:10/31/2016Visualizer:JK
Arizona Mining Inc (AZ-T)
ProfileSearchWeb SiteTreeForumSEDARQuoteIPV
Issued
249,561,630
Price
$2.150
Working Capital
$4,826,942
Key People: James K. Gowans (CEO), Richard W. Warke (Chair), Paul J. Ireland (CFO), Donald R Taylor (COO)
Diluted
289,279,031
Insiders
33.8%
As of
9/30/2016
Visualized Outcome: Arizona Mining - Hermosa-Taylor
Arizona Mining Inc owns 100% (subject to shareholder approval) of the Hermosa-Taylor project in southern Arizona where a world-class scale sulphide carbonate replacement deposit was found in 2014 at the base of the Central deposit (formerly Manto Zone) on which AZI spent $40 million from 2006-2013 for an open-pit PFS that would have produced silver, electrolytic manganese and zinc from an oxide deposit. An inferred resource of 39,400,000 tonnes of 4.48% zinc, 4.48% lead, 66.19 g/t silver and 0.14% copper was reported in Feb 2016. In mid 2015 AZI acquired adjoining patented claims that cover the downdip projection of the CRD zone which was iintersected at 1,600 m depth on a neighbouring property by Asarco decades ago when it operated the Trench Mine on the patented claims. In Feb 2016 AZI initiated an 8 hole drill program of wide spaced holes on the Trench claim to establish the basis for an infill drilling program designed to set the stage for infill drilling and determine the best location for a shaft or decline to access the ore from infrastructure on the patented claims. Current plans for 2016 imply a $15-$20 million budget invlving 5 drill rigs culminating in a PEA by the end of 2016. The geological context implies a footprint of several hundred million tonnes of zinc-lead mineralization with a silver credit of which only a portion would be extracted by an underground mine of 8,000-10,000 tpd operating for 20 years. The 2016 focus will be to isolate the most continuous, high grade part of the system that would be targeted for initial mining. Key targets for 2016 are to boost the resource to 60 million tonnes to support a 8,000-10,000 tpd underground mine with a 20 year mine life, and isolate a sweet spot with combined zinc-lead grades in the 10%-15% range compared to 9% in the inferred resource.
Source Note: On April 3, 2017 Arizona Mining Inc published a PEA for Hermosa-Taylor which retires this OV published on Oct 31, 2016 to replace the Sept 8, 2016 version which increased the mining rate from 9,000 to 10,000 tpd and expanded the resource to 80M tonnes, double the 43-101 resource of 39.4 M tonnes, and boosted the estimate grades 50% to 14% zinc+lead. The resource covers only a portion of the deposit which in 2016 will be delineated in order to establish the sweet spot for the initial underground mining scenario expected to be 10,000 tpd if a shaft is required. A higher rate is possible if a key property can be acquired that allows driving a decline to the deposit. On Oct 31, 2016 AZ published an updated 43-101 resource estimate which featured nearly 100 million tonnes at a 4% Zn Eq cutoff. This is more tonnage than needed for a 20 year mine life, so I used the resource for the 6% Zn Eq cutoff which yielded indicated+inferred 81.3 million tonnes of 5.3% Zn, 5.5% Pb, 85.7 g/t Ag and 0.2% Cu. (Note the resource was reported in short tons with silver ounces and has been converted to the metric system adopted by the rest of the world except Myanmar, a failure of adaptation to common sense and pragmatism that offers a germ of truth to Trump's perceived need to make America great again.) The Sept 8, 2016 OV is unchanged except for the substitution of the 43-101 grades at 6% Zn cutoff and the recoveries used by AZ in its Zn equivalent formula.
Visualized Outcome Summary: Arizona Mining - Hermosa-Taylor
Deposit Scenario: 81,324,000 t @ 5.30% Zinc, 5.50% Lead, 85.7 g/t Silver, 0.20% Copper
Mining Scenario: Underground 10,000 tpd 22.3 yrs, CapEx $400.0 million, SustCapEx $100.0 million, OpEx $64.00/t (USD)
LOM Payable: 7.3 billion lb zinc, 8.9 billion lb lead, 181.0 million oz silver, 174.0 million lb copper
Economic Outcome (USD): Revenue Model at OV designated Metal Prices

Annual AverageLife of Mine (LOM)LOM Stats
Recoverable Revenue:$1,100,730,865$24,524,886,806$302/t ore Recoverable Value:
   Smelter/Transport Costs:($221,738,522)($4,940,455,771)20.1% of Recoverable Revenue
Gross Payable Revenue:$878,992,343$19,584,431,03679.9% of Recoverable Revenue
   Royalties:($26,369,770)($587,532,931)3.0% of Gross Payable Revenue
Net Payable Revenue:$852,622,572$18,996,898,10577.5% of Recoverable Revenue
   Mining Cost:($146,000,000)($3,252,960,000)61% of OpEx - $40.00/t ore
   Processing Cost:($47,450,000)($1,057,212,000)20% of OpEx - $13.00/t ore
   Other Cost:($40,150,000)($894,564,000)17% of OpEx - $11.00/t ore
   Sustaining Cost:($4,347,826)($100,000,000)2% of OpEx - $1.23/t ore
Total Operating Cost:($237,947,826)($5,304,736,000)28% of Net Payable Revenue - OpEx - $65.23/t ore
Pre-Tax Cash Flow:$614,674,746$13,692,162,10572% of Net Payable Revenue - $168.37/t ore
   Taxes:($250,527,030)($5,582,708,084)41% of Pre-Tax Cash Flow - $68.65/t ore
After-Tax Cash Flow:$364,147,717$8,109,454,02143% of Net Payable Revenue - $99.72/t ore
Note: Concentrate transport costs, smelter treatment costs and retention are subtracted from recoverable revenue to get gross payable revenue to which the uncapped royalty rate for the project is applied. The annual average of LOM sustaining cost is expensed as an annual operating cost. Annual average figures reflect full production years.
Economic Outcome (USD): Royalty Model for 1% NSR at OV designated Metal Prices
Mine Life:23 yearsStartupNPV 5%NPV 10%NPV 15%
Annual Avg NSR:$8,526,226Now$107,628,098$68,232,062$47,227,384
LOM NSR:$189,968,9812022$84,329,431$42,366,742$23,480,357
Economic Outcome - Discount Rate: 8.0% - CAD AT NPV: $4.1 billion - Fair Speculative Value
Gross Rock Value (USD/t):$241Recoverable Rock Value:$302Payable Rock Value:$241
LOM Net Payable Revenue (USD):$18,996,898,105LOM PT Cash Flow (USD):$13,692,162,105LOM AT Cash Flow (USD):$8,109,454,021
USD Pre-Tax NPV:$5,462,015,660Pre-Tax IRR:153.7%Pre-Tax Payback:0.7
USD After-Tax NPV:$3,099,842,436After-Tax IRR:92.6%After-Tax Payback:1.1
CAD Fair Spec Value Low:$412,248,046CAD Fair Spec Value High:$1,030,620,114CAD Implied Project Value:$621,949,917
Price Target if Visualized Outcome delivered by Expl-Dev Cycle without dilution: CAD $14.25
Fair Speculative Value Stock Price Range: CAD $1.43 - $3.56
MSV (Market Cycle S Curve): Market Speculative Value represents the typical market pricing pattern of a new discovery as it moves through its exploration-development cycle. The irrational pricing behavior of the yellow channel contrasts with the fair speculative value of the blue channel as defined by the rational speculation model because during the pre-economic study stages there is great uncertainty about how big the discovery will turn out.
Fair Speculative Value Ladder
USD OV NPVCAD OV NPVExch RateDilutedNet Interest
$3,099,842,436$4,122,480,4551.3299289,279,031100.00%
Project StageUncertainty RangeCAD FSV RangeCAD FSV per Share RangeCAD MSV per Share Range
Grassroots 0.5% - 1.0% $20,612,402 - $41,224,805 $0.07 - $0.14 $0.14 - $0.36
Target Drilling 1.0% - 2.5% $41,224,805 - $103,062,011 $0.14 - $0.36 $0.36 - $0.71
Discovery Delineation 2.5% - 5.0% $103,062,011 - $206,124,023 $0.36 - $0.71 $0.71 - $10.69
Infill Drilling 5% - 10% $206,124,023 - $412,248,046 $0.71 - $1.43 $7.13 - $14.25
PEA & Metallurgy 10% - 25% $412,248,046 - $1,030,620,114 $1.43 - $3.56 $3.56 - $10.69
Prefeasibility 25% - 50% $1,030,620,114 - $2,061,240,228 $3.56 - $7.13 $3.56 - $7.13
Permitting & Feasibility 50% - 75% $2,061,240,228 - $3,091,860,342 $7.13 - $10.69 $3.56 - $7.13
Construction 75% - 100% $3,091,860,342 - $4,122,480,455 $10.69 - $14.25 $7.13 - $10.69
Production 100% $4,122,480,455 $14.25 $14.25 - $17.81
Market Speculative Value Stock Price Range: CAD $3.56 - $10.69
Warning: while the market spec value (S-Curve) and fair spec value channels presented in project value terms track the evolving expected ultimate outcome value, when presented in stock price terms the expected stock prices are subject to dilution through future equity financings or project interest farmouts.
Alternative Metal Price Scenarios

Metal 1Metal 2Metal 3Metal 4

ZincLeadSilverCopper
Spot:$1.26 /lb$1.05 /lb$18.06 /oz$2.65 /lb
OV Assigned:$1.26 /lb$1.05 /lb$18.06 /oz$2.65 /lb
Pessimistic:$0.75 /lb$1.05 /lb$18.06 /oz$2.65 /lb
Optimistic:$1.20 /lb$1.05 /lb$18.06 /oz$2.65 /lb
Fantasy:$2.00 /lb$1.05 /lb$18.06 /oz$2.65 /lb
Note: for Metal 1 pessimistic, optimistic and fantasy price scenarios, OV assigned prices are used for Metals 2-4
Economic Outcomes with Alternative Metal Price Scenarios

USD PT NPVUSD PT IRRUSD AT NPVUSD AT IRRAT Payback yrs
Spot:$5,462,015,660153.7%$3,099,842,43692.6%1.1
OV Assigned:$5,462,015,660153.7%$3,099,842,43692.6%1.1
Pessimistic:$3,924,430,113113.2%$2,208,042,81869.0%1.4
Optimistic:$5,275,823,660148.8%$2,991,851,07689.7%1.1
Fantasy:$7,678,301,078212.1%$4,385,287,978126.5%0.8
Fair Speculative Value for Alternative Metal Price Scenarios
Stage: PEA & Metallurgy - 10.0% - 25.0%

CAD AT NPVCAD Target PriceCAD FSV RangeCAD FSV per Share RangeCAD MSV per Share Range
Spot:$4,122,480,455$14.25$412,248,046 - $1,030,620,114$1.43 - $3.56$3.56 - $10.69
OV Assigned:$4,122,480,455$14.25$412,248,046 - $1,030,620,114$1.43 - $3.56$3.56 - $10.69
Pessimistic:$2,936,476,144$10.15$293,647,614 - $734,119,036$1.02 - $2.54$2.54 - $7.61
Optimistic:$3,978,862,746$13.75$397,886,275 - $994,715,686$1.38 - $3.44$3.44 - $10.32
Fantasy:$5,831,994,482$20.16$583,199,448 - $1,457,998,621$2.02 - $5.04$5.04 - $15.12
Detailed Visualized Outcome (KRO Members Only)
VU = Very Unsure SU = Somewhat Unsure SS = Somewhat Sure VS = Very Sure
The confidence indicator is intended to convey the visualizer's degree of uncertainty with regard to a particular assumption.
Deposit Scenario

Metal 1Metal 2Metal 3Metal 4

Zinc
Zn
Lead
Pb
Silver
Ag
Copper
Cu
Grade:5.30%VS5.50%VS85.7 g/tVS0.20%VS
Recovery:90.0%SS95.0%SS85.0%SS50.0%VU
Payable:85.0%SS95.0%SS95.0%SU97.0%SU
Concentrate Grade:56.0%SS75.0%SS
Price:$1.26 /lbSU$1.05 /lbSU$18.06 /ozVU$2.65 $/lbVU
Price Type:Spot
Spot
Spot
Spot
Annual Payable:326,257,101 lb
399,422,539 lb
8,121,022 oz
7,805,386 lb
LOM Payable:7,269,186,971 lb
8,899,353,022 lb
180,940,827 oz
173,908,284 lb
Metal 1 Note: Bench scale indicates zinc 85.5% recovery, no deleterious elements, zinc smelters retain 15%.
Metal 2 Note: Bench scale indicates 92.9% lead recovery, lead smelters retain 5%.
Metal 2 Price Note: Lead does not appear to have the depletion problems of zinc, so happy to let it ride at spot.
Metal 3 Note: 76% of recovered silver reports to lead con, 15% to zinc con, hence 90% silver recovery, expect smelters to retain 5% of silver.
Mining Scenario
Tonnage:81,324,000VSStrip Rate:0.0VS
Operating Rate (tpd):10,000SSMining Type:UndergroundVS
Mine Life (years):22.3
Startup:2022VU
Tax Treatment:DDBM - double declining balanceVUTax Rate:42.0%SS
Operating Rate Note: Management initially played with a 8,000-10,000 tpd mining rate but has changed its focus to a 6,000-8,000 tpd rate, probably because that is within reach of the zone so far outlined. It is possible that if drilling expands the tonnage and improves grade, the higher mining rate will be considered for the PEA.
Mining Type Note: The CRD sulphide zone at Hermosa-Taylor starts at about 250 m depth and dips at 25 degrees to the northwest. Just over 2,000 m from the pit base on claims beyond the Trench patented claims several older Asarco holes intersected the CRD zone at depths of 1,300-1,600 m, which offers a strong case for the hypothesis that the CRD zone continues at least another 1,300 m downdip from the limit of the Feb 2016 resource estimate. In addition, because 2015 drilling was confined to a strip of patented claims, the CRD zone so far outlined may represent only a third of the width of the zone.
Est Startup Year Note: Expect deposit delineation and PEA in 2016, a PFS in 2017, and an EIS-FS in 2018. Although Arizona can be a difficult place to permit an open-pit mine, Taylor's location on patented claims and its underground mining nature promise to generate less permitting opposition than an open-pit mine on unpatented land under the administration of the forest service.
Tax Rate Note: Federal 35%, state 7%.
Cost Scenario

CurrencyUSD CostExchange Rate
CapEx:$400,000,000VUUSD$400,000,0001.000
Sustaining Capital:$100,000,000VUUSD$100,000,0001.000
Mining Cost ($/t rock):$40.00SUUSD$40.001.000
Mining Cost ($/t ore):$40.00
USD$40.001.000
Processing Cost ($/t):$13.00SUUSD$13.001.000
Other Cost ($/t):$11.00SSUSD$11.001.000
Total OpEx ($/t):$64.00
USD$64.001.000
Zinc Concentrate Cost ($/t con):$210.00
USD$210.001.000
Lead Concentrate Cost ($/t con):$210.00SUUSD$210.001.000
Metal 1 Con Cost Note: $60/t transport cost (Trail smelter), $150/t smelter treatment charge is half way between $200 high and current $100/t. Concentrate grades based on bench scale metallurigical studies by AZ.
Metal 2 Con Cost Note: $60/t transport cost, $150/t smelter treatment charge.
Risk Factors - Risk-Adjusted Discount Rate: 8.0%

Risk LevelRisk WeightConfidenceNote
Environmental Permitting:High1.5SUPermitting a mine in the USA is always a problem given the cost-dumping, self-centered "not-in-my-backyard-but-give-me-cheap-my-goods" mindset of America's elite. However, the location on patented claims and the underground nature of the mine, coupled with experienced management in terms of mine building and permitting suggests this could be easier built than an open-pit mine.
Social License:Low1.0SSThe patented claims imply no aboriginal issues, though "retired" people living in the general area may resist a mine because it gives them something to do. The most unhappy group is likely to be drug smugglers and human traffickers, but Trump's plan to have Mexico build a great big wall could put an end to that complaint.
Title:Low1.0SUThe project was acquired out of a bankruptcy in 2006. Title problems should have arrived by now.
Tax:Very Low0.5SSWith 42% combined federal and state income tax already, the chance of higher income tax rates is very low, though the imposition of a government royalty is always a background risk.
GeoPolitical:Very Low1.0VSGiven the nonsense spewed by leading presidential nomination candidates, one has to wonder about the risk of instability sweeping the USA. However, global geopolitical chaos is a plus for Hermosa-Taylor because it will underline the wisdom of developing a major new domestic supply of zinc and lead.
Infrastructure:Very Low0.5SUThe fact that the much bigger Hermosa-Central plan yielded a positive PFS (at base case prices) indicates few problems for the much smaller scale Hermosa-Taylor operation in terms of power, rail and water.
Technical:Very Low1.0SUThe CRD sulphide deposit does not appear to have any metallurgical issues, and seems to track the contact between the carbonates and overlying volcanics quite nicely. A key technical question is to what extent a continuous sweet spot is present with a mineable grade at or above the inferred resource grade.
Management:Very Low0.5SSAZI has an impressive management team: CEO Jim Gowans is an accomplished mine builder, having built the Red Dog and Polaris zinc mines, Chairman Richard Warke has two buyouts worth $2 billion in his recent track record, one of them Augusta's Rosemont mine in Arizona, plus a huge equity stake in AZI, so raising $15-$20 million in 2016 is plausible at higher stock prices, Don Taylor knows Hermosa inside-out, Johnny Pappas helped get Romarco's Haile gold project permitted despite a "wetlands" obstacle course.
Financing:Low1.0SS$10 million sale of 1% NSR to Osisko plus $18 million PP at $1.29 in June 2016 funds PEA. Management has track record raising feasibility scale funding for 100% owned project, but dilution risk exists.
Risk Factor Weight Table

Very LowLowHighVery High
Environmental Permitting:0.51.01.52.0
Social License:0.51.01.52.0
Title:0.51.01.52.0
Tax:0.51.01.52.0
GeoPolitical:0.51.01.52.0
Infrastructure:0.51.52.54.0
Technical:1.02.54.05.5
Management:0.51.53.04.0
Financing:0.51.01.52.0
The risk adjusted discount rate is the sum of the weight of the risk level assigned to each risk factor.
Disclaimer: A visualized outcome is one of many possible outcomes for an exploration project as it moves through the 9 stages of the exploration-development cycle from grassroots to a producing mine with failure as an outcome at any point along the way. The range of possible outcomes for the physical nature of a deposit shrinks after delivery of an initial 43-101 resource estimate. While the nature of the deposit constrains the range of mining scenarios, the cost assumptions will vary as the project moves through the feasibility demonstration stages of the cycle, which affects the economic value of the final outcome. This economic value will also vary according to the prices of the metals targeted for extraction which may change during the years it takes for a project to become a mine. An outcome visualization is thus a compilation of best guess assumptions for the key variables that drive the discounted cash flow model, the basis for assigning an economic value to a mine. An OV is not intended as a prediction, but rather as a framework that allows the incorporation of new information generated by the exploration-development cycle for the project into a valuation model on an ongoing, dynamic basis.
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