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| Mon Apr 3, 2017 SVH Tracker: New OV:1000007-JK (Apr 3, 2017 - PEA) for Hermosa-Taylor Publisher: Kaiser Research Online Author: Copyright 2017 John A. Kaiser
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Outcome Visualization Project as of Apr 3, 2017: Arizona Mining - Hermosa-Taylor |
Project: | Hermosa-Taylor | Location: | United States | Stage: | 7-Permitting & Feasibility |
Net Interest: | 100% WI | Uncapped NSR: | 3.0% | Target Metals: | Zinc Lead Silver Copper |
OV Project ID: | 1000007 | OVP Posted: | 2/29/2016 | OVP Retired: |
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Current OV ID: | 1000046 | Current OV Confirmed: | 4/3/2017 | Visualizer: | JK |
Issued 249,561,630 |
Price $2.230 |
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 |
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Visualized Outcome: Arizona Mining - Hermosa-Taylor - PEA |
Arizona Mining Inc owns 100% 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 AZ spent $40 million from 2006-2013 for an open-pit PFS that would have produced silver, electrolytic manganese and zinc from an oxide deposit. During 2016 AZ drilled 96 holes (109,189 m) which resulted in a PEA on April 3, 2017 for a 10,000 short ton per day underground mine with a resource of 60.8 million short tons at 4.4% zinc, 4.3% lead and 1.7 opt silver with an after-tax NPV of USD $1.26 billion (at 8%) and IRR of 42%. CapEx was USD $457 million, Sustaining Capital $500 million and OpEx $48 per short ton for a 19 year mine life. AZ plans to conduct further delineation drilling and initiate permitting in Q2 of 2017 with the goal of starting production in 2020. The current OV reflects LOM averages using metric tonnes converted from published short ton figures. Management is proceeding from PEA to a feasibility study. |
Source Note: This OV is based on the assumptions in the 43-101 PEA published on April 3, 2017 treated as LOM averages with full production in all years. The PEA indicates that in the first four years high grade ore will be processed before dropping to avout 9% zinc equivalent. Note that the PEA is based on an optimized ore schedule whereas the OV uses LOM averages. The PEA used 8% as a discount rate. The OV uses a discount rate that arises from the risk factor ratings made by John Kaiser. The confidence rating has been set to "very sure" for any assumptions clearly articulated by the PEA. Otherwise they reflect John Kaiser's confidence of the provisional choices he has made. |
Visualized Outcome Summary: Arizona Mining - Hermosa-Taylor - PEA |
Deposit Scenario: 55,200,000 t @ 4.40% Zinc, 4.30% Lead, 58.3 g/t Silver |
Mining Scenario: Underground 9,072 tpd 16.7 yrs, CapEx $457.0 million, SustCapEx $500.0 million, OpEx $53.00/t (USD) |
LOM Payable: 4.2 billion lb zinc, 4.7 billion lb lead, 82.0 million oz silver |
Economic Outcome (USD): Revenue Model at OV designated Metal Prices |
| Annual Average | Life of Mine (LOM) | LOM Stats |
Recoverable Revenue: | $786,995,333 | $13,119,440,943 | $238/t ore Recoverable Value: |
Smelter/Transport Costs: | ($219,237,259) | ($3,654,748,827) | 27.9% of Recoverable Revenue |
Gross Payable Revenue: | $567,758,074 | $9,464,692,116 | 72.1% of Recoverable Revenue |
Royalties: | ($17,032,742) | ($283,940,763) | 3.0% of Gross Payable Revenue |
Net Payable Revenue: | $550,725,332 | $9,180,751,353 | 70.0% of Recoverable Revenue |
Mining Cost: | ($129,040,582) | ($2,151,144,000) | 63% of OpEx - $38.97/t ore |
Processing Cost: | ($39,172,442) | ($653,016,000) | 19% of OpEx - $11.83/t ore |
Other Cost: | ($7,284,816) | ($121,440,000) | 4% of OpEx - $2.20/t ore |
Sustaining Cost: | ($29,411,765) | ($500,000,000) | 15% of OpEx - $9.06/t ore |
Total Operating Cost: | ($204,909,605) | ($3,425,600,000) | 37% of Net Payable Revenue - OpEx - $62.06/t ore |
Pre-Tax Cash Flow: | $345,815,728 | $5,755,151,353 | 63% of Net Payable Revenue - $104.26/t ore |
Taxes: | ($133,246,356) | ($2,225,223,568) | 39% of Pre-Tax Cash Flow - $40.31/t ore
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After-Tax Cash Flow: | $212,569,372 | $3,529,927,785 | 38% of Net Payable Revenue - $63.95/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: | 17 years | Startup | NPV 5% | NPV 10% | NPV 15% |
Annual Avg NSR: | $5,507,253 | Now | $58,378,014 | $39,834,074 | $28,812,619 |
LOM NSR: | $91,807,514 | 2020 | $50,429,123 | $29,927,929 | $18,944,765 |
Economic Outcome - Discount Rate: 8.0% - CAD AT NPV: $1.8 billion - Good Speculative Value |
Gross Rock Value (USD/t): | $254 | Recoverable Rock Value: | $238 | Payable Rock Value: | $171 |
LOM Net Payable Revenue (USD): | $9,180,751,353 | LOM PT Cash Flow (USD): | $5,755,151,353 | LOM AT Cash Flow (USD): | $3,529,927,785 |
USD Pre-Tax NPV: | $2,466,638,260 | Pre-Tax IRR: | 75.7% | Pre-Tax Payback: | 1.3 |
USD After-Tax NPV: | $1,366,017,577 | After-Tax IRR: | 47.9% | After-Tax Payback: | 2.1 |
CAD Fair Spec Value Low: | $914,275,565 | CAD Fair Spec Value High: | $1,371,413,347 | CAD Implied Project Value: | $645,092,239 |
Price Target if Visualized Outcome delivered by Expl-Dev Cycle without dilution: CAD $6.32 |
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Fair Speculative Value Stock Price Range: CAD $3.16 - $4.74 |
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 NPV | CAD OV NPV | Exch Rate | Diluted | Net Interest |
$1,366,017,577 | $1,828,551,129 | 1.3386 | 289,279,031 | 100.00% |
Project Stage | Uncertainty Range | CAD FSV Range | CAD FSV per Share Range | CAD MSV per Share Range |
Grassroots |
0.5% - 1.0% |
$9,142,756 - $18,285,511 |
$0.03 - $0.06 |
$0.06 - $0.16 |
Target Drilling |
1.0% - 2.5% |
$18,285,511 - $45,713,778 |
$0.06 - $0.16 |
$0.16 - $0.32 |
Discovery Delineation |
2.5% - 5.0% |
$45,713,778 - $91,427,556 |
$0.16 - $0.32 |
$0.32 - $4.74 |
Infill Drilling |
5% - 10% |
$91,427,556 - $182,855,113 |
$0.32 - $0.63 |
$3.16 - $6.32 |
PEA & Metallurgy |
10% - 25% |
$182,855,113 - $457,137,782 |
$0.63 - $1.58 |
$1.58 - $4.74 |
Prefeasibility |
25% - 50% |
$457,137,782 - $914,275,565 |
$1.58 - $3.16 |
$1.58 - $3.16 |
Permitting & Feasibility |
50% - 75% |
$914,275,565 - $1,371,413,347 |
$3.16 - $4.74 |
$1.58 - $3.16 |
Construction |
75% - 100% |
$1,371,413,347 - $1,828,551,129 |
$4.74 - $6.32 |
$3.16 - $4.74 |
Production |
100% |
$1,828,551,129 |
$6.32 |
$6.32 - $7.90 |
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Market Speculative Value Stock Price Range: CAD $1.58 - $3.16 |
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 1 | Metal 2 | Metal 3 | Metal 4 |
| Zinc | Lead | Silver |
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Spot: | $1.25 /lb | $1.04 /lb | $18.16 /oz |
| OV Assigned: | $1.25 /lb | $1.04 /lb | $18.16 /oz |
| Pessimistic: | $0.75 /lb | $1.04 /lb | $18.16 /oz |
| Optimistic: | $1.20 /lb | $1.04 /lb | $18.16 /oz |
| Fantasy: | $2.00 /lb | $1.04 /lb | $18.16 /oz |
| 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 NPV | USD PT IRR | USD AT NPV | USD AT IRR | AT Payback yrs |
Spot: | $2,458,425,402 | 75.4% | $1,361,254,120 | 47.8% | 2.1 |
OV Assigned: | $2,466,638,260 | 75.7% | $1,366,017,577 | 47.9% | 2.1 |
Pessimistic: | $1,440,030,978 | 48.7% | $770,585,354 | 31.8% | 3.1 |
Optimistic: | $2,363,977,532 | 73.0% | $1,306,474,355 | 46.3% | 2.1 |
Fantasy: | $4,006,549,183 | 116.0% | $2,259,165,913 | 71.6% | 1.4 |
Fair Speculative Value for Alternative Metal Price Scenarios |
Stage: Permitting & Feasibility - 50.0% - 75.0% |
| CAD AT NPV | CAD Target Price | CAD FSV Range | CAD FSV per Share Range | CAD MSV per Share Range |
Spot: | $1,822,174,765 | $6.30 | $911,087,382 - $1,366,631,073 | $3.15 - $4.72 | $1.57 - $3.15 |
OV Assigned: | $1,828,551,129 | $6.32 | $914,275,565 - $1,371,413,347 | $3.16 - $4.74 | $1.58 - $3.16 |
Pessimistic: | $1,031,505,555 | $3.57 | $515,752,777 - $773,629,166 | $1.78 - $2.67 | $0.89 - $1.78 |
Optimistic: | $1,748,846,572 | $6.05 | $874,423,286 - $1,311,634,929 | $3.02 - $4.53 | $1.51 - $3.02 |
Fantasy: | $3,024,119,491 | $10.45 | $1,512,059,745 - $2,268,089,618 | $5.23 - $7.84 | $2.61 - $5.23 |
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 1 | Metal 2 | Metal 3 | Metal 4 |
| Zinc Zn | Lead Pb | Silver Ag |
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Grade: | 4.40% | VS | 4.30% | VS | 58.3 g/t | VS | |
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Recovery: | 92.7% | VS | 95.4% | VS | 92.5% | VS |
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Payable: | 85.0% | VS | 95.0% | VS | 85.7% | VS |
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Concentrate Grade: | 56.1% | VS | 69.7% | VS |
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Price: | $1.25 /lb | VS | $1.04 /lb | VS | $18.16 /oz | VU | |
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Price Type: | Spot |
| Spot |
| Spot |
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Annual Payable: | 253,091,200 lb |
| 284,489,436 lb |
| 4,920,186 oz |
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LOM Payable: | 4,219,103,868 lb |
| 4,742,521,587 lb |
| 82,020,927 oz |
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Metal 1 Price Note: Base case price $1.10/lb zinc |
Metal 2 Price Note: Base case price $1.00/lb lead |
Metal 3 Note: 23.2% recovery to zinc concentrate, 69.3% to lead concentrate, overall 85.7% payability. |
Metal 3 Price Note: Base case price $20/oz - is above spot at $18.23 as of Apr 3, 2017 PEA date. |
Mining Scenario |
Tonnage: | 55,200,000 | VS | Strip Rate: | 0.0 | VS |
Operating Rate (tpd): | 9,072 | VS | Mining Type: | Underground | VS |
Mine Life (years): | 16.7 |
| Startup: | 2020 | VS |
Tax Treatment: | DDBM - double declining balance | VU | Tax Rate: | 42.0% | SS |
Operating Rate Note: 10,000 short ton per day shaft based underground operation. Converted to metric tonnes.The mine life is shorter than the 19 years in the PEA because full production is not achieved until year 3. Should AZ secure title to adjacent ground which allows driving of an adit to access the underground ore, the 10,000 tpd limit posted by the shaft scenario would be eliminated. |
Mining Type Note: Facility will be entirely build on patented claims, half of tailings will be returned underground as cemented backfill, the rest dry stacked. |
Est Startup Year Note: Management plans to start permitting in Q2 of 2017 which it believes will take 12-18 months. This implies that AZ will go directly from PEA to FS. |
Tax Treatment Note: The technical report which would allow insights into the tax treatment deployed was not filed as of April 3, 2017. |
Tax Rate Note: Federal 35%, state 7%. |
Cost Scenario |
| Currency | USD Cost | Exchange Rate |
CapEx: | $457,000,000 | VS | USD | $457,000,000 | 1.000 |
Sustaining Capital: | $500,000,000 | VS | USD | $500,000,000 | 1.000 |
Mining Cost ($/t rock): | $38.97 | VS | USD | $38.97 | 1.000 |
Mining Cost ($/t ore): | $38.97 |
| USD | $38.97 | 1.000 |
Processing Cost ($/t): | $11.83 | VS | USD | $11.83 | 1.000 |
Other Cost ($/t): | $2.20 | VS | USD | $2.20 | 1.000 |
Total OpEx ($/t): | $53.00 |
| USD | $53.00 | 1.000 |
Zinc Concentrate Cost ($/t con): | $320.00 |
| USD | $320.00 | 1.000 |
Lead Concentrate Cost ($/t con): | $287.00 | VS | USD | $287.00 | 1.000 |
CapEx Note: Process plant = $99 million, shaft = $84 million, UG development = $67 million, site infrastructure = $61 million, mining equipment = $32 million, contingency = $63 million |
Mining Cost Note: PEA used $35.35 per ST |
Processing Cost Note: PEA used $10.73 per ST |
Other Cost Note: PEA ised $2.00 per ST |
Metal 1 Con Cost Note: $210/dmt smelter charge plus $13/mt penalty for manganese content. Transportation is $97/dmt. Note that the PEA is using the punitive 85% payability and high smelter treatment charge that have long prevailed for zinc concentrates. These figures do not reflect the potential arising for higher payability and lower treatment charges due to a shortage of zinc concentrates arising from surplus refining capacity and zinc supply that has plateaued in China and is headed for decline for non-Chinese sources. |
Metal 2 Con Cost Note: $190/dmt smelter charge and $97/dmt transportation. |
Risk Factors - Risk-Adjusted Discount Rate: 8.0% |
| Risk Level | Risk Weight | Confidence | Note |
Environmental Permitting: | High | 1.5 | SU | Management plans to start permitting in Q2 of 2017 and achieve a permit within 12-18 month for operations entirely situation on patented claims. Forest service is hostile toward any development on surrounding land over which it has jurisdiction. |
Social License: | Low | 1.0 | SS | Proximity to Patagonia with its dual population of rural working class and a community of retirees, artists and new age tourists may generate conflict and opposition. |
Title: | Low | 1.0 | SU | The project was acquired out of a bankruptcy in 2006. Title problems should have arrived by now. |
Tax: | Very Low | 0.5 | SS | With 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 Low | 1.0 | VS |
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Infrastructure: | Very Low | 0.5 | SU | Small footprint operation. |
Technical: | Very Low | 1.0 | SU |
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Management: | Very Low | 0.5 | SS | AZI 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: | Low | 1.0 | SS | Management believes it can finance with debt ($250-$300 million), offtake financing ($75-$150 million) and a silver stream ($200-$350 million). |
Risk Factor Weight Table |
| Very Low | Low | High | Very High |
Environmental Permitting: | 0.5 | 1.0 | 1.5 | 2.0 |
Social License: | 0.5 | 1.0 | 1.5 | 2.0 |
Title: | 0.5 | 1.0 | 1.5 | 2.0 |
Tax: | 0.5 | 1.0 | 1.5 | 2.0 |
GeoPolitical: | 0.5 | 1.0 | 1.5 | 2.0 |
Infrastructure: | 0.5 | 1.5 | 2.5 | 4.0 |
Technical: | 1.0 | 2.5 | 4.0 | 5.5 |
Management: | 0.5 | 1.5 | 3.0 | 4.0 |
Financing: | 0.5 | 1.0 | 1.5 | 2.0 |
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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