Tracker - May 13, 2021: InZinc: Stop the West Desert Giveaway!
InZinc Mining Ltd has a long history of being a KRO recommendation that goes back to 2003 when it was a shell called Lithic Resources Ltd which caught my interest because Resource Capital Funds was a major shareholder. What cemented my interest was the mid 2005 acquisition of the West Desert project in Utah (then called Crypto) which hosted a zinc enriched skarn system Cyprus had found in 1961 while exploring for magnetite targets. At the time zinc was only $0.50-$0.60 per lb but as the China super cycle drove up base metal prices the CEO Chris Staargaard was able to secure a $3.8 million financing in 2007 followed by several smaller ones in 2010-2013 that led to the delivery of a PEA in 2014 for a 6,500 tpd underground mine that would produce zinc, copper and magnetite concentrates from a resource of 34 million tonnes that supported a 15 year mine life. With CapEx at USD $247.5 million and OpEx at $41/t, West Desert generated an after-tax NPV of USD $258.1 million at 8% discount rate and an IRR of 23% with a 3.7 year payback period at base case prices of $1.00/lb zinc, $3/lb copper, 62% iron ore at $105/t, gold at $1,300/oz and silver at $21/oz. The deposit also had a significant 30 g/t indium credit that zinc smelters could recover but are disinclined to pay for. Although the PEA outcome cleared development hurdles in 2014, metal prices subsequently slid below the base case prices and West Desert ended up worthless. In 2012 InZinc had attracted Wayne Hubert, Kerry Curtis and George Ireland as investors through a straight share financing at $0.05 which helped fund the PEA, and it looked like they would play a leading role in InZinc's revival. But it was tough to fight low metal prices and InZinc ended up back below $0.10.
Metal prices were still weak in late 2017 but Wayne Hubert decided to take on the role of CEO and raise money to fund an expansion drill program. A historical hole to the east of the zinc skarn deposit had yielded a high grade copper interval whose geological context could not be explained. The deposit appeared to be cut off to the west but Staargaard had wondered if this was more the result of hole deviation than lack of ore. Hubert managed to raise $3.5 million through a private placement of 34,890,000 units at $0.10 in December 2017 and InZinc spent about $1.6 million drilling these two target areas with deep holes in 2018. By mid year InZinc had reported success demonstrating that high grade zinc mineralization does extend west beyond the resource limit, opening the way to grow the deposit with additional drilling in this direction. But the eastern target just came and went without much discussion about what was or wasn't encountered. After a brief flurry of market interest in Q1 of 2018 the stock price faded away, and when InZinc decided to divert the rest of the money into the early stage Indy project, the market completely lost interest.
After publishing its 2014 PEA InZinc went dormant but perked up in 2016 as part of what appeared to be a turnaround for the resource junior market which had turned bearish in 2011. InZinc's uptrend started to accelerate in early 2017 when it was suddenly crushed by a wall of selling about whose origin the new CEO Kerry Curtis claimed to have no idea. It turned out to be George Ireland who apparently was not happy about the Indy project InZinc had optioned in October 2016 from a private company controlled by Kerry Curtis who had been involved with this play during his Cominco days. Curtis had been pressuring InZinc to option Indy for some time and it is a reason Staargard resigned as CEO in June 2016. Although InZinc can earn 100%, the terms were stiff considering this was an early stage zinc-lead Sedex play in central British Columbia which looked like a distraction during a bear market from the more advanced West Desert project. Since optioning the Indy project InZinc has paid to Curtis' private company $140,000 cash, 1,500,000 shares and spent $600,000. The company made the $35,000 and 400,000 share payment due on January 31, 2021 to Curtis, which is disclosed in the notes to the annual financials filed on April 29, 2021, but there is no mention of an extension that keeps the option agreement from now being in default. A responsible CEO and board should have insisted that Kerry Curtis extend the terms before paying out the cash and shares. In April of 2020 Curtis generously agreed to extend the option term from 5 to 6 years in exchange for an extra $10,000 and 300,000 shares. This time he did not.
Not only does InZinc no longer have the right to any interest in the Indy project, but drill results to date are only encouraging in the imagination of the project owner. Even if Curtis is willing to renegotiate the terms, InZinc should walk away from Indy because clearly the market has no interest in this play. Despite a turnaround in the resource sector in 2020, and strong base metal prices in Q1 of 2021, InZinc stock has sat at $0.035 bid, enabling InZinc to secure a pity waiver from the TSXV for doing a financing below $0.05, in this case $200,000 at $0.03 with a half warrant at $0.06 taken down by 3 directors and a broker called Semida Allen. Wayne Hubert, who stated in October 2020 that he planned to give up all involvement with InZinc to focus on his gold company corporate governance responsibilities, did not participate. InZinc now has 134.7 million shares fully diluted; board members own 22.4 million shares or about 18.4%.
In December 2020 InZinc announced a letter of intent to sell the West Desert project to a private Australian group called American West Metals Ltd for a series of cash payments valued at about 85% of the $7 million InZinc has spent on West Desert. American West is controlled by John Prineas, David O'Neill and Sarah Shipway, two of whom are principals of ASX-listed St. George Mining Ltd which has spent most of its life since listing in late 2010 below $0.20 while bloating its issued to 503 million shares as it advanced its Mt Alexander nickel-copper project in Western Australia. In March 2021 American West secured a deal to option 80% of Aston Bay's Storm and Seal projects on Somerset Island for $500,000 up front and $10 million exploration over 9 years. Storm-Seal is still largely a conceptual play, so this is a good deal for Aston Bay. On April 16, 2021 InZinc formalized the West Desert sale. It will receive USD $500,000 on approval, CAD $1 million within one year or 30 days of American West securing an ASX listing, whichever is earlier, USD $1.5 million within 2 years of approval or completion of a PFS, whichever is earlier, and CAD $2.5 million in stock valued at the IPO price. If American West has not gone public within 2 years, InZinc can ask for the $2.5 million to be paid in cash. At prevailing exchange rates that is about CAD $5,920,000 in payments over 2 years. The deal entitles InZinc to 50% of the payable indium, but that royalty is worth something only if the smelter to whom the zinc concentrate is delivered is willing to pay out anything for the indium it recovers.
I decided to update the discounted cash flow model I had constructed on the basis of the 2014 PEA using today's metal prices and was staggered by the result. But way more staggering is that CEO Wayne Hubert agreed to these sale terms in the current economic climate where investment bankers are talking about a commodity super cycle. I don't know much about the other board members, Louis Montpellier, a retired lawyer, and John Murphy, a retired investment banker, who own 2.7 million and 3.4 million shares respectively, but how can the CEO of a previous $4 billion buyout who owns 6.4 million shares give his blessing to this giveaway? Although Kerry Curtis is the largest InZinc shareholder at 9.9 million, his interest lies with the Indy property into which these payments from the West Desert sale will be sunk. But this deal requires shareholder approval through the upcoming AGM on May 27, 2021. The day of record was April 20 but existing shareholders have until 5 pm est May 25, 2021 to deliver their votes. This deal serves only one party and that is Kerry Curtis. Every other self-respecting shareholder should vote against this deal.
The graphic above shows the basic parameters used in the cash flow model and the after-tax NPV in USD generated with 5% and 10% discount rates at various zinc prices. The graphic below is the same thing except the NPV has been converted into CAD at 0.827 USD and divided by the 134.7 million fully diluted shares. Although 64% Fe iron ore is currently at $215/t, I have used the base case price of $115/t in the model, but used the current spot prices for the other by-product metals. At $1.32/lb zinc the West Desert PEA indicates an after-tax IRR of 46% and an NPV of USD $880.7 million at 5% and $569,400,000 at 10%, which in turn translates into a range of CAD $5.11-$7.91 per InZinc share. Using the uncertainty ladder range that applies to a project for which a PEA has been delivered but for which a funded PFS has not yet begun, namely 10%-25%, fair speculative value for InZinc should be $0.51-$1.28 at the 10% discount rate and $0.79-$1.98 at 5%. The stock should not be trading at $0.035. But it was trading there last year because the market was judging management as unworthy, and it is now trading here because once the West Desert asset is gone, InZinc Mining Ltd only has shell value.
If you still own InZinc, vote against the West Desert sale agreement. At the end of 2020 when I saw the proposed LOI terms I downgraded InZinc Mining Ltd from a Bottom-Fish Spec Value rating to a No Spec Value Rating because without the West Desert asset InZinc is worthless. But even if the American West deal is rejected, InZinc remains worthless as long as the current board remains in place. The next step will be replacement of the existing board by a team prepared to work on behalf of minority shareholder interests.
*JK owns shares in InZinc Mining Ltd