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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

 
Outcome Visualization Project as of Apr 3, 2017: Arizona Mining - Hermosa-Taylor
Project:Hermosa-TaylorLocation:United StatesStage:7-Permitting & Feasibility
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:1000046Current OV Confirmed:4/3/2017Visualizer:JK
Arizona Mining Inc (AZ-T)
ProfileSearchWeb SiteTreeForumSEDARQuoteIPV
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
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 AverageLife 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$9,464,692,11672.1% of Recoverable Revenue
   Royalties:($17,032,742)($283,940,763)3.0% of Gross Payable Revenue
Net Payable Revenue:$550,725,332$9,180,751,35370.0% 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$5,755,151,35363% 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
After-Tax Cash Flow:$212,569,372$3,529,927,78538% 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 yearsStartupNPV 5%NPV 10%NPV 15%
Annual Avg NSR:$5,507,253Now$58,378,014$39,834,074$28,812,619
LOM NSR:$91,807,5142020$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):$254Recoverable Rock Value:$238Payable Rock Value:$171
LOM Net Payable Revenue (USD):$9,180,751,353LOM PT Cash Flow (USD):$5,755,151,353LOM AT Cash Flow (USD):$3,529,927,785
USD Pre-Tax NPV:$2,466,638,260Pre-Tax IRR:75.7%Pre-Tax Payback:1.3
USD After-Tax NPV:$1,366,017,577After-Tax IRR:47.9%After-Tax Payback:2.1
CAD Fair Spec Value Low:$914,275,565CAD Fair Spec Value High:$1,371,413,347CAD Implied Project Value:$645,092,239
Price Target if Visualized Outcome delivered by Expl-Dev Cycle without dilution: CAD $6.32
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 NPVCAD OV NPVExch RateDilutedNet Interest
$1,366,017,577$1,828,551,1291.3386289,279,031100.00%
Project StageUncertainty RangeCAD FSV RangeCAD FSV per Share RangeCAD 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
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 1Metal 2Metal 3Metal 4

ZincLeadSilver
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 NPVUSD PT IRRUSD AT NPVUSD AT IRRAT Payback yrs
Spot:$2,458,425,40275.4%$1,361,254,12047.8%2.1
OV Assigned:$2,466,638,26075.7%$1,366,017,57747.9%2.1
Pessimistic:$1,440,030,97848.7%$770,585,35431.8%3.1
Optimistic:$2,363,977,53273.0%$1,306,474,35546.3%2.1
Fantasy:$4,006,549,183116.0%$2,259,165,91371.6%1.4
Fair Speculative Value for Alternative Metal Price Scenarios
Stage: Permitting & Feasibility - 50.0% - 75.0%

CAD AT NPVCAD Target PriceCAD FSV RangeCAD FSV per Share RangeCAD 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 1Metal 2Metal 3Metal 4

Zinc
Zn
Lead
Pb
Silver
Ag



Grade:4.40%VS4.30%VS58.3 g/tVS
Recovery:92.7%VS95.4%VS92.5%VS

Payable:85.0%VS95.0%VS85.7%VS

Concentrate Grade:56.1%VS69.7%VS
Price:$1.25 /lbVS$1.04 /lbVS$18.16 /ozVU
Price Type:Spot
Spot
Spot


Annual Payable:253,091,200 lb
284,489,436 lb
4,920,186 oz


LOM Payable:4,219,103,868 lb
4,742,521,587 lb
82,020,927 oz


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:55,200,000VSStrip Rate:0.0VS
Operating Rate (tpd):9,072VSMining Type:UndergroundVS
Mine Life (years):16.7
Startup:2020VS
Tax Treatment:DDBM - double declining balanceVUTax 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

CurrencyUSD CostExchange Rate
CapEx:$457,000,000VSUSD$457,000,0001.000
Sustaining Capital:$500,000,000VSUSD$500,000,0001.000
Mining Cost ($/t rock):$38.97VSUSD$38.971.000
Mining Cost ($/t ore):$38.97
USD$38.971.000
Processing Cost ($/t):$11.83VSUSD$11.831.000
Other Cost ($/t):$2.20VSUSD$2.201.000
Total OpEx ($/t):$53.00
USD$53.001.000
Zinc Concentrate Cost ($/t con):$320.00
USD$320.001.000
Lead Concentrate Cost ($/t con):$287.00VSUSD$287.001.000
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 LevelRisk WeightConfidenceNote
Environmental Permitting:High1.5SUManagement 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:Low1.0SSProximity 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: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 Low1.0VS
Infrastructure:Very Low0.5SUSmall footprint operation.
Technical:Very Low1.0SU
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:Low1.0SSManagement 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 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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