The following is from The Australian business section today.
Zinc enthusiasts would have been encouraged to see the mini-bidding war which broke out in recent weeks over Rox Resources’ (RXL) 30 per cent stake in the world-class Teena zinc deposit in the Northern Territory, with Marindi Metals (MZN) winning the day.
The long-forecast surge in zinc prices provided the heat in the battle.
The galvanising metal closed out last week at $US2300 a tonne, which is up nearly 20 per cent on last year’s (calendar) average of $US1928 a tonne.
And there are plenty of analysts expecting a continued steady rise to more than $US2500 a tonne sometime in coming years as recent mine closures (Century in Queensland and Lisheen in Ireland) and Glencore’s supply cutbacks continue to bite.
There is always the danger of the rising price triggering a quick supply response to close down the party just as it begins. But most seasoned zinc industry veterans think not, for the simple reason that there are very few new projects which can be brought into production fast enough.
The mine closures and cutbacks had a telling impact on global zinc supply in the June half. Macquarie estimates zinc supply was down by as much as 14.5 per cent in the period.
“We have seen an inexorable slide in volumes, spearheaded by mine closures in Australia, Ireland and elsewhere, a big disruption in India, and complemented by ore grade decline in Peru,’’ Macquarie analysts said in a commodities note last week.
It is forecasting zinc to respond by rising to a 2017 (calendar) year average of $US2325 a tonne ahead of a surge to $US2593 a tonne in 2018 and $US2825 a tonne the following year.
That lends support to the idea that while there will be a supply response to the stronger prices, it is won’t be as fast as the smelter operators reliant on external zinc concentrate supplies might like.
And that is borne out by the relatively short list of ASX-listed companies with genuine zinc exposure — Metalicity (MCT: Admiral Bay), Red River (RVR: Thalanga), Venturex (VXR: Sulphur Springs/Whim Creek), Heron (HRR: Woodlawn) and Energia (EMX: Gorno), and then the options start to run out quickly.
Marindi was already on the list in a relatively modest way with its Newman project in the Pilbara (which includes the Prairie Downs deposit), but last week it worked its way to the top of the pile with a surprise win in the contest to snare Rox’s stake in the Reward joint venture with Canadian metals heavyweight Teck.
Marindi outbid rival IM Medical (IMI, a listed shell) with a $21 million deal comprising cash, shares and convertible notes, and a payment on the completion of a bankable feasibility study in to a development.
It said the deal would position it “at the forefront” of emerging ASX-listed zinc developers, putting it “on the global stage”.
The claim is not without merit. Perth broker Argonaut described the Reward project last week as a “Tier-1” mining asset, with the Teena deposit (58 million tonnes grading 12.7 per cent combined zinc/lead) ranking as one of the best Australian base metal discoveries outside of Nova-Bollinger in the last decade.
Teena sits deeper than would be preferable, with the upper lens starting at 400 metres. But the resource also remains open and requires further drilling to establish its full extent, and the broader Reward joint venture comes with the nearby Myrtle deposit (it has an indicated resource of 5.8 million tonnes grading 3.56 per cent zinc and an inferred resource of 37.8 million tonnes grading 4.17 per cent zinc).
There is a bit of bad blood between IM Medical and Marindi on the latter gazumping the former with its bid.
But it is Marindi that has secured the nod from Rox. And besides, Marindi is already a big landholder in the broader McArthur River region, which is home to Teena courtesy of its McArthur project to the north, where it is also in a joint venture with Teck.
Marindi upped the ante with its winning bid, but it looks as if it has secured the nod from Rox at a pretty attractive price.
The current global enterprise value per tonne of zinc resource is about $US35 a tonne. On that basis the Teena deposit, with 7.4 million tonnes of contained zinc, would notionally give Marindi’s 30 per cent stake a value way north of the $21m imputed value of the deal.
Preliminary modelling by Argonaut suggests that Teena will have very low cash costs of production of less than US50c a pound, which is a good place to be when zinc’s medium term future is clearly going to be somewhere north of $US1 a pound.
But there is lots of work to do — and financing to arrange — before Teena can be thought of as a producer. That is why the market’s initial reaction to the deal was subdued.
The subdued reaction also reflecting the situation where Marindi must wait to see if Teck exercises its pre-emptive right to match its offer. Nevertheless the deal, which if successful, has the potential to dramatically rerate Marindi.
It last traded at nicely rounded 1c a share for a market capitalisation of $11.5m. Because of its other interests, it can be said that there is nothing in the group’s share price yet for the Teena deal.
That is particularly so remembering that apart from its existing zinc interests, Marindi is also an early-stage lithium player, again with nothing in its share price for that just yet.
It is known to be assembling a lithium ground position adjacent to Kidman (KDR) in Western Australia. Kidman last week pulled in $21m from a share placement to step up exploration on its lithium ground, as well as its gold properties.
RXL Price at posting:
1.9¢ Sentiment: Hold Disclosure: Held
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