http://www.fareastcapital.com.au/imagesDB/newsletter/WeeklyComm22...

http://www.fareastcapital.com.au/imagesDB/newsletter/WeeklyComm22April2017.pdf

Looking for a good zinc play? Try Consolidated Zinc

CZL dropped in to see me during the week. Whilst I was aware of its existence, I had never had the chance to meet management before. I was impressed with what I saw. With a market capitalisation of only $10m, it looks like it is all upside from here. Why is it so cheap? Maybe because its project is in Mexico and the Australian punters can’t get their heads around it.

The Plomosas Zinc Project is located in the the state of Chihuahua, well known for its mining credentials. The project has a long history of production. Between 1945 and 1974, the Grupo Mexico mined 2.5 Mt at 24% Zn+Pb and 80 gpt Ag, to a depth of 260m. Thus it is high grade. The Martinez family acquired the project and conducted intermittent remnant mining from 1978 to 2014, at which time CZL acquired a 51% interest, with the right to go to 100%.

By the end of 2015, CZL had spent $1.4m dewatering the mine, which has water inflow of 4m3/minute. The pumps can now handle the inflow while operating on a 10 day on/ 20 day off schedule. Development activity is now focusing on Levels 7 and 8.

CZL has announced a JORC resource of 568,000 t at 16.7% Zn+Pb, including an indicated portion of 99,000 t at 28.3%. While modest at the moment, it is just the beginning. The historical mining has worked the Main Manto Horizon which averaged 2.5m in thickness, but CZL has made an important discovery at Tres Amigos only 100-150m beneath the Main Manto trend. The first drill hole hit 4.7m at 42% Zn, 4.6% Pb and 32 gpt Ag. Back at Main Manto, CZL has found a 500m strike extension to the south which it has named Carola South. A 500m drive on Level 7 into this was channel sampled at 10m intervals, returning very good assays with 75% returning combined grades of better than 30%. As far as CZL knows, this zone is open above and below the 7 Level.

The real sweetener for CZL is the availability of a small processing plant already on site, that was last employed in 2011. While only having a capacity of 60,000 tpa, CZL believes it can be refurbished and expanded to a capacity of 115,000 tpa at a capital cost of US$8m and the use of a contract crusher. The underground infrastructure has a capacity of up to 1,000 tpd with there being three shafts and two 4.5m x 5.5m declines. Mining capacity is much greater than the planned production rate of 300 tpd. At this rate CZL could be producing 14,000 tpa of metal in concentrates, generating US$25m p.a. in revenues. Mining, processing and overhead costs are estimated at US$70, $25 and $15 pt respectively. Government royalties will take 7.5% and corporate income tax 30%. Net cash flows could be in the order of US$7-10m p.a., which suggests an attractive payback period of 12-15 months. The mine life on JORC resources would be 4-5 years.

Further out CZL would like to aim for a new treatment plant that has twice the capacity, but that will be dependent upon continued exploration success and the expansion of resources

So how will it fund this development given that it has less than $1m in the bank? A near term share issue is on the cards but it won’t fund the development alone. Trade finance will also be looked at with CZL believing it can raise 50% of the costs through prepayment of concentrates.

The bottom line is that there is not much downside from here, with there being a possibility of making a multiple of your money. That is what I look for at the junior end, so I have already started to pick up a few in the market. We have added Consolidated Zinc to our chart coverage.