Special Report on Canadian Zinc

After my recent site visit to the Prairie Creek mine in the Northwestern Territories here is what I found. I spent a day onsite at the company’s facilities and toured the operations and five kilometers of underground adits.

Getting to the site is not easy as I had to take flights from Denver to Calgary, Calgary to Yellow Knife and private plane from there to the mine site. The Prairie Creek Mine is located in steep and desolate terrain and one cannot feel unimpressed with the efforts that were made to build this mine based on a winter-access only road.

The plant is in excellent condition (concrete and steel structure) for being close to 35 years old. As you tour the facilities you get overwhelmed that so much money was spent and was never used. The mine was ready to go into production when everything was suddenly shut down in 1980 due to the Hunt Brothers problems with the U.S. Government. It has been on care and maintenance since that time.

There is nothing like a site visit to get the answers to the unanswered question. Without visiting the site one wouldn’t know what the right questions were in many cases. There is no way to look at these things just on paper to understand what is really going on, so the site visit was very valuable from this standpoint.

I felt I was able to better grasp where we stand at this point and what it is going to take to move this mine into production. From what I saw, there were some positive things and some negative things that I took from the visit.

First and the most important part of the trip was to talk with those who are working in the trenches regarding the permit. Before the trip I would have said we are at a 60% chance in favor of getting the permit. After the trip I would say I am 90% sure we will get the permit.

The Canadian Government is providing $3 million for Aboriginal training initiatives for the Prairie Creek Mine from 2011 to 2014.

On site we were able to talk with the person who is working directly with the local First Nations people and got the inside scoop into why things have suddenly changed in our favor. This was extremely informative and would not have happened unless we were onsite. He explained how the local young people are being taught culinary skills at the camp kitchen at the Prairie Creek Mine and how successful this program has been. I have to admit that over the years I have eaten at many mine site camp kitchens and the food at Prairie Creek was off the charts!

This is a political win/win for everyone and I got the sense that the politicians know it. With the local First Nation group highly supportive of the mine, I would say the odds of us getting our final permit are very good. That doesn’t mean we can let up during this final phase of acquiring the permit. There is nothing easy about any part of the permitting process and the company is getting some critical toxicity tests back this month that need to go to the regulatory people.

From one standpoint, taking these numbers to the fourth decimal seems to be bordering on the ridiculous, but walking into the final phase of a permit decision without an iron clad approach is akin to suicide. The time line or chain of events after we had a hour long question and answer session with management looks like this.

The water toxicity report when its released gets distributed to all interested parties – environmental, parks, fisheries, public forum, and the closest communities. This should last around three months at which time we hope to get the receipt of draft permit sometime in December of 2012. Right now things seem to be on schedule but any delays could cause this date to be pushed back.

After the receipt of draft permit, we go through another period of review at various levels before we hope to get the final water license that would allow us to commence production. It is anticipated that the earliest that this could happen is April of 2013, but most likely will be delayed until June or July of 2013.

If we can hold to this schedule then this means we are getting very close to a major revaluation of CZN, probably in the $2.00 to $4.00 range as the commencement of getting the mine online begins.

The negative information that I learned from the site visit is that it is going to take much longer and more money to put everything back into production. It was anticipated all along over the course of the last five years that with receipt of final permit, the mine could be back into production within eight months. This is no longer the case as a new plan has taken shape.

Economically the five huge diesel generators to operate the plant are of late 1970’s vintage and terribly inefficient compared to the latest technology generators. In other words we would waste too much fuel trying to use the old generators even though they were never used. At current costs for diesel I can understand why this is a problem.

So after much discussion we found out that it is going to take a full $160 million (with a $30 million contingency) to get this plant back online and a much longer time frame than eight months. The time frame is more like 1.5 to 2 years before we are fully underway. This was a disappointment for me as I first realized this but the plant needs to be modernized to operate with efficiency.

The company would have no problem getting this money if they get their final permit but with a winter only access road this slows down our ability to get things into production in a quicker time frame. The good news is that it can be done and the mine would be operational within two years which in the mining world is nothing. The fact that the mine exists in the first place does save an inordinate amount of time and money as opposed to starting from scratch.

The other thing that impressed me as we walked in the five kilometers of underground adits that were built by the Hunt Brothers is the extremely high grade nature of the lead, zinc, copper and silver ore you can see in the main mineralized vein. To think this potential mineralized vein could be 16 kilometers in length or more based on outcroppings and some drilling is mind boggling.

In addition, at what the company is referring to as the Rico showing that was discovered as they cut in a new road recently, it is now believed that we may have a parallel vein to the known vein. In other words the potential for further exploration success is enormous at this site. In fact it appears to be so big that the difficulty would be in building a mill and processing facility big enough to handle this size resource. As it stands, the lack of flat land in the area makes it difficult to exceed a 1,300 tonne per day mining plan with a processing ability of 1,200 tonnes per day. To do anything bigger than that would require building additional facilities in a neighboring valley(s). This fact brings up a good point for investors to consider as I always thought of this situation as a buyout from a bigger fish in the industry. The majors would consider a 1,200 mill capacity as too small. They are looking for operations that could do 5,000 or 7,000 tonnes per day. While the size of this resource would definitely attract the majors, the limitations to increase the size of the processing plant would be an hindrance.

For this reason, it is now my opinion that a mid-tier company would more likely be suited as the kind of company that would take us out. From an economic standpoint, the Prairie Creek Mine looks like it would be incredibly profitable if lead, zinc and silver prices stayed where they are. But when you consider where these prices could end up, and add in the copper component to boot, then you can understand why this project would be taken out rather quickly once a final permit is in hand.

My overall take now is that CZN still represents a buyout opportunity with a much better chance at getting our permit in the near term. Once the permit was received I would expect our share price to quickly get into multi-dollar territory where money could easily be raised or borrowed to fund all of our re-build efforts. Once financing was secured our share price would again be revalued to a higher level in anticipation of a buyout that for a mid-tier company would be more in the $6.00 to $8.00 range. Originally I thought this could be suited for a major, but now that I have seen the site, it would be a big stretch to imagine a major mining company coming into this area and building anything bigger than what already exists.

I love the potential of CZN to deliver for investors in the next twelve months if the schedule outlined above for the permit can stay on track as close as possible. While I am not as optimistic about having a CZN share price over $10 as I once was, a rapidly rising silver price could change the dynamics of this project very quickly in a positive way.

I am recommending new investors take initial positions in the company or dollar cost average over the course of the next several months for existing shareholders before the permitting decision is made sometime in early to mid 2013. At that point we will consider our options and hope to begin taking some profits if things go our way.

After my site visit, I am still very optimistic about CZN and recommend them as a BUY.