Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Darnley Bay has only owned the Pine Point project for four months. In that time they have already shown that a new mine on this historic zinc asset makes a lot of sense.
But investors take note: the best is very much yet to come.
Pine Point is in the Northwest Territories, on the south shore of Great Slave Lake. It was already a mine once: from 1964 to 1987 Cominco mined 64 million tonnes grading 7% zinc and 3.1% lead. Those grades meant Pine Point was a very profitable operation.
The mine shut down because they mined out the deposits right near the plant and zinc prices slid. Add in the high cost of maintaining the mine townsite in the north and Pine Point shut down.
Note what is not on that list: a lack of resources. In fact, the mine left 68 deposits unmined.
Today, the things that made it not work in 1987 are gone. The nearby town of Hay River now exists, so there would be no expensive town site. The mill was reclaimed, so a new facility could be built close to the remaining deposits.
And zinc is in a bull market once again. The price gained 80% last year and a fundamental lack of new supply is expected to support a strong price for the foreseeable future.
The team at Darnley Bay saw the opportunity at Pine Point. No one had picked the old asset up because the last group that tried ended up in bankruptcy, their efforts having come a few years before zinc came back to life. As a result Darnley was able to buy the asset for a steal.
The company has one goal: prove to the market that Pine Point has the ore and infrastructure to become a profitable mine once again.
Step one – use existing data to define a basic mine plan – is already done. Darnley recently published a preliminary economic assessment outlining a mine tapping into ten open pits, a few at a time. Processing would involve a dense media separation plant and a regular flotation facility to produce two good clean concentrates, zinc and lead. Concentrates would head south by train, just as they did in Cominco’s days, from the railhead just 50 km away in Hay River.
The ten deposits in the plan host 25.8 million measured and indicated tonnes grading 2.94% zinc and 1.12% lead, plus 3.7 million inferred tonnes of similar grade. The operation would use old and new open pits for tailings. No underground operations, no tailings facilities, no mine camp – a simple operation.
The mine would generate a 34% after-tax internal rate of return, assuming a zinc price of US$1.10 per lb. That nice rate would enable payback of the $154 million capital cost in less than two years, versus a mine life of 13 years.
That’s all darn good. In a zinc market very shy on economic, near-development assets, Pine Point already stands out.
But Darnley is only just getting started.
The PEA was based completely on old information: drilling and metallurgical work completed by the previous Pine Point operators. The data was good but those operators, working in a weak zinc market, were limited in what they could do. That gave Darnley only limited data to work with.
This summer, that will change.
Darnley is prepping to head to Pine Point for its first season on site. It will be a very busy summer because by fall the team wants to have proven that Pine Point can be significantly better than this PEA suggests.
More and better deposits: The deposits in the PEA were simply the ones with enough drill data, but there are another 36 known deposits at Pine Point. A good chunk of Darnley’s drilling this summer will work to prove up some of the best of those other deposits, which should mean either a longer mine life or higher average ore grades, or both.
Exploration opportunity: The 46 known deposits at Pine Point are all zones Comino tested, but there are several very good exploration targets that Cominco never touched because they were too far from the old mill or were literally underneath the old town site. Darnley will probe some of these targets in search of the kind of high grade, near surface zones that really help mine economics, and given the geology the odds of success are fairly high.
Metallurgy: Even though Cominco mined at Pine Point for 25 years, regulations barred the PEA from considering any of that historic metallurgical data. That left only limited met studies from the previous operator, which the engineers took with a grain of salt. The result: recoveries for zinc and lead are estimated at roughly 82% when Cominco’s recoveries averaged more like 94%. Darnley will drill a host of metallurgical holes this summer with the goal of improving those recovery numbers, which would feed directly into better economics.
Capital costs: Estimating costs is always challenging, but especially so when a study is done quickly. In such cases the engineers have to make assumptions for many costs – and a good engineering firm always makes very conservative assumptions. With more time Darnley should be able to better define and likely lower some of the capital costs.
Power: The Northwest Territories has been looking for an excuse to expand the nearby Taltson River hydroelectric dam, so as to be able to power communities that lack grid access. A new mine at Pine Point would be just such an excuse. Darnley would likely help to repay the capital cost through a slightly higher power cost, but grid access would still cut power costs by at least 60%.
That is a slew of upside. The point is: Darnley’s PEA outlines a good mine, but Pine Point a better project.
With the PEA now out, Darnley has two tasks in its sights. First, get to work at Pine Point and demonstrate with drills and metallurgical tests and development studies that this upside is real.
Second, get out and market the story. Management had a hard time of that before the PEA was out because they couldn’t talk about developing a mine without a supporting document. Now they can. Moreover the firm that did the PEA, JDS, is highly regarded and their engineers supported Darnley’s approach to managing groundwater flow, which answered a question that had been hovering around the asset.
This summer’s work will inform a pre-feasibility or feasibility study within a year. The list of upside opportunities at Pine Point is long and the options have good odds, especially in the hands of Darnley’s experienced team of mine builders.
The PEA was good but I think the next study will be great. The zinc market needs new mines. Pine Point has the ore and infrastructure to fill that need. Darnley Bay has the people to advance this asset. It’s a winning combination.
