Wandering geologists, geopolitics, and zinc

Published at Feb 26, 2016, in Mining

It’s always an interesting exercise to find out how exactly small cap resources plays end up in some of the most far-flung places looking for a dollar or two for their shareholders.

They pursue gold projects in Mongolia, graphite in Tanzania, oil in Ukraine, or geothermal in Chile.

One such company is Consolidated Zinc (ASX:CZL), which is currently looking for zinc in the middle of the Mexican desert – but how it got there can be traced back to money men, pan-national trade deals, and most intriguingly of all a couple of wandering geologists.

CZL managing director Will Dix told Finfeed that the company didn’t so much find the opportunity, and the opportunity found them.

As he tells it, a couple of Perth-based geologists had been wandering South and Central America for years – trying to find the next big South American play.

In the course of their travels, they met up with a family looking to take Plomosas to the next level.

“Over a period of time they [the geologists] got to know the Martinez family in Mexico who we ended up doing the deal with,” Dix said.

“The Martinez’s had held the project since the early 1980s and they had decided about two years ago that they were going to look for a partner to take the project either into private hands or into the public sphere.”

The Martinez family in Chihuahua State at least is heavily associated with the mining industry. Luis Rogelio Martinez Valles, who now sits on the CZL board as the family’s representative, has 40 years of minerals experience.

After their chat with the Martinez family, one of the geologists came back to Perth and told corporate advisor Ross Cotton about the project.

At that time, Cotton had access to a shell by the name of New Era Resources, which would subsequently become CZL.

“He basically said to the board of New Era that if you’re looking for a project, there may be something here of interest,” Dix said.

At the time, New Era Resources was stagnant. It had projects, but was doing very little with them.

“New Era had some tired old uranium assets in northern WA which they hadn’t really worked on for about five or six years. They had recently got out of the Mongolian coal project, or in the process or exiting that, and they had some really Greenfield exploration tenure in Sweden,” Dix said.

“They really just had holding assets with nothing going on there.”

So, the New Era board was more than interested when Cotton presented the offer.

“Then the New Era board said ‘that looks pretty interesting, can you go and do some due diligence on that?’. Ross [Cotton] did that due diligence through a company called Arena Exploration.”

So, Arena went off and did technical due diligence in October and November of 2014, which involved site visits from a mining engineer and two geologists. They poked through both the data and the rocks from existing mining operations on the site.

Once Cotton reported back, New Era knew it was onto something – but didn’t have the muscle to get into the project lock, stock.

So, it needed to re-capitalise and re-focus.

It did so with the help of major shareholder and Victorian based entrepreneur Stephen Copolous, who coincidently owns the second-largest number of KFC franchises in the country.

He moved to help recapitalise the company, and with money sorted, it then arranged for SRK in Denver to complete some independent due diligence and a short time later the now-re-named CZL, and Dix, had boots on the ground.

The project

CZL currently has a 51% stake in the Plomosas zinc project, about an hour north of the northern city of Chihuahua – but is likely to bump this up to 80% as the project nears production.

It’s chasing a high-grade zinc resource at the project to make itself stand out from the pack – and with some existing production facilities on site it’s hoping to get into production (albeit on a small scale) sooner rather than later.

The mine itself has a bit of history having been mined down to about 270m in the past, but CZL’s play is to drill deeper and explore different horizons that previous explorers ignored.

Historical zinc production from the project has reached 2.5 million tonnes with an average grade of 22% combined zinc and lead — putting it well above the average grade of existing zinc producers.

The drilling done to date at the project has backed up the thesis, while CZL has been able to chisel out new horizons such as the promising Tres Amigos play.

CZL is hoping it’s entered the market at the right time as well, with historical zinc mines such as Century in Queensland shutting down because their supply has been exhausted.

Commodities giant Glencore also made the decision to slash its zinc production by a third in response to a short term slump in the price of zinc.

But the shut down of zinc supply around the world due to short-term price pressure and mine exhaustion has the potential to bring the longer term supply/demand balance back in favour of producers in the longer term – when CZL expects to be producing.

For now, CZL finds itself focusing on more immediate things like getting to production within a year.

Dix had not been to Mexico before CZL got involved at Plomosas.

He said that as a junior resources player, he had been conditioned to traveling to a lot of far-flung places in the world – looking for the next big project.

That experience, he said, has taught him one lesson: not to judge a place until you set boots on the ground.

“I didn’t really have any pre-conceived ideas about the country before I went there. I try not to have any ideas about a place, because I’ve found those can be quite wrong,” he said.

“You really need to go in with a glass half full approach I’ve found. Having said that, you’d be naïve to not be careful, so you do that.”

Mexico, at least from a more western perspective, usually enters the news pages because of drug crime and poverty – but Dix said that while that may exist, he hasn’t seen it.

“It’s a big country of over 130 million people so there are parts which are like that...but certainly where we are it’s a relatively wealthy state with a very strong mining and manufacturing economy. A lot of that wealth goes back into the community and infrastructure,” Dix said.

Wheeling and dealing in Mexico

Mexcio, as an investment destination, can sometimes unfairly be lumped in with the rest of Latin America – which has a decidedly mixed reputation when it comes to welcoming foreign investment.

Some of this reputation, at least on Mexico’s part, comes down to the regulation of its oil assets.

It is only in recent years that foreign oil companies such as Chevron or BP have been able to bid on oil leases within Mexico.

Before this point in time, Mexico’s national oil company Pemex had a monopoly on the space.

To a more western audience, the perception has been that where there’s a national resources company, there’s going to be trouble with the government and anti-foreign sentiment.

The truth on the ground, according to Dix, couldn’t be farther from the sentiment.

“One of the things we love about Mexico is that they’re very welcoming on foreign investment. There’s no restriction on ownership so we can own 100% of the asset. From a mining point of view it’s a very favourable jurisdiction to operate in,” he said.

“It’s got fair and transparent permitting processes in place, and regulations as well. Certainly where we are, it’s got a long history of mining so they’re very understanding of what we’re trying to do.”

In recent years, it’s even pulled ahead of Brazil as the pre-eminent jurisdiction for foreign investment thanks to its low-cost manufacturing base.

This is despite labour laws which are significantly different from Australia.

“The one thing that is significantly different is the framework around labour laws. That’s something we’ve had to learn and had to think about how to structure things in terms of our employees. It’s not better or worse, it’s just different,” he said.

“There’s differences in terms of leave loading and built-in bonuses that you don’t have in the Australian mining industry. There’s a lot of restrictions about the number of hours people can work under their award.

“It’s a different approach to things, and the labour laws in Mexico are very strongly drafted towards the employees which isn’t a bad thing – it’s just a different way of doing things than we do it in Australia.”

It’s hard to know where the recent appetite for foreign investment on Mexico’s part came from, nor the appetite of foreign companies to explore Mexico as an investment destination.

But, it could lie within the free trade agreement it signed with the US and Canada back in 1993.

That agreement essentially broke down a lot of the barriers which had existed for trade between the countries, and precipitated a move from US auto manufacturers to move some operations south of the border to take advantage of lower manufacturing rates.

However, as Dix’s experience thus far demonstrates this improved the situation in Mexico by creating more employment and adding a new skills base into the country.

Fast forward to 2016, and CZL will be hoping some of these manufacturing skills translate over to its project.

But, that’s in the future. For now, it will simply move through the phases and drill away, knowing that it is on solid ground in Mexico.

CZL’s story is just one of dozens in the small cap resources space where the opportunity can’t be traced back to any one event.

Instead, the opportunity comes as a result of things happening on the ground and in the background on a local, national, and international scale.

Time will tell whether CZL will be able to grasp the opportunity presented to it – but it’s on fertile ground in more ways than one.

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