Blue Moon Metals: Asymmetric Risk And Reward

Summary

• Update since my last write up on Blue Moon “The Road Map.”.
• Discussion on potential Zinc super cycle driven by significant government focus and investment in “green energy” and the potential of Zinc Air batteries.
• Updated valuation scenarios for Blue Moon based on current metals pricing.
• I recommend that patient investorslooking for an asymmetric investment opportunity invest in Blue Moon.

Source: 2017 NI-43-101 Technical Report 

Investment Thesis:

Blue Moon Metals  (TSXV: MOON), (US OTCQB: BMOOF) offers a compelling asymmetric investment opportunity. The company has two properties with significant mining potential. Blue Moon trades at a fully diluted market cap of $9 million USD with no debt and minimal royalties on its properties. If they can successfully bring the Blue Moon project to commercial production the return upside is very large. Blue Moon's potential is very compelling even without factoring the possibility of an even stronger metals market and the likelihood for a significant increase in demand for Zinc driven by adoption of Zinc Air battery technology which is both eco-friendly and cost effective.  The company has a clear project development plan and 2021 catalysts as well as an experienced management team.   I recommend that risk-tolerant investors looking to add a stock with significant price appreciation potential add Blue Moon Metals to their portfolio.

The Update since “The Road Map”

In November 2020 I did a comprehensive review of Blue Moon. If you are new to Blue Moon, I highly recommend you read my previous review as a primer. I listed some key impact and risk factors that I felt would ultimately determine the success of an investment in Blue Moon.

Original Impact/Risk Chart (November 2020)

Here is my current view on the progress in these key areas since my last post.

PROGRESS CHART

Update on the progress items above.

Permitting: This is still a critical but final step for Blue Moon. I show some progress here as on December 23, 2020 their current drilling permit was extended until June 26, 2023. The longer-term goal of getting a mining permit will be a later and very critical step for Blue Moon.

Resource Confirmation: Another key component of the Blue Moon story is the confirmation and (hopefully) expansion of the resource base at the Blue Moon Site. They have made some progress in that the drilling permit was extended and they did do a first round of financing to fund a planned drilling program in 2021. My understanding is the plan is to begin additional drilling in summer 2021 following the closing of current financing round. Drilling should take 2-3 months with assays to follow. The hope here is that Blue Moon expands the known targets for (VMS lenses) for additional drilling. Ultimately the plan is to issue a new NI-43-101 using a higher resource base and more current commodity prices (last 43-101 was from 2017) by 4Q 2021.

Zinc and Precious Metals Markets: One important thing to understand about Blue Moon is that it is a poly-metallic deposit that is measured on a zinc equivalent basis, however, there is a lot of Copper, Silver, and Gold along with the Zinc deposit.

Precious metal markets have performed quite well since December 2020. Zinc has lagged the other key metals; however, it is also up since December 1, 2020.

Source: CNBC for Cu, AG, and Au and LME Cash Price tonnes converted to pounds for Zinc and Lead

Pricing of metals is not under the control of management; however, it has certainly trended favorably, and it is interesting to note the significant difference on current prices versus the NI-43-10 technical report filed in November 2018. I will examine this further in the updated valuation models.

Clearly metal prices have moved favorably for the valuation of Blue Moon. The current economic situation and government fiscal response leads me to believe that even higher metal prices are quite possible if not likely.

Joint Venture Agreement: When I first examined Blue Moon, I had some concerns about the Joint Venture Agreement with Platina Resources (covered in detail in “The Road Map”). Under the terms of that agreement Platina could have earned as much as a 70% interest in the Blue Moon Property if they completed drilling and financing obligations. Platina did not meet the required hurdles and Blue Moon and Platina agreed to amicably end the JV agreement on December 2, 2020.

Platina did help in advancing the project via some important drill results but in the end decided to focus on its core market (Australia) while retaining an equity position in Blue Moon. Ultimately, dissolution of the JV Agreement is positive for Blue Moon shareholders and why I show it as complete.

Financing: My understanding is that Blue Moon is in the final stages of completing its financing which will be used to complete additional drilling at the Blue Moon property. The original goal was $1 - $2m and the company hopes to have this closed in the next 6-8 weeks.

Blue Moon also recently up listed to the US OTCQB market for shares traded in the US which should enhance liquidity and trade execution for US based shareholders.

Zinc Super Cycle and Zinc Air Batteries

On the face of it, the idea that Zinc could become an undersupplied metal that would drive significant price appreciation for Zinc seems unlikely. The price of Zinc has appreciated recently, however, not nearly to the extent of Copper, Silver, or Lithium. There is in my mind, however, a scenario that could cause the demand and prices for Zinc to rise significantly. Mind you this is a hypothesis and a reasonable investment case in Blue Moon is not predicated on much higher zinc prices, but I would like to give the reader something to consider and to keep an eye on.

According to Capital Economics commodity price supercycles are typically triggered by some sort of structural boost to demand that is large enough to move the needle at a global level and to which supply is slow to respond.

US President Joe Biden’s $2.3tn American Jobs Plan and Europe’s Green New Deal are government spending plans that will pump huge amounts of investment into commodity-intensive infrastructure and projects aimed at meeting the goals of the Paris agreement on climate change. One such project that would drive significant Zinc demand is the development of a commercially accepted Zinc Air battery.

American Jobs Plan

Biden’s ambitious $2.3T plan to improve infrastructure, create jobs and provide clean energy includes a couple of items that are potentially very relevant to Zinc and Blue Moon.

Promotion of Electric Cars: Barring additional progress on Zinc Air Batteries the biggest impact here will be continued support for strong copper and silver prices which are important components of electric vehicles.

Zinc Air Battery for Energy Storage:

This is potentially the most significant item that could specifically affect the supply and demand balance of zinc. There is a lot of work being done in this area right now.

Zinc batteries have several positive features including being lightweight, compact, less flammable, and more sustainable than other types of batteries. Zinc is also less expensive than lithium. The big drawback to current designs is that they are not rechargeable and thus have lower usage lives. This is the primary reason that they have long standing but limited application such as in hearing aids, remote controls, and lighting.

Dr. Wei Sun of the MEET Battery Research Center at the University of Muenster has developed a new zinc battery chemistry that makes recharging Zinc Air batteries possible and extends the life cycle of these batteries. Mind you this is still in early development but the potential for market expansion is very large given the eco-friendly and cost savings potential of such a battery. Here is a quote from the linked article.

“The identified increased energy density has now the potential to compete with the lithium-ion battery currently dominating the market. "The zinc-air battery provides a potential alternative battery technology with advantages such as environmental friendliness, high safety and low costs," emphasizes Sun. "This technology still requires further, intensive research and optimization before its practical application."

In fact, NantEnergy owned by billionaire Dr. Patrick Soon-Shiong has had a rechargeable Zinc-Air battery on the market for a few years and claims to have a battery that over 200,00 people around the world use as their sole source of power and used in over 1,000 cell towers internationally. It is very interesting to note that they claim to be able to produce such batteries at 20% of the cost of Lithium-Ion Batteries.

Source: Blue Moon Investor Presentation with Author Emphasis

Final Thoughts on Future Zinc Demand

I am not predicting a massive near-term shortage for zinc. Wood Mackenzie estimates that in 2021 that Zinc production will be 13.9m tonnes versus 13.6m tonnes indicating a market surplus of 0.3m tonnes or 2%. That said given the factors discussed above a scenario where demand for Zinc increases dramatically in the future is certainly possible. Zinc Air batteries may provide a safe, inexpensive, and more environmentally friendly solution to energy storage (and even potentially EV usage) with a more secure supply base. Zinc Air battery development and adoption is something to keep an eye on for the future. It is relevant for Blue Moon because commercial production of Zinc is most likely 3+ year away.

Valuation and Tables

SHARES OUTSTANDING	129,290,228
Warrants outstanding	14,031,028
Options outstanding	7,950,000
Fully diluted	151,271,256

Source: Blue Moon

I have updated the valuation analysis to account at least in part for the current prices of Gold, Silver, and Copper that were not part of the NI-43-101 calculation. The scenarios below are still relatively conservative as they do not attempt to factor significantly higher pricing nor the “Zinc Super Cycle” I discussed above. It is also important to note that this assigns zero ($0) value to the Yava Project in Canada which is located adjacent to Glencore’s $50m Hackett River property.

Low Scenario: Pricing in line or below the 2018 NI-43101, 10-year Life of Mine, 1500 Tons per days and 120 million in Capex costs. Total tons produced well below inferred resource from NI-43-101 This scenario is very conservative. +253%

Base Scenario: Metals Pricing at or below current levels, 15-year Life of Mine, 1500 Tons per days and 120 million in Capex costs. Total tons produced consistent with inferred resource from NI-43-101. This would imply minimal new discoveries of material at Blue Moon and thus intentionally still conservative. +672%

High Scenario: Zinc and lead at current price levels, Copper below current prices and Gold and Silver about 10% above current levels, 20-year Life of Mine, 2000 Tons per days and 250 million in Capex costs. Total tons produced roughly 2x NI-43-101 to reflect potential success in expanding resource via drill programs. A reduced discount rate at 7.5% to reflect a scenario where resource confirmation is strong and thus less risky. The resource expansion is the most speculative aspect of this scenario, but pricing is only mildly bullish from today’s prices. +2718%

Metal Price, Revenue and Margin Per Ton Assumptions

And here are the final calculated numbers...

Summary Valuation Scenarios

RISKS

Blue Moon Metals is not without risk. Here are some of the risks that could affect the valuation:

• If Blue Moon is unable to obtain the necessary mining and environmental permits in California, then the value of Blue Moon would be at significant risk.
• If further drilling does not confirm the inferred resources at Blue Moon this would negatively affect the valuation.
• Zinc equivalent prices could fall below my low and base case scenarios which would negatively impact the valuation.
• Necessary financing for drilling and Capex may not be available or available at unfavorable terms. Additional funding requirements is likely dilutive to current shareholders.
• I have assumed a 10% discount rate for valuation of future cash flows of my base scenario, a higher rate would lower these valuations.
• Blue Moon is a junior miner traded on the Toronto Ventures exchange and the US OTCQB market and subject to significant volatility.

Summary

Blue Moon Metals gives the investor the opportunity to participate in a very asymmetric risk/reward profile. Based on the Blue Moon property (California) alone the company’s stock has the potential for significant capital appreciation. This is an investment in real assets in a decidedly more bullish (and inflationary) commodities environment. This article does not contemplate any value for Blue Moon’s “Yava” property which could be significant. The company could benefit from the tailwinds of higher metal prices (copper, silver, gold, and zinc) as well as the development of better Zinc Air batteries that could have widespread use in green technologies such as energy storage and possibly electric vehicles. The other thing to like about Blue Moon is that the management team is experienced and has significant skin in the game, owning almost 20% of shares outstanding. An investment in Blue Moon is not without risk but if the company is able to successfully execute the “Road Map” the potential returns to the patient investor are significant.