Rathdowney Resources Set For Upside As Zinc Plays Enter The Spotlight

Apr. 05, 2012 10:57 AM ET
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Junior zinc play Rathdowney Resources (CVE:RTH) is different from any other company in its small peer-group, as it has the ability to build a long-life zinc mine at "only a fraction of the cost" other peers would need to shell out, says president and CEO John Barry.

This places the company, with its flagship property in Poland, in a prime position to benefit from the newfound buzz around zinc, as the once-boring and over-stocked metal has become a new target for investors given the expected increasing demand from emerging economies, combined with the supply shortage forecast in the medium term.

In Poland, the company's properties lie in the Upper Silesian Mining District, a region of Mississippi Valley-type (MVT) zinc-lead deposits, which has supported a sequence of long-life zinc mines in the post WW II era and where it has been granted two prospecting concessions and applied for a third, encompassing an area of 150 square kilometres.

Located along strike from the operating Pomorzany-Olkusz mine, Rathdowney's concessions were explored by the Polish State Geological Institute, with a large historical drilling database of more than 1,000 holes.

The historical resource on all the properties is rather large at over 100 million tonnes, with a smaller but higher grade recent historical estimate from 2008 on Zawiercie, part of the Olza project, estimated to have 17 million tonnes in the C1+C2 category, grading 5.8% zinc and 2.32% lead.

For now, the company is looking to bring only a portion of the 100 million tonne resource to NI 43-101 compliant status, and started a C$20 million resource verification and exploration drilling campaign last June.

So far, it has drilled 110 holes with a total of six rigs, with the zinc miner aiming to release a NI 43-101 compliant resource estimate by mid-year, at which point it will start a preliminary economic assessment (PEA) for the project.

Its Olza project is located in the historic Silesian MVT mining district of Poland, 90 kilometres northwest of Krakow. The area has extensive mining infrastructure including power and rail, as the project is also near a state-owned zinc smelter complex that is expected to have additional smelting capacity when the Pomorzany mine closes in the next three to five years.

"For the PEA, the concept is to plug into the state-owned infrastructure that already exists in the area, as the plan is to just run the zinc from our mine on the existing rail to the nearby zinc smelter, significantly reducing costs," says Barry.

"This makes our project more advanced and different from every other zinc junior out there at the moment. It costs a lot of money these days to build a new mine with power, infrastructure and plant."

Indeed, the company considers a start-up for operations with a one million tonne of ore per year throughput through the nearby plant as realistic, a plant which now has a 2.5 million tonne per annum capacity. The idea would be to ramp up to two million tonnes within a few years.

Barry says this can be achieved due to the "much smaller" capex required to start the operation as a result of the existing infrastructure. The company wouldn't have to build a mill, concentrator or permit waste facilities.

"We don't need to have such a large resource at the beginning. We have a unique opportunity to get up and running with a relatively smaller resource and get cash flow, and then build the resource around us."

The release of the PEA will be a milestone for the company, adds Barry, after which Rathdowney plans to operate a few rigs to expand the resource further, as now the miner is "mostly sampling" to verify and compare the historical resources.

Highlights of the latest results from the company's drill program include 2.70 metres of 25.85% lead plus zinc in hole OLZ-044, 21.73% lead plus zinc over 2.70 metres in hole OLZ-051, and 9.38% lead plus zinc over 3.60 metres in hole OLZ-047. In addition, hole OLZ-059 hit 6.00 metres of 4.25% lead plus zinc.

Barry says he is confident in the substantial historical resources at the Polish concessions which have supported big mines in the past and that he believes will have the potential to support long-life mines of 30 to 40 years in the future.

Aside from the infrastructure benefit, there is also a skilled labour force in the area that will be looking for work once the Pomorzany mine closes, Rathdowney's CEO adds.

The Polish project should no doubt come on the radar screen of the big zinc producers like Xstrata (LON:XTA), which is due to merge with commodities trader Glencore (LON:GLEN) in a $90 billion deal.

This is because, beginning in 2013, the Xstrata-owned Brunswick and Perseverance mines in Canada, along with the Vedanta Resources-owned Lisheen mine in Ireland will close, removing more than half-a-million tonnes of zinc from the global system.

China's Minmetals is also on the hunt for zinc as its Century mine in Australia closes by 2015.

As a result, some of the major producers are already starting to acquire smaller suppliers in order to secure zinc concentrate, and they will be looking to secure mines like Olza that have a long-life supply of the metal and are expandable.

Analysts are forecasting that the upcoming supply deficit, combined with increasing consumption in places like China from industrial growth and urbanization, will lead to a surge in zinc prices by mid-2014 - sparking investment into new projects.

Zinc's uses range from coatings to protect iron and steel through galvanization, to sheets for building and a range of chemical applications. The metal is used in the automotive and building and construction industries, with galvanized steel growth being the main driver of zinc demand. The total world zinc consumption was estimated to be 12.45 million tonnes in 2011.

With $22.5 million in the bank, Rathdowney "has the cash, and the scaleable project with the infrastructure, making it the best in class in terms of the junior zinc space," Barry stresses.

The company also has zinc properties in the zinc-lead-silver district of the Irish Midlands, where its team continues to combine the data obtained from the 2011 drill program with historical information in order to define new targets for drill testing.

Work has now been prioritized in three project areas of Galway, Laois and Westmeath South, with the company having drilled about 6,000 metres and taken more than 20,000 samples.

"We haven't made a discovery yet on our Ireland properties, but we have narrowed down the project areas to three," says Barry.

"We look forward to developing the project with either our own financial resources, or we may look at farming out these properties to focus on Poland. A discovery in Ireland could be transformational."

Barry, an economic geologist who has worked in the exploration and mining industry since 1988, said Rathdowney listed on the TSX Venture Exchange in March of 2011, and currently has a market capitalization of around $33 million with $22.5 million of cash, rendering it "cheap" at around 42 cents per share.

The company is also backed by Hunter Dickinson, a diversified, global mining group, who together with Rathdowney management, own around 18 percent of the junior zinc miner.

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