Canadian Zinc (TSE:CZN) – Inflated technical report

(This company is not worth shorting unless its share price were a lot higher.)

Canadian Zinc’s flagship property is the Prairie Creek property.  It used to be a mine that opened in 1982 and shut down the year after.  It must have been a horribly uneconomic mine to have shut down so fast.  Fast forward to today.  CZN is trying to raise capital as it needs at least $234M to build a mine on the property (probably more).

The deposit itself has very high grades but there is a major flaw with it: the mineralization is between 0.5m and 5m wide.  Because the deposit is so thin, it will be very expensive to mine it.  It is anticipated that the company will use cut and fill mining, which is one of the most expensive forms of underground mining.  As well, mining will be labour intensive as only small mining machines can be used.  This means that mechanization can’t be used fully to lower labour costs.  To make things worse, most costs will be much higher (e.g. labour, electricity) because the deposit is remotely located.

Major red flags

The latest technical report (filed Aug 9 2012 on SEDAR) has a number of extremely dubious price assumptions:

Economic Analysis An economic analysis with a +/ – 10% sensitivity factor centering on the Base Case outlines the average annual EBITDA, NPV, IRR payback period and are shown on a pre-tax and pre-finance basis in Table 6 . The base case shows a Pre-tax Net Present Value, using an 8% discount, of $ 253 M, with an internal rate of return of 40.4 % and payback period of three years. Metals prices used were US$1.20 /lb in the short term and US$1.00 /lb in the long term for both lead and zinc, and US$28.0 /oz in the short term and US$26.0 /oz in the long term for silver.

This is not a reasonable assumption since neither lead nor zinc has stayed at $1.20/lb in the past few years.  The authors of the technical report should have stuck with the industry standard (*what should be the industry standard) and used the trailing 3-year average.

Similarly, the report makes another inappropriate assumption in determining the cut-off grade:

The results from the AMC review and reclassification are shown in the tables below. Table 14. 8 shows a summary of the Mineral Resource at a cut off of 8 .0 % Zn equivalent (Zn Eq) for all zones . This cut off is based on costs, recoveries and payable product used in the Mineral Reserves and uses an elevated zinc price of $1.30 /lb. All these values are shown as notes in Table 14.8. With the deposit being relatively high value moving the cut off grade makes little difference at these levels, other than for the lower grade Stockwork Zone.

There is no legitimate reason to use an elevated zinc price.  This is very sloppy work designed to inflate the size of the resource.

Other bad signs

The company is spending exploration dollars on something other than its flagship project (South Tally Pond, which is less promising).  This is not a good idea because the company will need a huge amount of capital to build a mine at their flagship project.  They should conserve what capital they have because they don’t have enough to it.  Spending money elsewhere suggests that the company’s flagship project is uneconomic and that insiders are looking to divert investors’ attention.

Secondly, the company has not released a feasibility study on the project.  The problem with PFSs (pre-feasibility studies) is that regulations surrounding them are pretty weak.  Authors can make many unreasonable and ill-informed assumptions to inflate the project’s economics.  A feasibility study is held to a higher standard (though there are many engineers willing to publish inflated feasibility studies).  If the company is serious about raising >$234M to build a mine, a feasibility study would be a good idea.

Bottom Line

I’d avoid this stock.  I don’t think that it’s a compelling short because the valuation is not extreme and there is no catalyst.  I’d much rather be shorting Canada Lithium than this company.

*Disclosure: No position.  Short 200 shares of CLQ, which is an insignificant position (there often isn’t stock to borrow either).


2 thoughts on “Canadian Zinc (TSE:CZN) – Inflated technical report

  1. Have you ever talked to CZN? The mine never opened or operated in 1982 (you meant 1981). Hunt Brothers owned the project and they went bankrupt when silver price collapse in 1981. Had nothing to do with PC’s operation since it never operated. CZN couldn’t do FS because the slow Gov’t EA/Permitting process wasn’t completed and SNC couldn’t give accurate numbers for the road option, second water pond option, water compliance issues, etc. Metal prices were based on external forecasters hired by SNC… Yeah too aggressive but $1.20/lb zinc/lead is based on first 2 years only, then it is based on $1 zinc/lead? Hearing zinc is the main metal story… Patricia Morh (Scotia Capital) calling $1.50/lb zinc in 2016, when the PC mine is supposed to be producing metal con for market. Perhaps the metal expert’s use expected supply/demand as a factor? Cut N Fill? Hasn’t that changed to Long Hole? No money for STP even thou Duck Pond Mine has scheduled to close in 2 years and its entire mill infrastructure is 18 km away? The exploration money raised is flow through money… they have to spent the $2-3 million on exploration before the time limit expires or pay a penalty. $234 to build a mine? I believe it is around $193 (which include a 20% cost cushion) to build the mine, and the $234 total includes working capital for the first year? Your comment on flawed vein mineralization due to thickness is puzzling. I usually go with the metal value for tonnage… Nice vertical vein deposit is great for long hole method…See what Tetra Tech comes up with the FS study in 2014?

    I do agree with your disclaimer at the top.
    “Some of the information on this site is wrong. Always do your own research”

    • 1- I don’t like talking to company management. If you aren’t going to join the bull ship then it’s a waste of time.

      2- The technical report details the history of the project and a mine closure in 1982.

      3- The company will likely be doing feasibility studies internally before coming to a production decision.

      4- The width of the veins will affect the project’s economics a lot.

      I’m guessing you’re long. I wish you the best of luck. I still have no position in CZN.

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