Strategic Resource Acquisition Corporation (SRZ.TO)
The USA's Next Producing Zinc Mine
Website: http://sra-corporation.com
Symbol: SRZ – TSX
Share Structure:
- Outstanding Shares: 29.0M
- Fully Diluted: 32.0M
Insider Ownership: 12.2%
Cash: est. C$100.0M
Debt: $57.2M
New Arrival
Strategic Resource Acquisition Corporation (SRA) just recently conducted its IPO in late May 2007, and only began trading on the TSX exchange a few weeks ago on May 29th. The IPO was conducted at C$4.85/share. With SRA currently trading at C$4.60, the opportunity now exists to acquire a position at a slight discount to those who participated in the 2x overly subscribed IPO.
Near-Term Producer
SRA is on track to commence mining at its 100% owned Middle Tennessee Zinc Mining Complex (MTM) in Q4 2007. The objective is to achieve full production in early 2008, producing 125M lbs of recoverable zinc annually in concentrate form*.
* SRA owns its own mill and concentrator on site with a capacity of 8,000 tpd.
The MTM project has a long history as a producing mine, and as can be seen from the chart below, there has never been a problem replacing reserves.
The MTM project produced nearly 40.0M tones of ore since 1975, and notably, the historical zinc recovery rate was always quite good. For instance, in 2003, the zinc recovery rate averaged an impressive 96.5%. Not only that, but the zinc concentrate to be produced by SRA at the Gordonsville mill is considered to be very clean and desirable by smelters. Likely as a result, at least four written letters of intent have already been drawn up concerning the potential processing of the zinc concentrate at different smelters.
Another reason to be excited about SRA’s project is that all the critical mining, tailings and environmental permits are already in place*. Furthermore, there have never been any historical environmental issues, and to date Dynatec (SRZ’s contracted mine operator) has not identified anything that would be considered a serious impediment to re-opening the mines at the MTM project.
* Some of the local permits simply need updating.
If we calculate project economics using both the indicated and inferred resource base and we include the germanium by-product credits, using a 10% discount rate we arrive at a net present value of C$269.9M. This assumes a zinc price of $1.37/lb. Given the ideal location of the project, in a country with minimal political risk, and a quality management team (see below), we believe that even if SRZ does not pursue any further acquisitions within the next 12 months* a 100% return on one’s investment seems realistic at this point with minimal downside risk. There is the risk, of course, that the zinc market undergoes a significant correction, but this is something which we do not expect to occur in the near future. Furthermore, it appears as if SRA may be able to achieve lower costs through improved productivity, brought about by such changes as moving to a 7-day mine operation, using a longer 10-hour shift, employing larger trucking units, mechanizing the blasting cycle, increasing mill through-put, and computerizing the data systems.
* SRA’s intention is to redeploy the cash flow realized from the MTM project to pursue a strategy of accretive acquisitions, as is made clear in the interview below.
The following quotations come from a recent interview with SRA’s CEO Victor Wyprysky and CFO Ian MacNeily which help to explain the company very well:
Strategic Resource Acquisition Corporation (TSX: SRZ) is looking to make a name for itself, starting in Tennessee. Victor Wyprysky, president and chief executive officer of SRA, says the company’s “claim to fame” will be that “we know how to find, assess, acquire. And it remains to be seen, but hopefully build up the project and then operate it.”
Newly formed last fall, SRA expects to push its first project into production by November. A small company with a market capitalization of $135 million, SRA purchased the Middle Tennessee Zinc Mines for US$16.3 million in December 2006. The mining complex is comprised of five underground zinc mines: Elmwood, Gordonsville, Carthage, Stonewall and Cumberland, as well as the undeveloped East Carthage zinc deposit, and the Gordonsville mill and concentrator.
The mines were previously operated by Pasminco, an Australian company, but were shut down in May 2003 due to low metal prices; which is one of the reasons that compelled SRA to make this purchase. “We were looking for quick projects that could be put into production quickly,” says chief financial officer Ian MacNeily. “It being a past producing mine had a relatively short rehabilitation time required to get it back into production.”The mines were particularly attractive, says MacNeily, because of its “29-year history of past production, very consistent production profile, good source of labour in the area and fantastic infrastructure.” Only 50 miles from Nashville, a major city, makes transportation relatively easy.
MacNeily also says that he’s attracted to the United States because of the political stability but also for its economic benefits. “I like the United States for a lot of reasons, but one specifically is the US dollar – it’s a good natural hedge for your operating costs. And certain states are mine friendly.”
SRA completed its $105 million initial public offering last [sic] May, of which nearly three-quarters is allotted for restarting the mine. “We’ll probably spend about US$70 million between now and the end of the year rehabilitating the mine, buying mobile equipment, setting up the mill– so that will consume a good chunk of the IPO,” says MacNeily. But he expects the mines to produce about 150 million lbs. at US45¢ per lb. and to generate over US$200 million in revenues next year.
SRA plans to offset operating costs by selling two byproducts; germanium and gallium (both commonly used as semiconductors). “We are embarking on recovery studies – germanium has already been recovered and paid for in this mine and we think we can do the same for gallium,” says Wyprysky. “If we are successful in recovering both of those, we will drive our cost structure into the US20¢ per lb. area and I think that will make us bulletproof to any point in the zinc cycle.”
The metals are thinly traded through contract and sales, but MacNeily says “there’s a growing global demand for the metals.” Global evaluations indicate a current value of US$710 per kilogram for germanium and US$950 per kilogram for gallium. SRA produces approximately 40,000 kilograms of each per annum. “What appeals to us is that SRA would be one of the leading producers of each in the world, thereby enabling us to possibly be price setters in each area,” says Wyprysky.
Additionally SRA sells its waste products to local companies. “We’re very lucky in that Mother Nature has blessed this ore body as a limestone host – so what we produce from the mill is benign,” says MacNeily. “The larger stones gets sold to an aggregate company next door, the ground up fine residue is bought by another local group for agricultural lime, and the water coming out of the mine doesn’t need to be treated, because it’s limestone – it’s PH-neutral.” The limestone pebbles are used for roads and ditches, whereas the fine residue is sprayed onto farmer fields to help reduce the PH level in the soil. Revenue from the sale of limestone only amount to $2 to $3 million, but Wyprysky says choosing an environmentally friendly operation is only partly about the economics; “I’d like to think that we’re showing people that we will act, and intend to act, as a global example of a socially responsible company.”Dynatec Mining Corp. (TSX:DY) has been signed on as operator for the first two years of the operation, which SRA says will help achieve its operational objectives faster and allow the company to focus on potential new acquisitions in the base metals industry. “I think there are more opportunities for companies like us to acquire mid-size projects that fit nicely and that can quickly add value to our stories,” says MacNeily. “I think that’s how we’ll make our mark – by going from $150 million (market cap) to a billion pretty quickly.”
An Impressive Management Team
-Victor Wyprysky, President, CEO & Director
Mr. Wyprysky has been an investment banker with a number of investment firms for over 26 years. In 2004 he founded Crescent Financial Corporation. Prior to this he co-founded Harris Partners Inc., an investment banking firm where he held the roles of President and Chief Executive Officer from 1999 until 2004.
-Ian MacNeily, EVP, CFO & Director
Mr. MacNeily, who is a Chartered Accountant, has been a senior officer and director of a number of public mining and mineral exploration companies, including North American Palladium Ltd., Tiomin Resources Inc., and of Pangea Goldfields Inc.
-Paul A. Carroll, Chairman
Mr. Carroll is President of Carnarvon Capital Corporation, a corporate management and advisory company. He has had a lengthy business career in the mining industry, both as a lawyer and as a director and/or officer of many mining companies. He has been engaged in the mineral exploration and mining industry in Canada, the United States, Central and South America, Africa, China, Russia and Kazakhstan. Companies with which he has been extensively involved include Dundee Corporation, Corona Corporation (during its development and operation of the Hemlo and Eskay Creek gold mines), Zemex Corporation (industrial minerals), Royex Gold Mining Corporation (gold), Campbell Resources Inc. (gold, copper and asbestos), Cobra Emerald Mines Ltd. (emeralds), Lacana Mining Corporation (gold and silver), Arcon International Resources plc (zinc), Tahera Corporation (diamonds, during the discovery and early planning for production from the Jericho kimberlite pipes in Nunavut, soon to become Canada’s third producing diamond mine), World Wide Minerals Ltd. (uranium and gold), Riphean Platinum Corporation (gold and PGMs), Poco Petroleums Ltd. (oil and gas), Mascot Gold Mines Ltd. (gold), United Keno Hill Mines Ltd. (silver and zinc), Repadre Capital Corporation (now IAMgold Corporation, gold) and Crowflight Minerals Inc. (base metals and PGMs).
-Bill M. Shaver, Vice Chairman
Mr. Shaver is a professional engineer and mining executive with over 40 years experience in the mining industry. He is currently the Executive Vice President of Denison Mines Corp., a uranium producer listed on the TSX, a position he has held since September 25, 2006. In 1980 Mr. Shaver co-founded and acted as Senior Vice-President of Dynatec Corporation, one of Canada's leading mining and contracting companies. Mr. Shaver's experience in the mining industry includes positions as the Operating Officer in developing mines for Inco Limited, Falconbridge Limited, Barrick Gold Corporation, Newmont Mining Corporation, Goldcorp Inc., Aur Resources Inc. and FNX Mining Inc. Mr. Shaver is also Chairman of the Ontario Mines and Aggregates Safety and Health Association.
-Jim Roxburgh, VP Project Co-ordination
Mr. Roxburgh has more than 40 years in the mining industry with experience in project evaluation, acquisitions, operations and executive roles. In 1993 Mr. Roxburgh founded the consulting firm Roxburgh & Associates, which has been his principal occupation since its founding. From 1970 until 1993 Mr. Roxburgh held management positions with Rio Tinto Zinc Corporation and Rio Algom Limited, including President of Elliot Lake Uranium Operations. He also worked as a miner, supervisor and project engineer for Inco Limited and is the past Vice President - Operations and Vice President - Business Development with Dynatec Corporation.
-John Thompson, VP Resource Development
Mr. Thompson has over 30 years experience as a geologist and geological engineer in surface and underground exploration and mine development projects, property evaluation and acquisitions, joint venture negotiations and executive management in the international minerals industry. Mr. Thompson is also experienced in negotiating and managing joint venture agreements, and has supervised and evaluated major greenfield exploration and mine development programs in Canada, the United States, South America, Mongolia, China, Russia and India.
-Jack Stoch, P Geo & Director
Mr. Stoch is the President and CEO of Globex Mining Enterprises Inc.
-Patrick J. Raleigh, P Eng & Director
Prior to 1996, Mr. Raleigh held the position of the Chief Engineer of Falconbridge Limited and Technical Consultant to Falconbridge Chile S.A., a subsidiary of Falconbridge Limited. Since then he has provided consulting services relating to various mining projects. In his position with Falconbridge, he contributed to the development of many mines, including the Collaghuasi copper mine in Chile and Raglan in Quebec and he has been involved in the operations of the Kidd Creek mine in Ontario. He has operated mines in Canada, Central and South America and Haiti.
-Ken Gum, General Manager
Mr. Gum was the previous MTM General Manager under Pasminco and will oversee the restart of Cumberland, Gordonsville, and East Carthage mining and milling operations.
Hedging Plans
SRA is obligated to hedge at least 15% of its zinc production, according to the terms of its note offering in late May. After discussing this with SRA’s CFO, Ian MacNeily, it appears as if SRA intends to hedge more than the minimum required given the current robust zinc prices. As of today, the forward curve shows that SRA would be able to lock in a price of around $1.35/lb for 2008 production. While this is less than ideal, we doubt that SRA would hedge more than 30% of its production, which still leaves plenty of upside, and more or less locks in guaranteed profits at today’s prices as long as the hedges are short lived and do not extend out for several years into the future.
Acquisition Strategy
SRA would like to be operating at least two major projects within two years. This is not to say that an acquisition will not be made for another two years, but it is at least likely that for the next 3-6 months SRA will be focusing most heavily on its MTM project. Nevertheless, as the company’s own name states, the strategy for growth is going to be much more driven by acquisitions than exploration, so if an opportunity presents itself, management is ready to bite.
Conclusions
Like last months profile, Orvana Minerals, SRA is another fairly simple story. They own a very near-term producing zinc mine that has an excellent production history. The location is ideal. The political risk is non-existent. Permits are in place. The project is fully financed with about C$20M to spare, and is progressing on schedule. There are no known environmental issues. Labor and Infrastructure, including power, railway, roads, water, supplies, and a large airport are all located very nearby. The management team appears to be more than capable, and the story is still relatively unknown to the general resource community. Again, we feel that a 100% return in 12 months time is not unlikely, given that this would only require the market to value SRZ at about 3x 2008 EBITDA, assuming a zinc price of $1.37/lb.
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