Monday, April 10, 2017

Arizona Mining PEA review

So, a few days late we got the PEA summary PR. Over the next month or so we should expect them to upload the complete report to SEDAR.COM and maybe a copy on their website in the next 45 days see bottom of page 8).

There is a lot of information in the press release, and it is a taster to what we will see in the full report that will be released around mid-May.


  • Robust numbers
    • NPV $1.26B
    • IRR 42%
  • Cost per tonne looks inline with other operations @ $48.08/tonne
      • Fresnillo = $43.93 tonne
      • Saucito = $36.75/tonne
      • Cienega = $55.49/tonne
  • All infrastructure will be within the Patented Trench concessions (i.e. the private land)
  • Initial production planned for 2020, but will take 3 years to ramp up to 10,000 tpd
    • year 1 ~4,000 tpd
    • year 2 ~7,000 tpd
    • year 3+ - ~10,000 tpd
  • According to the PEA - they will commence mining in Q4 2020, or 42 months from now
    • ground breaking will start in 8-9 months, before the completion of the Feasibility Study.
    • This is very aggressive


At this stage, we don't need to focus on the rocks. Any issues (e.g. Mn) can either be engineered out or they take a penalty charge at the smelter (i.e. increased CAPEX or decreased revenues). My initial questions are?
  • What permits and easements do they need to bring services to the mine (electricity, access)?
    • I know that the project will be on private land, but getting things to and from the mine site will require road upgrades and power-lines crossing Forest Service land?
    • what local opposition will there be to this?
  • The biggie - if they are going to commit to an aggressive development timeline, won't they need to have something more than "keen, ongoing interest in our future concentrates"?
  • What impact would (if they do ahead with it) a silver streaming deal do to the economics of the deposit?
When the PEA is released I'll be looking at the surface footprint and see if they have included all infrastructure. Occasionally they include all the important stuff (mine, waste dumps, tailings dams etc.), but miss off mine offices, service yards, storage areas etc.


The timeline is aggressive, I'm going to call it a 'perfect' timeline, assuming that all parts of the process run to the minimum  - no opposition, no delays and Mr. Murphy goes on holiday for 3 years. I'm not sure that this is achievable, as they have to raise money (a small $457M), sign contracts, obtain permits, build declines, mills, roads, shafts etc.

Metal prices are relatively high:
  • Silver = $20/oz
  • Zinc = $1.10/lb
  • Lead = $1.00/lb
The other big concern I have is the comment that they can raise significant funds via selling a silver stream.
  • Raise $200-350M selling the silver - normally done at $5/oz
  • silver represents 15% of the mine revenue @ $20/oz
  • At $5/oz, this decreases to:
    • $27.5M from $110M, or decreases the revenue by 12%
  • what impact will this have on the IRR, NPV and payback period?


  1. Looks like Silver Wheaton paid closer to the equivalent of $10/oz in their deal with Glencore, which occurred when silver was 25% lower than today?

    1. Some quick number crunching based on the Silver Wheaton deal -- AZ would need to sell 42 million ounce silver stream to raise $300 million in finance. There is roughly 240 million ounces in the measured, indicated, and inferred category. So the company would have to stream less than 20% of the silver to get the finance.

    2. Hello Jason,

      The final price will depend on what AZ management can negotiate, the difference is that Glencore was actually producing silver and AZ want money to put a silver project into production.
      For any proposed silver steaming deal (and nothing has been signed, it has just been mentioned as an option to raise funds), a development project (even with lost of silver) has a much higher risk, and therefore any company wanting to do a silver streaming deal will want to negotiate as low a price as possible as they need to cover the risk that the project will be delayed.
      We also have to remember that most mining projects are like trophy wives - always take longer than expected to get ready and always cost a bit too much.

    3. A reply to your second question:

      The key will be - if they do a silver steaming deal, when will it commence?

      If we take the $5/oz (worse case scenario) this means that AZ 'sell' 60moz silver.
      This is 10.9 years of silver production (60/5.5).

      We have to think about the NPV, as the Present value of the silver produced in years 1-11 is much more than years 12-22, so they will have a much larger impact on the NPV than later years.

      PV (5% discount rate)
      year 1 = $110M
      year 10 = $67M
      year 20 = $41.5M

      PV - hedged at $5
      year 1 = $27.5M
      year 10 = $16.8M
      year 20 = $10.4M

      When you factor in the PV and compare it against the potential streaming deal, let us say $300M, the company doing the deal will get ~$900M in silver revenues, but in reality to then that only has an NPV of $685M, which is a lot, but if there is a delay, the NPV for them changes from:
      no delays = $685m
      2 year delay = NPV decreases to $622M
      5 year delay = NPV decreases to $536M
      10 year delay = NPV decreases to $420M

      they still make money, but they are going to do a deal that minimizes risk for them.