Arizona PEA - quick comments and questions

So we have the Taylor PEA, it is lovely, beautiful and highly profitable. I've actually started sleeping with it, so I can absorb its awesomeness while I'll sleep, but sometimes every silver lining has a black cloud.

Summary:

• Bye bye Central, it was nice to know you
• They managed to get virtually all of the infrastructure onto the private land, but there appear to be a few Achilles's heel
• water pipes need to cross the public land
• they'll need to upgrade access roads and probably power-lines that cross the National Forest Land. It could be hard to get easements
• The recoveries used in the PEA look unrealistically high, especially as the ore close to surface has lower recoveries.
• the good ore is deep, so the first few years production could generate 10-15% less revenues, what knock-on will this have to the NPV, IRR and payback period?

I'll pass-over the fact that they are going to dump a load of tailings on top of the Central deposit (table 14.10), and ignore that Central has been on a the mango diet that has allowed it to shed an unsightly 60Moz from slimmed down from (table 14.19) a portly 200 Moz Ag to a sprightly 140Moz. I'm guessing that mango is laxative....

Do you like the way that AZ have squeezed everything onto the private land. That was some impressive origami, they managed to get everything on squeezed into the private land.

I've added the outline of the central pit

It makes for nice and easy permitting, just a few permits for water discharge, explosives and the like, but it does mean that they will have nearly 300 feet (or 100m) of dry-stacked tailings above the main production decline and shaft, and as they don't have enough land for everything, so unfortunately, Hermosa had to go and get buried.

However, they didn't quite get everything onto the private land, just a few irritating water pipes from the various water wells that they need to supply water to the mining operations. They couldn't drill in the public land so a couple of tubes will be fine.

red circles = where there is infrastructure on public land

I'm going to ignore the work required to upgrade access roads to site and the fact that there are several public forest service roads that cross the private land to get to the National Forest land on the other side, I don't if Arizona mining can prevent access, or if they will need to build new roads to bypass their property.

But, I'm confused, I was looking at the numbers in table 22.2 (page 215), as I was playing with the numbers, and I was checking the recoveries against the results of the metallurgical test-work.







You can see that the projected recoveries vary by zone, which is perfectly normal, we have a different amounts and types of lead, zinc and silver minerals. The very poor zinc recovery in the Scherrer zone is because the zinc is in silicates, not sulfides, and cannot be recovered through flotation.

However, as you know, I like to check the following:

• How do the grades of the metallurgical samples compare to the overall resource
• here we have a nice range, from 2.5% - this is going to be close to the cut-off grade, i.e. the lowest grade material that can be mined economically.
• We can also see that recoveries increase with grade
• This is also very typical
• Are the recoveries used in the financial model in-line with the results received from the various metallurgical tests. Recovery values used in the PEA
• Zn = 92.7%
• Pb = 95.4%
• Ag = 92.4%

Here are some nice pictures to show how they compare against the projected metallurgical recoveries (tables 13.5, 13.6 and 13.7) reported in the PEA.

I've added some nice, thick red-lines to show the recoveries used for each metal used in the recent PEA. You can see that only the Epitaph ore have recoveries that match the numbers used in the PEA, for the other zones they are, in some cases a lot lower. This is where the different zones are located:

Taylor ore-zones

Is this a problem? No, if AZ are only mining ore from the Epitaph zone. Their plan is to mine 60.8Mt over 23 years, so how much ore is there in the Epitaph Zone?

Table 14.10 from the 

So, if we take all of the Indicated and Inferred resources, we have 48.2 Mt in the Epitaph zone, but that leaves us with a small, 12Mt short-fall.

Where is this this material going to come from, and why is it important?

• Manto zone - contains oxides, won't be mined
• Scherrer zone- low Zn recovery, unlikely to be mined

This leaves the Concha zone, which is closer to surface, therefore require less decline and shaft construction (reducing costs), but the issue is, it has lower recovery, and if it is mined first (as it is close to surface), it will means that for the first few years, they will be getting lower recovery, and therefore lower revenues, which is not what you want.

Hermosa - drilling update and geology review

We've got another batch of drill results from Hermosa (link and link).

Summary

• Majority of the new assay data is from infill holes (7 of 10 holes) that intersected similar grades to surrounding holes
• We see a lot of grade inflation - thick zones are in reality a much narrower high-grade zone, surrounded by low grade rocks (e.g. hole 403)
• NW DH looking for the continuation of Taylor weren't anything special:
• Deep, narrow, low grade CRD mineralization - it looks like the system is dying out in this direction
• Shallow, high-grade vein mineralization - maybe this should be their focus for future drilling in this area?
• Permitting - Arizona Mining are pushing shit uphill with this project, mate.

Technical junk

Here is the accompanying map for the first release, with my annotations to help you understand the maps a bit better.

Taylor deposit drilling - Jan 17th PR (Source: Arizona Mining website)

Here is a another version showing the location of the private (patented) mineral concessions and public (unpatented - i.e. where AZ can't drill) land.

Red hatched areas = can't drill here

and looking regionally

Green shaded areas = public land, unshaded areas are private land. Taylor deposit is at the bottom of the image.

Not many places for picking and poking with drilling

Arizona mining did want to drill in the public land, but unfortunately their recent application for 8 holes was cancelled (link), and they have another permit for 5-6 exploration holes that are on-hold.

You can download the enture permit application and maps from here (link).

A big thanks to LM for that info.

The Question is this:

Do Arizona management need to inform their shareholders and the market that their permits to explore on public land have been cancelled? Is this of material importance to the project?

I feel it is, but then again, I'm a geologist and know nothing

As I have mentioned before, if they cannot get a permit to drill on public land, how can they believe that they can obtain the numerous permits to build and operate a mine, where potentially a large portion of the infrastructure, tailings and mine dumps will probably be (like for the Central Deposit) on public land? 

This is going to make the PFS study very interesting. Will they:

1. Do a cop out - not have any plans for the surface infrastructure
2. Do a Central - have plans for the surface infrastructure in the optimal locations (i.e. a large portion on public land) where you know they can't do anything
3. Try and squeeze everything into the private

I'm 50:50 between (2) and (3).

Geology Crap

Here is a long section through an idealized CRD deposit (source - Pasinex Adana deposit (link) and Dr. Peter Megaw)



and here is an annotated long section through Taylor



It looks very similar to Peter's model, which is good, and you can see that there are 3 distinct styles of mineralization:

1. CRD horizons - black dashed lines - these are dipping to the left (NW), and individual horizons are very extensive and have been drilled over lengths of >1km with relatively consistent mineralization. These are a nice steak.
2. Chimneys - mineralization restricted to narrow (100m x 200m) vertical zones, with sharp grade contacts (i.e. outside of the chimney grade is very low). Think of these as a bottle of wine - all the good stuff is inside. 
3. Veins - narrow, very high grade vertical structures. Think of these are those thin sheets of chocolate that you get stuck in desserts in fancy restaurants. They are great, but there is never quite enough.

Thee zones are very different (grade, style, orientation) and if you use a 'generic' control (i.e. assume that all the mineralization is horizontal), you may be over or underestimating the amount of mineralization in chimney zones. This is where infill drilling really helps to define the extents to mineralization.

• Ante Mineralum

• Post Mineralum

Source (link) - Photo of Fault with Fault Breccia by James S. John - I know it is the wrong rock type (Taylor is in limestone), but it was such a good photo showing bedding and faulting.

The Press Releases

This is where the holes were drilled

Blue = Jan 17th PR holes; red = Jan 26th PR holes

19th Jan - assays released from 7 drill-holes.

• 4 holes (HDS-388, 397, 398 and 400) were drilling into the core of the Taylor deposit 
• These are infill holes (i.e. drilling between earlier holes that hit mineralization)
• Low risk drill-holes as the earlier holes surrounding them give you a good idea of what you will hit.
• 3 holes (HDS-384, 390 and 392) looking for the NW continuation of the Taylor horizons. 
• These are (relatively) high-risk holes, as the main Taylor horizon is very deep (>1000m) here.
• Deep = expensive drilling.
• Results were poor, the CRD zones are thin and low-grade. However, the holes did hit some shallow, high-grade vein mineralization.

26th Jan - assays from 3 drill-holes.

• All holes were infill holes designed to better understand the Taylor deposit mineralization and to convert inferred into indicated resources. They won't have much impact on the overall tonnage of the deposit.
• Holes intersected narrow high-grade zones, surrounded by lower grade mineralization - this could have an impact on reducing the overall grade and tonnes of the deposit.

NW Holes

Here is a section through the deposit. I've added scale bars so you can see how deep AZ are drilling.
Holes 390 and 392 hit mineralization at ~1100-1200m depth (it is probably costing them at least $200K/hole to drill to that depth).

CRD zones = red lines.

We can Also see that the 2 main Taylor CRD zones stop between holes 401 and 392. So it looks like resource expansion to the NW is limited as best. I can;t see them drilling more holes in this area, unless they are going to focus on the shallow, high grade veins.

Central Zone

Here we see the chimney effect, in the chimneys we get much thicker and higher grade material, and when you look at the results in more detail, we actually see that these thick zones are really several, narrower high grade (>5% Pb) zones surrounded by marginal grade rocks.

Please note - I've used lead to highlight the high-grade zones

Here we see the grade in the BEST HOLE EVER - look at how the upper high grade zone is essentially gone in the holes that are only 70m away. You can also see how there is drastic grade changes between holes as well - the narrow (10m wide) high grade zones appear to continue some distance (these are probably representing replacement of specific beds in the limestone - see images above) but the thick zones don't. So what do you do in this type of situation? You have 2 options:

1. Cram as many holes into that area as possible that may significantly reduce change the size of this high grade zone, but would give some spiffy PR headlines
2. Treat this area as a "Zone of Avoidance" - if we don't touch it, we won't break it approach - this leaves a nice chunk of inferred resources but preserves its virtue and make sure it stays nice and large (and relatively undrilled).

So, for me, I think Hermosa is a large base metal resource, but no more. The local communities have successfully prevented any mining or exploration activities from being conducted on public land (not just for Arizona Mining but for several other companies as well), and I can guarantee that the PFS and FS due in Q1 and the end of 2017, will show how robust the economics of the project are, but if you can't get permits, the zinc, lead and silver are going to stay in the ground.

3D model can be found here (link)

Hermosa - January Update

AZ released some spiffy new drill-results today (link)



When you look at the accompanying plan map, you can see why the results from hole 396 were good, and the other holes didn't really hit much, just a few narrow zone and veins, so we'll ignore them.

high grade zone circled in red

When we zoom in, we can actually see that hole 396 wasn't a huge intercept of medium grade mineralization but a series of narrower high grade (>10%) zones within a large zone grading between 2.5-5% Zinc.

Red >10% Zinc; Blue 2.5-5% Zinc

Hole 396 was drilled to follow-up on the thick intercepts in holes 333, 334, 335 and 374. When you step back you can see that there are a couple of areas where the mineralization is much thicker than everywhere else.

Central zone centered on hole 333, 334 and 396; second zone centered on hole 104

You can see that there are 2 distinct orientations to the zinc mineralization:

1. Predominant - A series of sub-horizontal (dipping down to the left or northwest) zone related to rock contacts and the basal low angle fault.
2. Vertical pipes (?) of base metal mineralization - most likely related to vertical faults being used as conduits for mineralized fluids.

This is important as for accurately calculating the resources you need to model each zone separately, with their own bias to the direction (search ellipse) that the mineralized intercepts are joined together to link adjacent drill-holes. This is important for fault hosted mineralization (the vertical stuff) as the fault zone could be very narrow (a few tens of meters) and very high grade.

Check out the copper distribution:



The copper appears to show a bit of zonation. the deeper mineralized horizon is much richer than the upper Zinc horizons, except where you see those nice thick intercepts, is that telling us something? You would expect to see elevated copper in the hotter parts of the system, deeper or nearer the source intrusive, but also where you get zones of weaknesses where fluids will be focused.

In Summary, a good hole, but not an unexpected one. I'll be guessing that we'll be seeing a lot more holes being drilling into this zone over the coming months.

If you want, you can download the 3D model from here (link).

Hermosa - a sleight of hand

When you have a project that is suffering from a bit of turbulence, what do you do?

Easy - just remove any misleading statements from your presentation.

We're going to look at AZ's presentations on the Taylor deposit from the 7th December (link) and the 22nd December (link).

• Great concentrate comments - gone (it makes for a less cluttered slide)
• we now have different recoveries for Zinc and Silver

Slide 3 - original



Slide 3 - new and improved presentation

they still have the highly experienced management team

We also have different recoveries now

Slide 6 - original



Slide 14 - new and improved

oh no, the concentrate isn't clean anymore!

So in 2 week the recoveries have changed from:

Zinc Concentrate

• Zn - original = 87%, new and improved = 85.5% - a 1.5% difference
• Ag - 8-15% original, average ~12%, new and improved = 15%, a 3% difference 

Lead Concentrate

• Pb - original 93%; new and improved = 92.9% recovery, no real difference
• Ag - 76-85% recovery of silver, average ~80%; new and improved = 76%, a 4% difference

That is impressive, in 2 weeks with no additional testing AZ have managed to decrease recoveries of Zinc and Silver. Were the values in the earlier presentation wrong?

Hermosa - (lack of) Talent Section

Metallurgy and ore zones

I'm always suspicious of metallurgical data. Junior companies like to skew the results for Maximum Impact (tm) by sampling the best and highest grade material (to steal a yank term - the 'winningest' ore) to maximize recoveries. As we saw with Sandra Escobar, often (i.e. always) the high-grade material is very different (in form and style) to the majority of the material that forms a 'deposit', and there can be drastic differences in recoveries for low, average and high grade material.

Fortunately, AZ keep us calm with this from the latest technical report:

all is good

At Taylor we can see that AZ sent a single, 139lb, representative (for a 100Mt deposit - or just 0.0000000063% of it) for metallurgical testing. It was a composite made from 18 separate samples.



You can see that the grade of the met sample is twice that of the resources (not exactly representative), and we can see in the table above that there are huge range in grades from the individual 18 samples making the composite (I've included my spreadsheet with the 3D model (link).

• Lead: 7.99% vs 4.4% (range - 1.17% to 28.43%)
• Zinc: 7.98% vs 4.7% (range - 1.11% to 22.8%)
• Silver: 3.53 oz/t vs 1.8 oz/t (range 0.53 to 14 oz/t)
• Copper: 0.28% vs 0.1% (range 0 to 1.32%)
• Manganese: 1.32% (range 0.68% to 10%) - we have no 'official' Mn numbers in the resources

So it isn't a representative sample. As a prelim study it shows that you get very good recoveries for Pb, Zn and Ag from high grade ores, but will we see similar recoveries for average and low grade material that makes up the majority of the deposit?

My gut feel is yes, but i'm going to estimate that it will be a few percent lower (i.e. high 80s for Pb and Zn), but it would have been nice that AZ used these recovery values for the ZnEq calculation!

I also found these sections interesting. You can see that the Hermosa Central oxide zone extends down into and separates the upper and lower sulfide zones. Is this contact sharp or do we have a more complicated zonation from oxide through a mixed zones (with both oxide and sulfide minerals) into the sulfide zones?

Some rusty stuff in the middle like jam in a black forest gateau

This is important as each zone will have different characteristics (for mining, treatment) and  recoveries for each metal. We know the Central deposit contains significant manganese (it was being promoted as an Ag-Mn deposit), is the manganese evenly distributed throughout Central-Taylor or restricted to specific areas?

Would we also see a corresponding drop in Mn values in the concentrates? I was intrigued, so I went a bit further and brought in the location of the samples that were collected for the metallurgical sample to check that the samples were not just taken from a single hole but were spread throughout the deposit.

That manto is a bit of a prick

Ohh, we can see that the samples were collected throughout the deposit. However, a few appear to have been collected within or very close to the manto oxide zone, and they appear to contain a lot more Mn (>5%) than the samples taken from the deeper sulfide zone (<2%).

If you take away the samples containing more than 5% Mn, the grade of the composite drops from 3.42% Mn to 1.79% Mn, and if we use bad maths:

• Original met composite grade = 3.42% Mn gave a concentrate grade of 1.33% Mn
• TAG's composite grade = 1.79% Mn - would this give a concentrate grade of 0.7% Mn?
• I have no idea if this is good or bad, but it may be more manageable than 1.36%

It looks like AZ were focusing on maximizing the Pb and Zn recoveries (from their representative metallurgical sample), and have appeared to have FUBAR-ed the deposit by carelessly including a few samples with a metric F*ck-tonne (I'm using official SI units here) of manganese.

Imagine if AZ had been clever and had known that Mn was an issue in Zn concentrates (I admit that I didn't). They could have trawled through their assay database and picked good samples with low Mn values for the metallurgical sample and no-one would have known.

oops

You missed a trick, now you get to have nice awkward interviews on BNN, every investor, newsletter writer and awesome mining blog dudes irritating the shit out of you by asking....