Breathing new life into old mines

It cost a King’s ransom of C$97 million but Blue Note Mining (BN-T) chief executive Michael Judson says the resuscitation of two old zinc-lead mines in northern New Brunswick will be worth every penny.

The Caribou underground mine, 50 km west of Bathurst, and the Restigouche open-pit mine, another 30 km to the west, started producing ore last July after a decade-long hiatus.

Caribou reached commercial production by January 1 and one week later zinc recoveries topped 77.8%, with an average concentrate grade of 50.4%, while lead recoveries averaged 71.7% with concentrate grades of 45%.

The Montreal-based junior mining and exploration company, which moved from the TSX Venture Exchange to Toronto’s main board in early February, says it is expecting “a profitable year” and is currently trading at about 35 a share.

More than one analyst, however, believes the stock will move closer to its 52-week high of 77 a share in the next twelve months. John Redstone of Desjardins Securities, who re-launched coverage of the company late last year after it closed a C$40 million equity financing deal in November, believes the stock will regain its high of 77 per share by December.

Hendrik Visagie of Octagon Capital in Toronto has a one-year target price on the stock of 80. In a research note to clients on January 18, he upgraded Blue Note from “speculative” to a “buy” due to the start-up of commercial production, higher-than anticipated recoveries and robust lead and zinc prices.

Visagie believes “revenue realization” will occur in the first quarter of 2008 and has forecast total revenues for the year of about C$174 million.

Last year Blue Note’s mining operations posted net revenues of C$24.4 million. (The company suffered a net loss of C$11.8 million or 4 per share.)

Milling operations commenced in July, and a total of 298,459 tonnes of ore were processed in 2007producing 18,672 tonnes of zinc concentrate and 14,673 tonnes of lead concentrate.

Still, Judson has had to deal with naysayers troubled over the mines’ complex metallurgy, low recoveries and unstable milling operations. The deposit has fine-grained massive sulphide mineralogy, which has at times proven difficult to process.

What’s more, current reserve estimates for Caribou suggest a fairly short mine life of just five years.

Judson concedes Restigouche will be mined out in the next three or four years, but says he expects Caribou to last for up to 15 years.

“There’s a perception on Bay Street or among institutional investors that it’s just a five-year mine that it has a short mine life,” Judson says in an interview. “But that’s just not true. It’s going to have a long mine life and we will validate that with our next NI-43-101 reserve estimate.”

To that end, Blue Note kicked off a 9,000-metre drill program at Caribou last July to upgrade the resource. Blue Note expects those results by early 2009.

Currently the Caribou mine has reserves of 3.59 million tonnes grading 6.62% zinc, 2.86% lead, and 0.34% copper and 81.40 grams silver per tonne at a cutoff grade of 9% (combined lead and zinc).

In addition, the underground mine has an inferred resource of 3.98 million tonnes grading 7.36% zinc, 3.59% lead, 0.28% copper and 107 grams silver per tonne.

The Restigouche mine has reserves of 1.33 million tonnes grading 6.53% zinc, 5.05% lead, 0.33% copper and 100 grams silver per tonne.

In terms of the complex metallurgy of the deposits, Judson says the company’s $3 million investment in break-through grinding mills to treat the finely grained ore have performed well, providing the ultra-fine grinds required to achieve planned targets. The Isa Mills were developed in Australia and Blue Note is the first company to import them to Canada.

One of the biggest challenges Blue Note faces has been and continues to be cost containment, Judson says, adding that companies like Blue Note have to be “disciplined and as vigilant as possible” with their costsand labor costs make up a big portion of the package.

“As we evolve to a production company we have to lessen our dependence on a ready made fix of contractors because they are expensive,” he explains. “They come with a huge price-tag. We are a very cost-sensitive operation, ergo we have to deal with that facet of the business.”

Shortages of experienced labour and training costs have magnified the problem and finding skilled workers remains a headache. “We are short some people on some fronts,” he admits, especially qualified and skilled people for the mill. “You’ve got people in there twenties who don’t have a lot of experience operating a mill that are working for us. It’s just more difficult to find senior people.”

If Blue Note can conquer its labour issues and keep the lid on costs, Judson says, it will be blue sky ahead. He forecasts zinc prices will climb from their current levels of about $1.10 per lb to as high as $1.40 or even $1.50 this year.

Visagie of Octagon Capital forecasts zinc prices will average about $1.35 per lb this year but predicts zinc will average in excess of $1.40 per lb in 2009 and 2010.

As for supply, zinc production “will not be as robust as many suggest” Visagie notes in his January report. He cites a number of reasons including delays in new mine start-ups that originally had been scheduled for the middle of this year — such as Aqua Tenidas, Perkoa, Darla and Wolverine — all of which have been delayed to later this year, 2009, or even later.

He also points out that China closed many of its small, energy-intensive mines and therefore will not produce as much zinc in concentrate as some have forecast. New mines that have started operations have also taken longer to ramp up to full production, he writes in his January report.

On the exploration front, Blue Note has recently acquired more mineral claims in the Bathurst vicinity. In early April, the New Brunswick government allocated up to C$3 million in matching exploration funds to help Blue Note search for more mineral reserves in unexplored areas of the Bathurst mining camp.

Under the three-year exploration agreement, the government will match a maximum of C$1 million per year that Blue Note invests in exploration. “The ultimate goal is to be able to find enough [mineral reserves] to extend the life of the mine by several more years,” Natural Resources Minister Donald Arseneault said in a prepared statement earlier this month.

“The way we’re going to grow the company in a significant way is through mergers and acquisitions,” Judson says. “Do I expect something to be done in the next year? Yes. And that something could probably double our asset base.”

That’s excellent news for the 46-year-old father of two who once seriously considered parlaying his talent on the bass guitar into a professional music career before he set his sights on business.

“I was about twenty when I realized that it [a career in music] was likely to condemn me to a life of perpetual poverty so I thought twice about it,” he says. “I’m not the Bohemian I thought I was.”

Blue Note has about 362.8 million shares outstanding and a market capitalization of about C$126.7 million.