Blue Note Mining hopes to strike the right chord

It cost a king’s ransom of $97 million but Blue Note Mining (BN-T, BNMFF-O) chief executive Michael Judson believes 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 west, started producing ore last summer after a decade-long hiatus.

Caribou reached commercial production by Jan. 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 12 months.

John Redstone of Desjardins Securities, who re-launched coverage of the company late last year after it closed a $40-million equity financing deal in November, believes the stock will regain its high of 77 per share within the next year.

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 Jan. 18, Visagie upgraded Blue Note from “speculative” to a “buy” due to the start of commercial production, higher than anticipated recoveries and robust lead and zinc prices.

Visagie forecasts “revenue realization” will occur in the first quarter of 2008 and has pegged revenues for the year at about $174 million.

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

Milling operations began in July and a total of 298,460 tonnes of ore were processed in 2007 — producing about 18,670 tonnes of zinc concentrate and 14,670 tonnes of lead concentrate.

Still, Judson has had to deal with naysayers troubled over the mines’ complex metallurgy, and previously 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. “But that’s just not true. It’s going to have a long mine life and we will validate that with our next (National Instrument) 43-101 resource estimate.”

To that end, Blue Note kicked off a 9,000-metre drill program at Caribou last July to upgrade the calculation and convert the inferred resource to the indicated or measured categories. The company expects those results by the end of this year or in 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 81.4 grams silver per tonne at a cutoff grade of 9% combined lead and zinc.

In addition, there is an inferred resource of 3.98 million tonnes grading 7.36% zinc, 3.59% lead, 0.28% copper and 107 grams silver.

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

In terms of the complex metallurgy of the deposits, Judson says the company’s $3-million investment in breakthrough grinding mills that treat the finely grained ore are paying off. The Isa Mill technology produces ultra-fine grinds necessary for Blue Note to achieve its 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 costs — and labour makes up a big portion of those costs.

“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 can be problematic. “We are short some people on some fronts,” Judson concedes, especially qualified and skilled people for the mill. “You’ve got people in their 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.”

Judson says Blue Note has solved most of its labour requirements and if it can keep a lid on costs, it will be blue skies ahead. He forecasts zinc prices will climb to as high as US$1.40-1.50 per lb. this year from their current levels of about US$1.10 per lb. Visagie of Octagon Capital forecasts zinc prices will average about US$1.35 per lb. this year but predicts zinc will av- erage 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 predicts in his January report. He cites a number of reasons, including delays in new mine startups that originally had been scheduled for the middle of this year — such as Iberian Minerals’ (IZN-V, IZNFF-O) Aquas Tenidas, Aim Resources’ (AIM-A) Perkoa, and Yukon Zinc’s (YZC-V, YZCCF-O)Wolverine — all of which have been delayed to later this year, 2009, or even later.

Visagie 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 notes.

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 $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 provincial government will match a maximum of $1 million per year that Blue Note invests in exploration.

“The ultimate goal is to be able to find enough to extend the life of the mine by several more years,” New Brunswick’s Natural Resources Minister Donald Arseneault said in a statement in April.

“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 guess I’m not the Bohemian I thought I was.”

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