SRA revives Mid-Tennessee zinc complex

SITE VISIT

GORDONSVILLE, TENNESSEE–During 28 years of production at the Mid-Tennessee zinc mine complex, it wasn’t always the zinc that kept business afloat.

Agricultural lime, gravel, germanium and even a few calcite and fluorite crystals played a part in offsetting years of low zinc prices that stooped below US40 a lb. in 2003, forcing the mine to be put on care and maintenance.

But zinc has made a comeback, currently hovering above US$1 per lb., and so has the Mid-Tennessee mine.

Strategic Resource AcquisitionCorp.(SRZ-T), or SRA, restarted mining in January at the operation at 1,000 tons per day with the goal of ramping up to 5,000 tons by late spring. Already, SRAhas stockpiled 60,000 tons of ore as the refurbished mill goes through the final checks.

SRA plans to reach full production of 7,500 tons per day by midyear and aims to produce 147 million lbs. of zinc in concentrate per year, or 125 million lbs. of payable zinc, for the next 10 years.

Ken Gum, the mine’s general manager, says the economics of the project look good, especially with the byproduct potential.

“It’s something that differentiates us–we can sell everything,” Gum says. “That kept (the last operator) alive in the very depressed zinc market before.”

And although zinc has retreated from a peak of US$2 per lb. in late 2006, Gum isn’t worried. After 23 years of working at the mine, last operated by Autralian company Pasminco, he’s seen it survive at much lower zinc prices that never touched US$1 per lb.

The Mid-Tennessee complex had produced 2.7 billion lbs. of zinc metal when it shut down, but because it still had 10 years of reserves left, Gum knew it wouldn’t be closed forever.

“When we left, we tried to leave things to make a recovery possible,” Gum says.

The project now has no reserves, but it does have a National Instrument (NI) 43-101 indicated resource of 12.5 million tons grading 3.35% zinc plus 16.6 million inferred tons grading 3.43% zinc, using a cutoff of 2% with grades capped at 4.5%. The ore also has an average grade of 0.04% germanium and 0.05% gallium.

So far, SRA has spent US$78 million in preproduction costs to get the Gordonsville mine and mill going.

It will cost SRA another US$34 million in sustaining capital over 2008 and 2009 to add vent raises and fans to support increased production and to finish dewatering the Elmwood and Cumberland mines.

Over the 10-year mine life, total expenditures are expected to be US$180 million.

SRA’s operating costs are about US79 per lb. payable zinc before germanium and gallium credits are factored in.

The company is applying for permits so it can produce 40,000 to 45,000 kg of gallium per year and 30,000 to 35,000 kg of germanium. The spot price for gallium is about US$650 per kg while germanium goes for $1,100 per kg.

As well, SRA plans to earn about US$1 million per year for gravel and the same amount for agricultural lime.

The Mid-Tennessee zinc mine complex, located about 80 km east of Nashville, consists of five mines: Gordonsville, Elmwood, Carthage, Stonewall and Cumberland.

Mineralization was first detected in 1964, but it wasn’t until 1975 that mining began. Over the years, the complex grew to include 14 shafts and ventilation raises and 560 km of underground tunnelling.

Economic zinc mineralization in the area is confined to stratabound collapse breccias and dissolution cavities in Mascot dolomite. There are two breccia systems — the earlier systems are not mineralized while the later systems host sphalerite (zinc sulphide), as well as fluorite, barite, marcasite, pyrite, calcite, dolomite and quartz. Sphalerite mineralization is not distributed uniformly, but it is known to occur along the outside of the breccia orebodies.

The mine complex is spread across 13,000 acres of land, 12,000 acres of which are leased from local land owners, who hold a 4.5% net smelter return royalty divided according to land area.

SRA plans to exploit three of the mines over the next few years while it further develops resources at the others.

Up first for mining is the Gordonsville mine, which is where the mill is located.

“We advanced Gordonsville because it dewatered more quickly,” Gum says.

The Elmwood mine, which has slightly higher grades, will be brought on-stream in the spring, followed by the Cumberland mine in the summer.

“We’ll taper back at Gordonsville as we get Elmwood going,” Gum says. “We could mine like crazy here at Gordonsville but it’s widely spaced and lower-grade.”

SRA boasts that Mid-Tennessee zinc is sought after by smelters around the world.

Why? Because it’s so pure. After processing, the zinc concentrate averages a grade of 64.5%, near the theoretical maximum of 67%. Smelters use it to upgrade lower-quality zinc material.

The ore has straightforward separating characteristics and responds well to gravity separation. That purity means no penalties at smelters, as there are no additional contained metals. Through 28 years of continuous production, the recovery rate averaged 95% from ore with an average grade of 3.28%.

“That’s why we survived,” Gum says. “If it had been a more complex metal we wouldn’t have been able to.”

In the fall, the company signed offtake agreements with three smelters — the Ruhr-Zinc smelter in Germany, Teck Cominco’s lead-zinc smelter in Trail, B.C., and Nyrstar’s smelter in Clarksville, Tenn., just 160 km west.

The Clarksville smelter is no stranger to Mid-Tennessee zinc; in fact, the smelter was designed specifically to handle it back when the two operations were vertically integrated.

SRA has promised 90,000 tons of concentrate each year to Nyrstar — about three quarters of yearly production — for five years. The remainder will go to the other two smelters.

What’s more, Nyrstar, which used to send smelter residue overseas to a germanium processor, has agreed to send the smelter residue back to SRA so it can recover both gallium and germanium itself.

SRA is looking into building a processing plant for the gallium and germanium with current estimates at around $20 million. No decision has been made yet.

The gallium and germanium plant isn’t the only thing that’s different this time around.

Gum looks at the mine’s reopening as a chance to improve on the past.

The mine used to operate on a five-and-a-half-day workweek; SRA is pushing it up to a full seven-day week, increasing production.

The company also wants to be more selective about the ore that it sends through the mill.

“That was the mistake before,” Gum says. “If it came up, we processed it; if it had colour, we mined it.”

Now, the company is planning ahead. A fourth percussion drill has just been added so that SRA can complete 9,000 metres of underground development drilling per month together with a 24-hole, 11,000-metre surface diamond-drilling program. The idea is to have at least two years of resources ahead of mining.

The company believes it can extend the mine life beyond 10 years. There’s a 2,400-metre development corridor between the Cumberland and Carthage mines, which has not been tested, and the company has plans to further expand resources beyond that.

All that drilling means a lot of costlyassaying. But that’s not a problem when assays are only needed in-house.

Deep within the dark, zig-zagging maze that is the Mid-Tennesee mine there sits a lone geologist away from the other underground crew members who monitor a modern percussion drill.

The geologist squats on a tiny stool holding an archaic mining tool: a gold pan. He’s actually panning for zinc, and he’s serious about it.

The swirling and sloshing of water is muted by the blare of the drill as it crushes through the ore that may one day be mined and milled.

After the crushed ore sample has settled in the pan of water, the geologist eyes the pan, tilts it one way then the other.He analyze
s the contrast of the light brown sphalerite against the grey dolomite, and then jots something down.

“Three point two per cent,” the geologist calls out to his coworkers.

Mid-Tennessee geologists have perfected this technique over the years, proving it to be nearly as accurate as sending samples to the lab. It’s been practised by other mines across the country, as well.

Gum says it was a way to save money that was just as reliable as chemical assaying.

A technical report that SRA commissioned from Watts, Griffis and McOuat concluded that, although visual assaying does not meet industry standards, when done by a highly trained and experienced geologist, the method is accurate, consistent, and in most cases slightly more conservative than chemical assays.

The U.S. Securities and Exchange Commission accepted the visual assay method for reserve and resource estimates in the past, however, visual assays are not accepted under NI 43-101, so the historic reserves at the Mid-Tennessee mine were downgraded to resources.

The report recommends that visual assaying continue at the mines because the estimates are economically practical, and can be used as a valuable check on chemical assay results. It cautioned, however, that chemical assays should not be used for calculating resources and reserves.

Geologists follow a fairly defined method to calculate zinc grades. When measuring drill core, the sphalerite is measured in tenths or hundredths of feet in a given intersection. Next, the total is divided by the number of feet in the mineralized section. That number is then taken to a calculations chart, which reveals the estimated zinc value.

For underground definition drilling, the method is a little different. Drillers collect samples of crushed ore, which falls into a barrel as it comes out of the hole. A sample is collected for every 6-ft. interval of drilling from the barrel and placed in a container. A geologist or technician takes a random sample from the container, puts it in a gold pan, rinses the sample and notes the lithologies and minerals present. Sphalerite mineralization is separated and concentrated due to the specific gravity differences between it and the waste rock. The sphalerite percentage is estimated, then taken to the same chart to get the zinc grade.

When a new geologist is trained to do this, the assays are backed up by chemical assays until he or she becomes extremely accurate.

If a mine could be described as being environmentally friendly, SRA would tell you why theirs is as close as you can get.

So might Al Gore, whose Tennessee home is just down the road from the Mid-Tennessee tailings pond. Yes, Al Gore, the former U.S. vice-president, who won an Oscar last year for his documentary film on climate change, An Inconvenient Truth.

SRA doesn’t quite have Gore’s stamp of approval — the environmentalist, who used to lease his land to the former mine operators, was sharply criticized for making a reported US$570,000 in royalties over the years — but he did take the time to write the company a letter urging it to be as green as possible.

Gum says Gore no longer leases land for mining.

Reports have claimed the mine emitted thousands of pounds of toxic substances.

Gum refutes these allegations. The company says the mine produces no harmful chemicals while the tailings impoundment acts as a large filter to trap the sediments, including agricultural lime, which is bagged and sold to farmers to neutralize acidic soil. SRA has negotiated to sell 150,000 tons of ag-lime per year to a third party.

Limestone pebbles are used for construction of roads and ditches in the area, decreasing waste.

Gum says the Toxics Release Inventory has a blanket definition for what constitutes toxic waste. Mid-Tennessee tailings discharge averages 0.15% zinc, which is considered toxic waste by the TRI even though it is beneficial to farmers for food cultivation. He says the U.S. Environmental Protection Agency’s Toxity Characteristic Leaching (not Leachate) Procedure (TCLP) has different criteria more suited to discharges that are not harmful. The TCLP is designed to determine the mobility of both organic and inorganic chemical compounds in liquid, solid, and multiphasic wastes.

But the majority of the ag-lime sits in the tailings pond and it’s becoming a problem because there’s only about five years worth of space left.

The ag-lime sales don’t help that much. SRA is restricted to local buyers because it’s too expensive to ship.

“I can produce way more than I could ever sell,” Gum says. “Freight is a killer.”

Gum says the company is already looking for alternatives — possibly stacking dry tailings.

“Instead of having a puddle, I’ll have a hillside,” Gum says.

Members of the current management and board were on the lookout for a new opportunity when SRA president and CEO Victor Wyprysky got wind of the Mid- Tennessee opportunity from Jack Stoch, the president and CEO of Globex Mining Enterprises (GMX-T, GLBXF-O), who sits on SRA’s board of directors.

SRA was incorporated in September 2006, and acquired the mine for $15.6 million in December with the help of a $20-million private placement. It then made an agreement with Dynatec Mining, a subsidiary of FNX Mining (FNX-T, FNXMF-O), to oversee the reactivation and mining for the first two years. By May 2007, SRA closed a $112-million initial public offering.

Globex retains a 1.4% gross overriding royalty on all zinc production according to the London Metal Exchange zinc price of US$1.10 per lb. or higher, or 1% on all zinc production between US90 and US$1.09 per lb.

The vendor of the mine holds a net smelter return royalty (NSR) of 1 per lb. zinc on the first 300 million lbs. of production to a maximum of $3 million. The NSR can be bought for US$2 million within one year of commercial production.

The returns appear favourable. According to the technical report, when considering only the indicated resources, the 10% after-tax net present value (NPV) of the project is $147.5 million but rises to $230.9 million when inferred resources are included. When germanium credits are included, the 10% NPV increases to $169 million with indicated resources alone considered, rising to $269.9 million including both indicated and inferred.

On top of that, the technical report found that the base case scenario, considering indicated resources only and no germanium or gallium credits, was still robust, with an 18-month payback period and a zinc price of US$1.37 per lb. However, zinc hasn’t been above US$1.30 since last fall.

Still, SRA management say the company is in a fairly secure spot. A testament to this is the recent investment by FNX Mining, which acquired 10.7% of SRA shares in a private transaction, at $2.85 per share, totalling about $10 million.

And like its name, Strategic Resource Acquisition Corp. is always on the lookout for other value-added, near-term projects. For now though, SRA’s focus is a smooth startup in Tennessee.