SRA speeds Tennessee zinc mines into action (June 18, 2007)

With a $105-million initial public offering completed in May, Strategic Resources Acquisition Corp. (SRA) (SRZ-T) is gearing up to bring the Middle Tennessee Zinc Mines back into production by the fourth quarter.

The route to full production — 147 million lbs. of zinc concentrate per year by early 2008 — involves bypassing a feasibility study, which is a risk SRA is comfortable with.

The company, through its wholly owned subsidiary Mid-Tennessee Zinc Corp. (MTZ), wants to take advantage of today’s high zinc prices, which are around US$1.60 per lb. — down from a late-2006 peak of US$2 per lb., but four times higher than the US40 per lb. it fetched in 2002.

Demand for zinc, used to make stainless steel, has risen due to demand from China, a shortage of zinc concentrates and a decrease in available stockpiles. Analysts predict that although more zinc projects are planned for the near future, a supply gap exists beyond next year.

The Middle Tennessee mines, which produced 36.9 million tons of zinc ore grading 3.18-3.38% zinc between 1975 and 2003, were closed due to low metals prices and have been on care and maintenance since. Pasminco, the Australian company that last operated the mines, produced 114 million lbs. zinc in 2002.

There are five mines included in the Middle Tennessee complex: Elmwood, Gordonsville, Carthage, Stonewall and Cumberland, as well as the undeveloped East Carthage deposit and the Gordonsville mill and concentrator. The mines are located about 50 km east of Nashville, and are on a land package of nearly 47 sq. km, 91% of which is leased.

At full production the mill will run at 7,000 tons per day, though it has the capacity to reach 8,000 tons. SRA expects the average mill feed grade to be 3.14% zinc and the operating cost to be US77 per lb.

The initial mine life is estimated at six years based on an indicated resource of 12.5 million tons grading 3.5% zinc. The company hopes to extend the mine life by upgrading the current inferred resource of 16.7 million tons, as well as through exploration. The company plans to drill 10 holes totalling about 5,000 metres this year — half twinning holes from previous drilling and half in prospective areas to extend known mineralization.

These estimates are based on historical production and grade, management’s knowledge of the mines and talks with Dynatec Mining, the contract operator.

SRA has budgeted US$70.8 million to restart the mines, which includes US$19 million for mining equipment. According to the technical report, another US$36.2 million will be needed between 2008 and 2012 to sustain capital and capital development.

Dynatec Mining, a subsidiary of the Richmond Hill, Ont.-based company, Dynatec (DY-T, DYTCF-O), will be the operator for the first two years of production. SRA says this will allow it to achieve its operational objectives faster than if it assembled its own mining team. Senior management of SRA hopes to focus attention on finding new acquisition and resource development opportunities in the meantime.

The Dynatec team has been on-site in Tennessee since February on a separate contract to prepare for production. Structural engineers are assessing surface ore handling systems and have met with fabricators to rehabilitate head frames, hoisting systems and conveyor belts. Electrical surveys have been completed at the Elmwood, Cumberland and Gordonsville mines and the electrical systems are being evaluated so that power can be restored.

The Gordonsville mine decline was reopened and ground control and ventilation planning completed. Progress was made in readying the shafts at Elmwood, Gordonsville and Cumberland.

Dewatering of the Elmwood mine, which is connected to Gordonsville, began in late April and should be finished by September. Dewatering began at the Cumberland mine in mid-May.

The mines consist of 5,500 ft. of underground ramp access, about 350 miles (563 km) of underground development, an ore haulage system and a previously permitted tailings impoundment.

SRA plans to sell germanium, gallium, limestone rock and agricultural lime (AG-LIME), which will help to offset operating costs — by US2.5 for aggregate limestone rock and US2 for germanium, per lb. of payable zinc.

The company bought the property for US$16.3 million last December, which included drills, loaders, scalers, hoists, elevators, mobile cranes, compressors and water pumps.

As a part of the deal, SRA will pay a US1-per-lb. zinc royalty on the first 300 million lbs. zinc to the previous owner, Mossy Creek Mining, an ag-lime producer.

Mossy Creek reserved the right to take up to 150,000 tons of ag-lime produced as a byproduct from mining activities, free of cost, though SRA is not obligated to produce ag-lime.

Globex Mining Enterprises (GMX-T, GLBXF-O) has a 1% gross metal royalty based on the London Metal Exchange zinc price when zinc prices are between US90 and US$1.10 per lb., rising to 1.4% above that window. The royalty was awarded on the basis of a “finder’s fee” in connection with Jack Stoch, a substantial shareholder of Globex, who informed SRA about the project. Stoch is now a director on SRA’s board.