Consolidated Zinc Ltd: Set to Benefit from Post-COVID Growth
Consolidated Zinc Ltd
Set to benefit from post-COVID growth
Consolidated Zinc Ltd (CZL.ASX) is a junior mining and exploration company, listing on the ASX in June 2006, holding a 100% interest in Plomosas Zn-Pb-Ag mine in Chihuahua, Mexico, where commercial zinc production was re-established in December 2018. The company is set to realise greater economic returns from its Plomosas mine through 2021 by delivering improved commercial outcomes and profitability from increased metal recoveries, more optimal mining and cost reductions resulting from greater direct operational control. With global economic growth expected to be strong in a post-COVID world, the outlook for industrial metals remains robust although this remains a critical risk to the short-medium term outlook. Whilst CZL is a ‘one-asset play’ at the moment, its tenement holdings around Plomosas are highly prospective with a high probability of delivering project extensions and new deposits subject to successful regional exploration and evaluation.
Scope
This report has been commissioned by Consolidated Zinc Ltd to present investors with an explanation of the opportunities presented by its mining and exploration ventures in Mexico and the value created from a range of possible outcomes.
Business model
Consolidated Zinc is a junior minerals company with current production and cashflow from its 100% owned Plomosas mine located in Mexico and holding significant tenements east of the historically highly prospective Santa Eulalia mining district. The Company intends to deliver on its strategic plan to deliver optimal returns from Plomosas through debottlenecking and final commissioning of its purpose-built processing plant
Scenario analysis
Our analysis and review of Consolidated Zinc’s opportunities assumes delivery of operational improvements as guided. We have evaluated the Plomosas project against a range of risk factors based on our assessment of the economic environment accounting for commodity prices, expected benefits through improved metallurgical recoveries and reduction of unit costs. We have applied where necessary discretionary risk weightings, and note our assumptions are subject to potentially significant adjustment as development data and operational outcomes become better defined.
Valuation of A$34mn (A$0.12/share)
We set our base asset value against a risk-weighted operating (NPV) scenario underpinned by company guidance and targets, applying where appropriate a discretionary probability weighting reflecting pricing, volume and success uncertainties that may be unwound over the course of 2021 as ‘actuals’ support mining and processing targets. We assign a nominal value on the exploration potential appropriate for the early-stage nature of work programmes, in our view. We model a risked valuation of A$34mn (A$0.12/share) to the asset base against a reference share price of A$0.045/share and highlight the strong NAV to share price premium (>250%) likely reflecting investment uncertainty over the macro economic environment and delivery of improved Plomosas performance. It’s worth highlighting we have been conservative in our model assumptions on both operating and metals pricing and note in our opinion strong upside risk to forecasts.
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