Zinc prices have come off a touch from the 10-year highs seen in the opening months of the year. But at the current price of $US1.47/lb – more than twice its low in 2016 – there can be no complaints about the metal’s performance, one driven by the possibility of an actual physical supply pinch if the world’s official and hidden stocks continue their dramatic slide.
It goes without saying that it is good time to be a producer of the metal. But for investors wanting leveraged returns, a better strategy is to seek out a near-term producer from a fully-financed project that, because of financing delays when zinc prices weren’t so supportive, has had the benefit of being studied to the nth degree.
No prizes today for guessing Heron Resources (HRR) fits the bill to a tee as it pushes towards first production from its Woodlawn polymetallic mine (mainly zinc) near Goulburn in NSW by year end/early next year. First production will be a major re-rating event for Heron, which last traded at 67.5c for a market cap of $160m.
Assuming a smooth commissioning, the re-rating event could be something special as there is broad agreement that steady- state operations from Woodlawn should be good for annual EBITDA of about $100m at current metal prices. Euroz was one to cite that sort of potential in a recent note on Heron that came with a $2 a share price target.
Clearly, the market is not getting too excited just yet on Woodlawn. But that’s pretty much standard stuff during the construction phase of any project. And while there are good reasons to think zinc is going to hold on to these elevated levels for the foreseeable future, there are some doubters out there who reckon we should all plug in a long-term zinc price of say $US1-$US1.15/lb.
Maybe so, just as Heron did in its June 2016 feasibility when it assumed a long-run zinc price of $US1.01 and a US73c exchange rate. On that basis (copper, lead and gold assumptions were lower than current prices while silver was higher), total costs for Woodlawn were put at US34c/lb. The point there is the project is lowest cost quartile, or robust as they come, put another way.
History tells us that as Woodlawn was mined between 1978 and 1988 by the long-gone Denehurst. Low metal prices played a part in the closure, but the bigger reason was a lack of sustaining capital after Denehurst blew up over a dud coal deal. The records show that in every year of operation Woodlawn returned cash to the parent, and was close to break-even just ahead of its closure.
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