The Gold Report - Tue, Jan 23, 2018

Coverage Initiated on 'Clear Standout Within the Zinc Space'

Kevin MacKenzie, an analyst with Canaccord Genuity, explained the rationale for adding this junior exploration company to his coverage universe.

Zinc stacks

In a Jan. 15 research note, analyst Kevin MacKenzie reported that Canaccord Genuity initiated coverage on Tinka Resources Ltd. (TK:TSX.V; TLD:FSE; TKRFF:OTCPK) with a Speculative Buy rating and a CA$1 per share price target. (The stock is currently trading at around CA$0.70 per share.) Tinka Resources is advancing its 100%-owned Ayawilca polymetallic zinc project in central Peru.

The investment thesis for Tinka, MacKenzie explained, includes four major, favorable characteristics of the Ayawilca project:

1) It has a "sizable resource base," MacKenzie wrote. The resource there, as of Tinka's most recent (late 2017) estimate, was 42.7 million tons (42.7 Mt) grading 7.3% zinc equivalent (7.3% Zn eq), or 6% zinc. This reflects a 127% increase in tonnage over the 2016 resource estimate.

2) Its resource remains "open for expansion on multiple fronts," said MacKenzie, and Tinka continues with exploration work. The company plans 15,000 meters (15,000m) of drilling in 2018. The recent zone 3 finding of 7.9% zinc and lead over 10.3m could significantly increase the resource base size. "We note that the Ayawilca project hosts multiple high-grade showings, which presents the potential for the discovery of additional centers of mineralization," the analyst added.

3) It boasts "attractive" economics, noted MacKenzie, who detailed two of four potential project case models: base and upside B.

The base case yields an after-tax net present value 10% (NPV10%) of CA$220 million (CA$220M), an internal rate of return (IRR) of 23% and a 23-year mine life. This assumes a long-term zinc price of US$1.10 per pound and a resource base of 52 Mt grading 6.59% Zn eq plus 40% exploration upside for further resource expansion. It assumes a throughput of 6.5 thousand tons per day (6.5 Ktpd) and an initial capex of US$300M.

The upside case B highlights an after-tax NPV10% of CA$380M and an IRR of 26%. It is comprised of the base case but also incorporates processing of the tin resource (13Mt grading 0.65% tin equivalent), greater mill throughput (10 Ktpd) and an additional 30% in exploration. "We highlight Pucarumi and Yanapizgo as prospective targets within this context," MacKenzie said.

4) Ayawilca stands out as a potential acquisition target in the zinc exploration space, MacKenzie indicated. This is due to the quality of the project's assets, specifically size and grade, and its "ongoing discovery momentum." As well, its location is ideal, in a well-developed mining jurisdiction in central Peru's polymetallic belt, where numerous midtier to senior mining firms operate and several recent zinc mergers and acquisitions have taken place. "We view Tinka as potentially an attractive acquisition for such local operators as Nexa, Volcan and Trevali," he said.

Upcoming catalysts for Ayawilca are release of 1) further drill results from the 2017-2018 exploration drill program, 2) a maiden preliminary economic assessment (PEA), scheduled for Q2/18 and 3) the metallurgical results for the zinc and tin zones, slated for H1/18. "We view the release of the Ayawilca PEA as a potential rerating/derisking point for Tinka as the company continues to focus on expanding the project's overall resource base," MacKenzie purported.

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