State One Stockbroking Research Note
Conclusions from the Research Note:
The rules in the zinc market have changed irrevocably, with Chinese and worldwide demand soaring. For these reasons, and using our own estimates of cost-of-production, we have generated a similar result to the scoping study which Mount Burgess commissioned. Setting aside all predictions of $1.39 of value due to the uncertainties ahead, the fundamental outlook of a strong and sustainable zinc, lead and copper price for the mid-term implies to us that in simplest terms, Kihabe represents a potentially economic deposit. We are unused to seeing mines in production on 2% Zn, because of a prolonged period of low base metal prices. One factor in Mount Burgess’ favour in the short term is the potential to lock in a supply and off-take agreement with a Chinese customer at a favourable hedge price, which could sustain profitability over the capital recovery period. Once that is achieved, the underlying 41c per pound production cost, and the fact that the resource is not entirely leveraged to any one commodity price, will insulate the operation from the natural fluctuations of the market.
We are bullish on the likelihood of Mount Burgess finding additional significant mineralisation close to Kihabe, which could provide additional tonnage to support longer-term production, and could even be higher grade. Certainly, our field visit confirmed the compelling prospectivity of the Gossan Anomaly drilled by Billiton in 1983. We observed the gossanous material, and the mineralisation in what drill chips were left. With kilometres of potential mineralisation within the soil anomaly, it stands to reason to expect (at worst) some small tonnage oxide deposit to eventuate, and from what is known of the grade we can only hope that it is of such a tenor.
Then we get to the diamond prospectivity of the Proterozoic Damaran rocks, and here we must strongly recommend consideration of the past, present and future scientific work done by Mount Burgess. With clear kimberlitic indicators and even microdiamonds, it is only a matter of time before a gravity anomaly is drilled and a diamondiferous kimberlite is found, at least in our opinion. What this could mean for the fundamentals of the company is up to interpretation, but the known highly profitable mineralised kimberlite pipes of Botswana are on the wish-list here.
