World Class Size and Strong Economics

World Class Size and Strong Economics - Fireweed is a Buy

Published: Tue, 06/05/18

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Eric Coffin's HRA ADVISORIES HARD ROCK ANALYST FIREWEEDZINC Special Situations Buy-Alert

Fireweed Zinc FWZ Built From Scratch For Shareholder Leverage

…and the Story is Just Beginning!

As many of you profitably know… I commenced active buy-coverage on Fireweed Zinc (FWZ) in the pages of my paid subscriber only HRA newsletter BEFORE the company went public. Now, just 12 months later, Fireweed is riding a wave of momentum and blasting through all previous projections for its flagship MacPass zinc project, Yukon.

You’ll recall that FWZ listed last June via a 50 cent IPO. I’ve been recommending Fireweed to my HRA subscribers every step of the way, and the stock is now up an impressive 250%. Whereas these early-stage gains undoubtedly represent a solid start from both a company and shareholder perspective – what you really need to know is this:

With the May 23 release of the company’s maiden economic study on the world-class Macmillan Pass project in Yukon, Canada—Fireweed Zinc is only just getting started!
Now is the time to reload on FWZ!

The term “world-class” is not something to be thrown around lightly. What’s important to understand here is that the company’s Macmillan Pass project – or “MacPass” as it has become commonly known in the marketplace – is one of only two high-grade zinc deposits in the world with 50 million-plus tonnes in resources NOT controlled by a major mining company. That fact alone should tell you a lot.

MacPass is BIG…very BIG. We’re talking about:

•

6.7 Billion pounds of Zinc

•

3.3 Billion pounds of Lead

•

55 Million ounces of Silver

That equates to approximately USD $13.5 billion in contained metals as confirmed by the company’s most recent resource update. And, as you’ll soon discover, there’s tons of room for MacPass to grow even larger by way of the drill—marking the beginning of the Fireweed success story.

I’m making this point as clear as I possibly can… If you don’t presently own FWZ, now is the opportune time to become an active participant in what I firmly believe will be the talk of the base metals sector over the next 12 to 24 months. If you’re already a happy Fireweed shareholder—You could comfortably average up at current price levels.

Fireweed Zinc Stock Symbol TSX.V FWZ Strong Buy Signal

Let’s start by taking a look at Fireweed’s new PEA
If you received my first Special Situations Buy-Alert on Fireweed Zinc from a couple weeks ago, you’ll recall I mentioned that a primary reason for FWZ being significantly undervalued as compared to its peers was the lack of an economic study on the company’s Macmillan Pass project.

There’s never really been any question as to the sheer magnitude of MacPass. Yet, as any astute resource stock speculator realizes: Deposit size doesn’t count for much without the positive economics to go along with it!

With last week’s release of the company’s maiden PEA (Preliminary Economic Assessment), we now have the positive economics that confirm what I have been predicting from day one: MacPass is a world-class zinc deposit that will, in fact, be mined!

Here’s a brief overview of the key economics from the MacPass PEA:

FIREWEED ZINC
Preliminary Economic Assessment Highlights

Using an 8% discount rate, all figures in $CAD unless otherwise noted.
Metal prices used: $1.21/lb zinc, $0.98/lb lead and $16.80/oz silver

Pre-Tax

After Tax

Net Present Value

$779 million

$448 million

Internal Rate of Return

32%

24%

Capital Cost

$404 million

Mine Life (4900 tonnes/day)

18 years

Payback Period

3 years

4 years

Operating Margin per tonne

$85.38

Operating Metrics at Current Spot Prices

Net Present Value

$1,214 million

$729 million

Payback Period

42%

31%

Internal Rate of Return

2.4 years

3 years

As you can see, the MacPass PEA (which you can view in more detail at the company’s corporate website) predicts a Net Present Value of CAD$448 million and an internal, post-tax, rate of return of 24%. These are very good after-tax numbers.

I particularly appreciate that management is utilizing an 8% discount rate, higher than many industry peers. The difference between the pre-tax NPV number of CAD$779 million and the post-tax figure of CAD$448 million tells me that management is being consistent in making conservative estimates about tax rates as well.

The study utilizes zinc, lead, and silver prices calculated by taking the average of three years of historic prices plus two years of forward pricing. In other words, the Fireweed team is wisely steering clear of the common practice of “cherry picking” metals prices, vying instead to institute conservative measures that are both consistent and easily repeatable.

Importantly, from a shareholder’s perspective, this is yet another impressive example of the type of conservative and transparent reporting early FWZ shareholders have come to expect from Fireweed’s management. To me, this approach just gives you that added confidence as a committed stakeholder in the company.

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Those who follow me closely know I’m a base metals bull!
If you’re similarly bullish at this point in the present market cycle, get ready to be impressed with the metrics calculated using current zinc, lead, and silver spot metal prices. These PEA metrics reveal an NPV (Net Present Value) of CAD$729 and a post-tax IRR (Internal Rate of Return) of 31%. This should give you a pretty good idea of just how leveraged MacPass is to higher metal prices going forward.

It’s an impressive economic study indeed, and it fundamentally affirms the work of management and the interest of current and future FWZ shareholders. With size and grade now confirmed, Fireweed is systematically elevating its profile as a potential takeover target by industry majors seeking to expand their base metals reserves.

A long mine-life time horizon is key…
If you’ve spent any time researching mining mergers and acquisitions, you understand that majors are always looking for projects with size, grade…and, perhaps most importantly, an extended mine-life! Majors want assurances that they’re going to be there for a long time before making a takeover bid. And Fireweed’s projected 18-year mine-life will undoubtedly go a long way in attracting potential suitors.

It’s near impossible to overstate just how important longevity is for major mining companies. These industry giants simply do not have the time nor interest in buying short-life mining operations…and it’s especially true for base metals miners.

Metals, like all commodities, are subject to major and, oftentimes, extended price gyrations. Miners know well that there will be years, near market tops, where a base metals mine is akin to a license to print money and other years, near market bottoms, where profits will be hard to come by.

Hence, by that precise rationale, top-tier miners are always striving to avoid being caught timing the metals markets. It’s just never a good idea. They instead prefer to acquire large projects with an extended mine-life horizon that can last through a couple of price cycles. It’s the only way to ensure that the benefits of those higher price-years are realized at any acceptable level of consistency.

Majors will also be pleased to see that the ratio of mine-life to payback period is a healthy 4.5 for the MacPass project using even the most conservative measures above. The same can also be said for large institutional investors who may be eyeing Fireweed Zinc as a potential stock investment. MacPass is without a doubt a top quartile base metals project that will be of interest to any number of major and mid-sized mining companies as well as smelters and concentrate buyers looking for product in the current tight zinc/lead market.

A significant producer on a global basis…
Another key metric that literally jumps out of the PEA for me is the moderate capital intensity of the project with MacPass falling neatly in the mid-range of capital required per tonne of production capacity.

This is good news for a Yukon base metals project, and it’s a testament to the excellent geometry of MacPass as a Sedimentary Exhalative (SedEx) style deposit. For Fireweed, this means an efficient mining process and delivery to a plant that will have a projected 4,900 tonne per day throughput and 18-year mine-life.

The bottom line is this…
Based on the solid throughput and high base metal grades as outlined in the PEA, MacPass should become a significant producer on a global basis. In fact, its average projected annual output of 160 million pounds of zinc and 110 million pounds of lead should place MacPass among the top 15 zinc mines in the world!

A bidding war for Fireweed is a real possibility…
It’s important to keep in mind that nearly all of those top 15 global zinc mines, as mentioned above, are already in various stages of production and controlled by majors. Hence, any major mining company seeking to enter the zinc space or increase zinc production have very, very few choices at the scale of Fireweed’s MacPass project.

Translation: MacPass is going to be very high on the proverbial wish-list for the Big-Guns of the base metals mining sector. Make sure you own FWZ before the bidding begins.

Fireweed Zinc: An Exercise in Momentum
If you didn’t know about Fireweed before reading this report, I can see where it could be easy to underestimate just how well management has executed before and since the company’s IPO. In just one year, Fireweed has reported excellent high-grade drill intercepts—in some cases far exceeding historic holes on the property.

The company’s well-guided approach to exploration has added, and continues to systematically add $BILLIONS in zinc, lead, and silver resources to MacPass and has produced a strong first-pass economic study on a project where economics had been under scrutiny—until now!

Best of all, this is NOT a team to rest on its laurels. Within 72 hours of the PEA’s release, Fireweed’s CEO, Brandon Macdonald, was en route to Asia to update interested investors and concentrate buyers – and the company’s VP of Exploration was putting the finishing touches on the next exploration program and starting to mobilize to camp.

Management has a full slate of meetings scheduled through the next several weeks with institutional investors and “corporates” that are keenly interested in MacPass now that positive first-pass economics have been revealed to the market. No doubt, many of them will want to find a way into the deal, and I have full confidence in the Fireweed team’s ability to successfully navigate this endeavor to the best interest of FWZ shareholders.

Fireweed is now cashed up with $12 million on hand to pursue an aggressive exploration program that’s starting now. The most recent financing was immediately and vastly oversubscribed within hours of being announced, with the lead investor, Resource Capital Funds (RCF), grabbing the lion’s share of the offering. As many of you are aware, RCF is infamous for its rigorous due diligence—thus, their heavy involvement shines a lot of positives on FWZ from an investment standpoint.

When large financial institutions such as RCF undertake a major investment in a publicly traded company such as Fireweed Zinc, those institutions end up holding far too much stock for the investment to be considered a “trade.” This strongly underpins the long-term investment merits of FWZ. To be sure, RCF’s end game is NOT a trade; it’s for Fireweed to continue along the path toward full-scale production of MacPass and/or toward a buy-out by a larger mining company to the benefit of early FWZ shareholders.

This puts you in excellent company as an early stakeholder in Fireweed Zinc!

HRA Journal provides you with in-depth analysis of the companies on our active coverage list along with insightful commentary on the metals and equities markets. As a recipient of this Special Situations report, please click the SUBSCRIBE button to access your exclusive savings. —Eric

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In addition to RCF’s strong investment, Fireweed’s management holds a significant block as does HudBay Minerals – a mid-sized miner that sold MacPass to FWZ. That accounts for nearly half of Fireweed’s very small share total of 30 million. That leaves a float of only around 15 million shares – and even that figure is probably a bit overstated since a large chunk of that 15 million is with highly supportive brokers and shareholders who are committed to FWZ for the long haul.

Fireweed is built to move under the right conditions. Let’s take a look at FWZ’s brief trading history to see what those “right conditions” might look like:

You can see from the chart above that FWZ quickly gained upward momentum following its June 2017 IPO as a result of heavy demand for the company’s shares. In fact, FWZ has never traded less than 40% above its IPO price!

FWZ shares drifted slightly from September to November as traders awaited results from last year’s drill program, which were delayed slightly due to the June IPO. Then, as Fireweed began reporting high-grade step-out holes, the market quickly reconvened to the upside pushing the stock toward the $1.50 level.

And, just like ducks in a row…a positive resource update was next on the predictable agenda—and FWZ delivered that in spades in early January of this year much to the delight of early shareholders. After a modest amount of “sell on the news” consolidation in February and March, you can see that FWZ quickly found a higher base yet again with a strong push above $2.

That same process is being repeated once more with Fireweed attracting a modicum of speculative buying heading into the PEA announcement—followed by some of those same traders taking partial profits off the table. This is normal, and it’s the sort of trend that typically only lasts a few trading sessions, especially when more positive news is expected from the company. And, that’s precisely what we have here!

As I write this report, Fireweed is kicking off a very large, two-rig drill campaign designed to upgrade and expand the known resource while simultaneously testing new targets on the greatly enlarged project area. As was the case last year, you can literally set your watch to Fireweed displaying its usual high level of drilling and reporting efficiency — so prepare for a steady stream of exciting news releases throughout the summer drilling months!

Let’s take a quick look at what we can expect.

Tom West – Growing High Grade Tonnage

The Tom West resource area represents some of the most obvious “low hanging fruit” for this summer’s drill program. The top of Tom West will be included in one of the high-grade starter pits; you can also see a large expanse of high-grade (+$200/tonne NSR) material that extends to depth.

Take a look at the large circle immediately adjacent to some of the highest-grade material. The obvious takeaway is that you can fit a lot of tonnes into that circle based on the thickness and density of the known MacPass zones. Plus, since this unexplored zone isn’t too far from surface, it could be scheduled early in the mine-life. There’s ample room in this one zone alone for the addition of, say, a few million tonnes. Thus, you can readily see how one small area can have an enormous positive impact on project value.

I’m a firm believer in those sorts of resource-building mining economics!

Also, take a quick look at the smaller circle. This highly prospective area surrounds an isolated deep drill hole that reported a fantastic intercept of 14.6 meters grading 14.1% zinc. This remarkable hole is situated approximately 150 meters from the current resource and has yet to see any follow up drilling. I think it goes without saying that a few drill holes, with similar intercepts with which to tie this underexplored area into the existing resource, could easily pile on a few million additional tonnes!

Big Picture Tonnage – Jason Syncline

There are several areas within the Jason North and South area where the resource can be expanded. Note the dotted “U” shaped line. The two main Jason zones are assumed to be two sides of a syncline—a large U-shaped fold. Past workers never drilled deep to connect these two resource areas. Doing that could add a large amount of tonnage to MacPass.

Now, take a look at the circled area on Jason South. There are several high-grade intercepts here that are not connected to the main zone and are not part of the current resource. More drilling here will help fix that. Note too that one interpretation of this area is that these outlier intercepts represent completely different zones. If that’s proven to be true, it could open up a much larger slice of geologic time as having high potential for mineralization.

Plus, I’m not just referring to Jason South – I’m talking about across the entire property. This, as one might imagine, would vastly increase both the target and scale potential for all of MacPass. Stand closely by as this summer’s drilling program promises to be the talk of the North American base metals mining sector. Your FWZ buy-window is open at current price levels.

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Excellent Potential for New Discoveries
As illustrated by the property map below, Fireweed has vastly increased the size of the MacPass project area through strategic claim acquisitions over the last nine months. MacPass now exceeds an astounding 470 sq km with the original Tom and Jason claims, which host the current resource, occupying only a small fraction of Fireweed’s massive land package.

What you’re seeing below is the culmination of a full winter of hard work by Fireweed’s technical staff who collected all of the historic data they could find to build a unified picture of MacPass. The colors on the map indicate the relative prospectivity for shale hosted zinc-lead-silver mineralization. The red and purple color swatches indicate areas where historic work has generated base metal soil geochemical anomalies or drainages with highly anomalous stream silt geochemistry.

Bear in mind also that the vast majority of the property has received little to no modern exploration work. Even the core Tom and Jason claims have seen zero exploration away from the immediate resource areas over the last 25 years.

As just one example, take a look at the End Zone area located in the middle of the property map.

This discovery area was split between two separate land holders until Fireweed consolidated the holdings late last year. As one might expect, with the mineralized horizon literally straddling the property boundary, neither owner had been too keen on performing large amounts of capital intensive exploration work to the benefit of the other neighbor.

Nevertheless, there has been a limited amount of drilling at End Zone which produced a highly impressive 19.4-meter intercept grading 13.8% lead+zinc along with nearly 3 ounces per tonne of silver!

Hence, there can be little question as to Fireweed’s potential for making new high-grade discoveries in several areas of the newly expanded MacPass property. As the drills begin turning at Tom and Jason, other FWZ crews will be hitting the ground on targeting surveys and ground proofing campaigns in a concerted effort to generate a ledger of completely new drill targets for later in the drill season.

MacPass Project Metrics: At a Glance
As mentioned, Fireweed has now reported results of its maiden PEA. As with any emerging stock situation, it will require some time for the market to properly rerate the stock as investors gain a clear understanding of not only the numbers as they’ve been presented, but also the vast potential for those numbers to be improved going forward.

Here are just a few ways we could see meaningful improvements in the MacPass project metrics over the immediate-term.

Partial or complete underwriting of the Canol Road upgrade
Fully one quarter of the startup capital costs of the project are allotted to upgrading the road that accesses the MacPass area. This is not a private road. Technically, it’s Territorial Highway 6. The Yukon government is aware of how critical road access is to resource development which is why the Yukon and Canadian federal governments agreed to a $468 million “Resource Gateway” initiative.

The Canol road has indicators of being a prime candidate for inclusion in this program. Passing some or all of the road upgrading costs onto the government would represent a cost savings of up to $100 million in capex for Fireweed Zinc. This alone would increase the NPV by a similar amount while increasing the after-tax IRR by about 6%. Needless to say, this would be a huge win for FWZ and I think it’s highly likely to occur.

Improving metallurgy and recoveries
Further metallurgical test work should improve an already positive set of metallurgical results for MacPass. That’s the normal outcome as metallurgy is optimized for base metals projects. Fireweed is already aware that it receives increased lead recoveries from higher-grade lead zones. Remember also that every percent increase in recoveries goes straight to Fireweed’s bottom line. Likewise, every percent increase in concentrate grade reduces the amount of concentrate shipped—again allowing for lower production costs.

Adding more high-grade open pit resources
A very pleasant surprise in the PEA is the plan to kick off production with two small, yet very high-grade open pits. This is extremely important as it allows for much of the underground development to be funded by cash flow from the pits—rather than being added to startup capital.

This is a relatively recent development, so conservative assumptions have been made in the absence of more geotechnical data. Work to be carried out this summer could show that these pits could be made even larger and/or deeper than currently projected. Adding just one year of additional open pit high-grade production would have a huge positive impact on the economics of MacPass.

Growing resources overall – and higher-grade resources particularly
The potential expansion of resources can serve to extend an already impressive 18-year mine-life—making MacPass all the more attractive to potential suitors. The key point here is that the addition of high-grade tonnage can be scheduled early in the mine-life, further front-end loading production and supercharging revenues and profits early in the mine-life to boost NPV and IRR even more. As you’ve seen in the Tom West section above, management has a very good idea of just where to drill to accomplish this important task.

Making new discoveries to cement MacPass as not just a great deposit – but a whole new mining camp
Since listing the company, Fireweed’s management has inked several deals to vastly increase the size of its property holdings at MacPass. To be certain, they didn’t do this just because they like the views! MacPass is a Sedimentary Exhalative (SedEx) style deposit, which form through regional processes occupying specific rock layers. Because these processes are of such a large scale, SedEx deposits are rarely found in isolation.

We already know there are at least two large deposits at MacPass. SedEx style deposits like MacPass form along with the rocks that enclose them. Mineralization is confined to specific rock layers of a specific age within a SedEx mining camp. The greatly enlarged MacPass project area protects tens of kilometers of the right rock layers, yet only a fraction of them has ever been seriously explored for new mineral occurrences. Thanks to Fireweed Zinc, that’s all about to change…and it starts NOW!

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Fireweed Zinc FWZ: 5 Key Profit-Points
Fireweed, as I fully anticipated, did not disappoint with their first ever economic study of MacPass. Yet, it’s by no means the end of the Fireweed story, nor is it the end of the FWZ buying opportunity.

I’m sending you this Special Situations Buy-Alert amid a “post-milestone” share price pullback—a common occurrence that usually doesn’t last long, especially for well-positioned companies like Fireweed Zinc. There are numerous reasons to remain bullish on FWZ. Here are 5 Key Profit-Points to keep in mind:

The PEA represents a major win for Fireweed Zinc: long mine-life, strong NPV and IRR numbers, manageable capex, and a ton of room for later improvement. The numbers are good and should get even better.

With the “trade the release” crowd exiting FWZ – a new forward looking “value and future news flow” crowd is starting to enter. Fireweed’s Enterprise Value currently sits at less than one-tenth the after-tax NPV of MacPass and less than one-thirtieth the Enterprise Value of the only other junior to control a +50 million tonne high-grade zinc-lead resource. A near-term rerating of FWZ to the upside is about as close to a lock as you can get in the resource space.

Most of the resource zones at MacPass are open for expansion, including the highest-grade areas of the resource. There is also potential for parallel zones as well as the connecting of the presently separate Jason North and South zones. In other words, there’s still room for MacPass to get A LOT BIGGER.

A large and aggressive exploration program is now underway at MacPass. News flow from drilling and new target generation should be coming thick and fast through the next three to four months. You saw how well the stock reacted to high-grade step-out holes late last year; we can reasonably expect a repeat of that success throughout the current drill program.

Base metal resources with the scale of MacPass are extraordinarily rare. There are a lot of larger mining companies that are in desperate need of filling their development pipelines, as well as smelters looking to tie down future concentrate feed. Fireweed’s management has made a point of being in regular contact with these types of companies, and thus, a strategic investment on favorable terms for FWZ could be forthcoming in the near-term.

As you can readily see, there are MORE reasons to be bullish on Fireweed Zinc TODAY than there were before the PEA’s release.

At this very moment, the market is offering an advantageous buy-window on FWZ. I urge you to take full advantage of it.

Sincerely,
Eric Coffman

Eric Coffin, editor
Hard Rock Analyst

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