This is a reprint in full (as is) of a commentary issued on the company 2/15/24 I received from a Canadian Investment Banker.

Arizona Metals (AMC:CN) has been under immense selling pressure. While this is not unique within the mining space, AMC has underperformed, declining from ~$5 to $1.70 in the last year. We think, in addition to macro factors, investor fatigue and lack of catalysts have also contributed. While drilling on the Western target showed clear signs they were honing in on a new discovery, an official discovery has yet to take place. New pads are required for continued West target drilling to the North and approval is not expected until 2H/24 – hence the investor fatigue during the last year.

With that said, we estimate AMC has delineated ~25Mt of 3-5% CuEq at Kay for a $2b NAV ($12.75/sh). Our target price is based on 0.5x NAV. The stock trades at 0.1x NAV vs 0.4x for the peer group. We expect a maiden resource at Kay in 2H/24 to underpin our valuation. In addition, there are several high-quality exploration targets on the property including 4 new targets identified and press released in January. VMS deposits usually occur in clusters. AMC should be no exception and there are signs pointing to new discoveries. The company is also preparing two spinout companies (a royalty co and its Sugarloaf gold asset) that could be public in 2H/24 to deliver hidden value to investors.

Long story short: Shares have declined for understandable reasons both macro and company specific. However, we think valuation has corrected too far (0.1x NAV!). AMC does not need cash w/ ~$40MM on the B/S. For those with 6-12 month time horizons, there are significant catalysts on the horizon.

• 11-12 shallow Kay holes at the lab. Expect at least a few of them back before PDAC and then a steady stream thereafter.
• Completed shallow drilling. Next week, begin deeper holes targeting higher grade/potentially wider width targets.
• Still waiting on BLM to authorize new pads to drill recently announced North Central target. If approval doesn’t happen soon, AMC will drill this target from pad 7. Plan is to be drilling this in Q1.
• Recently announced South East target expected to be drilled in Q2
o Reminder, AMC recently identified 4 new priority targets, 2 of which could be drilled in H1/24 (North Central: end-Q1 & Southeast target: Q2) and the other 2 in H2
o Currently 2 rigs, potentially increasing to 4 – 5 rigs by June
• Kay maiden resource by YE-2024: identified 30,000 m of drilling needs to be completed for resource definition of which ~15,000 m has been completed
• Working on plan of operations to allow for unlimited ground disturbance to accelerate exploration. Likely 2H/24.
• Met work update expected in 1H/24. Assessing optimal payabilities of Cu con and Zn Con.
• Spinouts of royalty and Sugarloaf gold asset to be voted on at Mid-May AGM w/ closing expected by end of Q2.
o AMC announced its intention to spin-out its Sugarloaf Peak gold project (1.5MM oz historic resource w/ massive expansion) and 2% royalty on Kay into two new companies
o AMC will retain 19.9% ownership in both the new companies while the remaining 80% will be distributed on a pro-rata basis b/w the existing AMC shareholders. Completion of the spin-outs is expected by end-Q2/24, subject to shareholder and other approvals.
o Depending on the market conditions, both the new companies could be taken public sometime in H2/24
• For permitting naysayers: This morning South32’s board approved a final investment decision for the Taylor zinc-lead-silver deposit, which is the first development in its Hermosa project in Arizona, for capital expenditure of $2.16 billion (see press release below).
o Hermosa is approx. 375kms SE of Kay and is in the same VMS belt. This signals a jurisdiction that permits and approves large-scale projects and a major willing to invest billions in the region.
o Also, this was the first mining project greenlighted under the FAST-41 program an accelerated permitting process for carbon capture projects.
o AMC has been exploring whether they qualify for FAST-41 wh/ would accelerate their permitting timeline.
o Also of note, South32’s project is in a more challenging location in that its 80 acres of private land is surrounded by national forest and therefore requires input/approval from Forest Services. AMC is entirely private or BLM land and does not interact with Forest Service.


South32 approves $2.16B development of Hermosa’s Taylor zinc-lead-silver deposit
Thursday, February 15, 2024 6:32 AM ET
By Meghan Gordon
Commodity Insights
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South32 Ltd.’s board approved a final investment decision for the Taylor zinc-lead-silver deposit, which is the first development in its Hermosa project in Arizona, for capital expenditure of $2.16 billion, the Australian miner said Feb. 15.
Hermosa has received US government backing for its potential to increase US production of zinc and become the only domestic source of battery-grade manganese. Both minerals are federally listed as critical by the US and other countries because of their importance to energy transition technologies and their limited supply outside of China. It was the first mining project considered under the US government’s Title 41 of the Fixing America’s Surface Transportation Act (FAST–41) program to accelerate permitting.

Graham Kerr, CEO of South32.
Source: South32 Ltd.
“We expect strong demand market fundamentals of zinc, with global demand growth expected to outpace production by approximately 3 million [metric] tons at 2031, and industry challenges [of] similar magnitude to copper,” South32 CEO Graham Kerr told analysts on a Feb. 15 call. “We expect higher incentive prices for zinc as Taylor ramps up to nameplate capacity.”
Zinc prices have been hit by weakness seen across many metals markets since the start of the year. The London Metal Exchange Shanghai 99.995% zinc price fell to $2,282.65/t on Feb. 9, the lowest since June 5, 2023. S&P Global Market Intelligence projects zinc will remain at a slight global surplus through 2028.
Kerr defended the Taylor FID when pressed by analysts if the estimated 12% internal rate of return was worth the large investment. South32’s stock price has fallen 34% year over year as of Feb. 14.
“We are quite confident around that supply gap actually existing and hence, stronger pricing,” Kerr said, adding that grades have been on the decline globally for the past 20 years. “Taylor has been the only discovery. You essentially need to produce almost three Taylor equivalents a year to meet the current forecast supply-demand gap” by fiscal 2031.
As the first mining project added to the FAST-41 program in May 2023, Taylor receives “certainty on time frames and a more coordinated and efficient process,” said Pat Risner, president of the Hermosa project, who expects a federal record of decision in the second half of 2026. Building the initial tailings storage and facilities entirely on private lands, while much of the project sits on federal land, reduces risks of potentially slow federal approvals, Risner said.
Kerr said about 26% of the funding spent on Taylor since the prefeasibility stage has gone to road, power and other infrastructure that will be shared by the rest of the Hermosa project, including the Clark battery-grade manganese project and other exploration prospects in a “highly prospective land package, which has already returned high-grade copper and zinc results.”
“When you make money out of this industry, you make money out of having a large resource you develop over many decades that has multiple development options,” the CEO said. “We shouldn’t lose sight of the fact that we’re operating in a safe jurisdiction as well: Good availability of workforce, good regulations. Once we’re up and approved in this space… you’re mining 20, 30, 40, 50 years here.”
South32 aims to reach first production at Taylor in the second half of fiscal 2027 and reach nameplate capacity of 4.3 MMt/y in fiscal 2030.
South32 approves the FID on Hermosa’s Taylor despite a 92% year-over-year drop in after-tax profit for the first half of its fiscal 2024 to $53 million, as the company’s record aluminum production and lower raw material input prices were offset by weak commodity prices and metallurgical coal volumes. South32’s revenue for the period declined 15% to $3.13 billion.

Varun Arora, MBA
Research Analyst, Mining Equities | CLARUS Securities Inc.