Canada Zinc Metals Inc. (CZX .V) coverage was initiated on April 5th, with additional notes on September 2nd and December 11th. We recently addressed the issue that the company had made a number of non-brokered placement which had a negative impact on the stock price. Moreover, we reported that CZX.V was significantly behind on the stock-buy back plan it committed to. Since our last update the following release were issued
Jan. 11th - Completion of Initial Earn-in on the Pie Option Properties (Pie) - Teck Resources Limited (Teck) and Korea Zinc Co. Ltd. collectively, the “Optionees”) have delivered notice regarding the Optionees’ First Option on the Pie, Yuen and Cirque East properties.
A closer look at the deal reveals the following.
Option I - Teck/Korea Zinc can earn an undivided 51% interest in Pie by incurring a cumulative aggregate of $3.5M in exploration expenditures on or before December 31, 2017. Hence, for $3.5M, they access 51% interest. This agreement dates back to September 9, 2013.
In four years a total of $0.75M/year was spent by both companies. Individually, each companies spent $0.37M per year.
Option II - Teck/Korea Zinc may elect to acquire an additional 19% interest for a total of 70%, by incurring an additional $5M in exploration expenditures (for a total aggregate of $8,5M in exploration expenditures) on or before December 31, 2019. - Hence, a total of $8.5M buys 70% interest.
In six years, a total of $1.3 M/year will be spent by both companies. Individually, $0.66M/year each.
We question the economics of the deal though it was in 2013. To date, the $3.5M spent by Teck and Korea Zinc generated one drill hole. To give some perspective, last year CZX.V raised more than $5M in private placement drilling eight holes on Akie. In addition, Akie is a much smaller property than Pie. Meanwhile, the preliminary economic assessment (PEA) on Akie is not due before Q2 2018. The timing is noted.
More importantly, CZX.V's CFO and CEO are partners at Varshney Capital, a firm which specializes in reverse take over (RTO).
There is a large fiduciary issue here. A private capital firm managing a public entity. Whose interests are being served?
The stock is recently up on some paid promotional pieces from two mining writers,
(a similar move occurred last year before PDAC). Once again the timing is noted.
Despite its strengths (i.e. Tongling Nonferrous Metals Group Holdings Co. Ltd. holding a 30% stake and Echelon issuing a fair value of $0.68 and a $0.50 book value), the fact that CZX.V's management is not arm's-length entity to Varshney Capital is a major problem. It also adds to an already long list of weaknesses: (1) stock buy-back status, 2) no new deal, 3) no spin off, and 4) no recent brokered placement.
As such, we're dropping coverage of this stock immediately.
We strongly believe that there are better zinc opportunities.
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