How a high-grade base metals deposit is becoming the next takeover target
The road to Sunnyside.
By Peter Krauth
Copper, zinc, lead – these three base metals are everywhere in our daily lives. North America and the world would be thrown back into the dark ages without them.
They are only going to become more critical as we move towards a greener economy.
Copper is the third most widely consumed metal in the world. It was one of the first metals humans extracted from the ground, and over millennia helped shape civilizations. Today the mineral is everywhere, used in construction for plumbing and electrical wiring, telecommunications, and in transportation for motors and radiators. Moreover, electric vehicles need about 80 per cent more copper than traditional ones.
Zinc is the fourth most widely consumed metal. Its anti-corrosive properties make it irreplaceable. Nearly half of zinc is consumed to coat other metals and prevent rusting; it’s also used in electrical components and automobiles. It’s even crucial to human health, animals and plants, all of which contain small but necessary amounts.
Lead has a lesser role but is also critical. In the U.S. today, about 88 per cent of lead goes into lead-acid batteries, with other applications in ammunition, pigments and casting metals.
However, extracting these metals is becoming ever more challenging.
Interestingly, Arizona is the most important U.S. state for copper production, and its storied history has shaped the American industrial landscape. In the mid 19th century, copper was essential to the American Industrial Revolution and has remained so to date.
Thanks to almost two centuries of being a cornerstone industry, Arizona continues to see its mining industry thrive. One of 2018’s largest mining deals happened there when South32 Mining acquired Arizona Mining’s Taylor-Hermosa project for $2.1 billion.
That deal was a windfall for shareholders of Arizona Mining. Nonetheless, it could lead to a life-changing outcome for Barksdale Capital Corp.’s (TSX.V: BRO • OTCQB: BRKCF) shareholders, thanks to its exceptional Sunnyside property.
“South32 made a considerable investment acquiring the project last year and have a $90 million budget this year focused on de-risking the development plan. The deposit that they are looking to develop straddles both Barksdale and South32’s ground, so we believe it will be of strategic importance going forward.” — Rick Trotman, President & CEO, Barksdale Capital Corp.
Sunnyside’s huge footprint and historic high-grades make it a clear target
Barksdale’s mission is to acquire, explore and monetize world-class assets. With its flagship Sunnyside project in southern Arizona, it’s well on its way to fulfilling this goal. Sunnyside hosts a zinc-lead-copper-silver system straddling the boundary onto South32’s prized neighbouring property.
The Sunnyside property shares a world-class mineral deposit with South32.
South32’s Taylor-Hermosa project is a Tier-1, world-class deposit. The 2018 Preliminary Economic Assessment (PEA) conducted by Arizona Mining suggests it would be a top-five zinc equivalent producer globally. As such, Bank of Montreal analyst, Alex Terentiew, said the project is one of “the premier base metal projects globally.”
What the market doesn’t yet seem to realize is that it could get much more significant, because neighbouring Sunnyside looks like an elephant in its own right.
“The Barksdale technical team believe that the Sunnyside porphyry was the heat engine that caused the formation of the Taylor deposit. We would expect that the areas closest to the porphyry could have higher grades than the rest of the deposit as they would have seen the most action in terms of heat and fluid flow,” says Rick Trotman, Barksdale’s President and CEO, as well as a trained geologist with an impressive mining pedigree.
Historic drilling of Sunnyside in the area immediately adjacent to the Taylor Deposit shows outstanding results, with significant copper, zinc and lead concentrations. Furthermore, Barksdale has locked up a large portion of the district. Many of those historic intercepts show grades up to three times those found in South32’s Taylor deposit.
A Up-close view of the significant mineralization at Sunnyside. .
De-risking Sunnyside makes it even more valuable
Barksdale’s next moves are pretty straightforward. They’re going to gradually de-risk Sunnyside to increase its value and make it more attractive.
This quarter, the company will work towards ranking its future drill targets for Sunnyside. In the back half of 2019, they will perform reconnaissance exploration over the rest of Sunnyside and another nearby area called Four Metals. Management will concurrently advance permitting for the initial drill campaign planned for next year.
Meanwhile, South32’s Hermosa project continues to advance. South32’s recent news release estimates that Hermosa’s mineral resource sits at 155 million tonnes, averaging 3.39 per cent zinc, 3.67 per cent lead and 69 g/t silver with a contained 5.3 million tonnes of zinc, 5.7 million tonnes of lead and 344 million ounces of silver.
Rick Trotman says, “South32’s acquisition of the Taylor-Hermosa project made waves when it was announced last year. The deposit continues onto our Sunnyside project, making us a natural acquisition target when South32 moves to consolidate the district.”
Mr. Trotman speaks from experience. He was an exploration geologist at Barrick Gold and Yamana. He then worked at Resource Capital Funds (RCF), a private equity mining fund that has put billions of dollars to work in the sector. While at RCF, Trotman helped to invest hundreds of millions of dollars in various projects and his expertise was instrumental in kick-starting a distinct fund to invest in exploration opportunities with numerous successes.
All of this knowledge means Trotman is ideally suited to help advance Sunnyside from his leadership position. He knows how to focus on the right technical work that will maximize shareholder value.
South32 makes for a natural acquirer
It’s easy to envision the company’s tremendous upside. At Barksdale’s current market valuation around $22.4 million, even if South32 were to offer a 200 per cent premium, it would only cost about $67 million to acquire. South32 has already spent north of $2 billion buying Hermosa, so taking on Sunnyside could be seen as a small additional cost to “lock up” the entire system.
Odds are South32’s experienced team is already considering this very scenario. The company even indicates they have the financial strength to consider testing “regional potential” as the area remains prospective.
Moreover, Barksdale boasts several high-profile investors. U.S. Global Investors and Eric Sprott are both principal shareholders. Recently, Teck Resources, Canada’s largest diversified resources company, became a significant investor, obtaining an 8 per cent interest in Barksdale. Osisko Gold Royalties’ stake also stands out, as they invested in Arizona Mining before South32 bought it at a high premium, and still hold a 1 per cent Net Smelter Return royalty on Hermosa.
Osisko has invested $3.5 million in Barksdale for a 15.2 per cent share, which allows them to maintain a pro-rata ownership interest, as well as a first right of refusal on any proposed royalty, streaming or similar transaction for five years. The company’s familiarity with these deposits and the mining district speaks volumes about the potential Osisko sees at Sunnyside.
As markets increasingly realize the scarcity of base metals such as zinc, copper and lead, Barksdale’s shares will continue to gain value. Sunnyside is a world-class mining asset that South32 must be eyeing. As the source of the area’s mineralization with high grades, this valuable rock would further improve the future Hermosa mine’s economics while extending its life.
The bottom line is that once Barksdale starts drilling and producing quality results, showcasing not only grade but also scale, suitors will be knocking. Insiders and large institutional investors already own over 60 per cent of shares. For now, Barksdale is massively undervalued, but that won’t last much longer.