Part of two Marias Germanium/Zinc due diligence...
As described, there are two types of Zn/Ge ore found at Tres Marias, oxide ore and sulfide ore. Oxide ore must be smelted to economically recover the zinc and germanium. The lack of an available smelter is what closed the mine in the early 90's. Oxide ore can be processed by 2 different chemical means but they are expensive due to the high consumption of either acid or caustic solutions in the leaching process. Also, recovering the zinc would require an expensive electrolysis process which would require high power consumption. Getting the ore to an offshore smelter is required.
There is available smelter capacity in Asia, Europe and Eastern Europe. When I asked War Eagle about this they said that they continue to investigate the best destinations and that there are several attractive possibilities.
The ore can be graded by hand at Tres Marias to raise the Zn/Ge concentrations and thus increase the value of shipped ore, to lower the shipping and smelting costs and therefore to lower the costs per pound of returned product. The zinc can be sold at the smelter and the germanium returned to the US. Return shipping of the germanium is not a significant cost given the extremely high value and low weight/volume of the returned product. Depending upon where the ore goes for smelting, it looks as though the shipping costs are in the order of $75 CDN per ton of mined ore. This cost is an estimate determined by phoning a shipping company which handles metallurgical coal being shipped to Korea. It's not a quote but an estimate given by the agent with whom I spoke.
The smelting costs, the best that I could determine through an engineer acquaintance with connections to somebody at a Canadian smelter, would be in the order of less than $200 CDN per ton of mined ore or about $300 CDN of high graded shipped ore assuming the ore grade was increased by about 50% at the mine site. (The friend of a friend is a convoluted connection but there isn't a smelter on every street corner.) The manually graded ore concentrations would be consistent with the results obtained by the previous mine operators using the same methods. War Eagle told me that the ore is very easy to manually sort given that the Zn/Ge material is a different colour than the accompanying limestone.
Labour costs in Mexico are low enough to make the manual grading economical. I have trouble determining how the costs for mining and sorting could be more than $40 CDN per ton of mined ore.
It therefore appears that the total cost of processing the oxide ore would be something in the order of $300 to $325 CDN per ton as mined, possibly less. The shipping and smelting costs could be lessened by more aggressive sorting and by increasing smelter surplus capacities resulting in lower smelting costs. For simplicity's sake, let's use $300 CDN as the cost per mined ton for producing saleable zinc and germanium from Tres Marias. The reader is invited to raise these estimates if it makes him or her more comfortable. I have confidence in these numbers.
Germanium has been selling lately for prices between $540/kg USD and $575/kg USD. This is $860 CDN to $920 CDN per kilogram. Since the germanium price was also more than $600 USD ($960 CDN) before the current slump, let's use CDN $900/kg. There will be a large increase in germanium consumption in the next 2 or 3 years due to increased fibre optic cable replacement and also due to increases in the solar panel and infrared markets as described elsewhere. I believe $900 is a reasonable number. Zinc has been trading at about $0.40 USD per pound or about $0.64 CDN. Let's use $0.60 CDN per pound for a zinc value.
The zinc and germanium grades in the oxide ore at Tres Marias are 20% for zinc and 300 ppm or 0.03% for germanium. The zinc in a ton of ore is therefore worth 2000 x 20% x $0.60 or $240 CDN per ton. The germanium is worth 2000 lb / 2.2 lb/kg x .0003 x $900 or $245 per ton. The combined value for the ore should therefore be $485 CDN. It should be noted that the ores previously mined at Tres Marias showed zinc values as high as 25% and germanium grades of 400-600 ppm.
These are nice numbers but I think we should be conservative here because the grades and quantities need to be
reconfirmed by War Eagle. That's a part of this year's activity as I understand it.
So, if the ore is worth $485 CDN and can be brought to market for $300 then we have a nice margin of $185 per ton of mined ore or a margin of 38%.
Trying to determine how much ore War Eagle will mine per year requires us to look at the germanium market and to make a guess or two. Total world refining of germanium in 2000 was 70,000 kg an increase of 20% over 1999. The North American refined amount was 28,000 kg, about a 15% increase over 1999. However, total world consumption was 105,000 kg indicating a refining shortfall. Recycling put 25,000 kg back in play while 9000 kg was supplied by government and nongovernment stockpiles. These numbers don't quite add up but are nevertheless those provided by the USGS. Let's use the 105,000 kg total world consumption. We should note that the 105,0000 kg in consumption was a 19% increase over 1999 consumption.
Where is the avenue of opportunity for War Eagle? Consumption is increasing and stockpiles are declining. Just to keep up with a 10% increase in consumption, War Eagle could sell 10,000 kg of germanium and 10% more would be required each subsequent year. With stockpiles declining and with new uses for germanium such as SiGe chips coming into play along with expanded satellite launches and automotive infrared system sales increasing, it seems that producing 20% of the germanium for the current market is not out of the question for War Eagle. Let's take all the increase of 10% for only 1 year and a further 5% because the opportunity seems to be there. That would require 15,000 kg per year. Working backwards, it would require 15,000 kg / .0003 (300 ppm Ge in the TM ore) or 50,000,000 kg of ore. That's 50,000 tonnes or 55,000 tons of oxide ore per year. Using 260 working days per year that would be about 211 tons per day of ore production, a reasonable number. I asked War Eagle if 200 t/day was possible at Tres Marias. They said they believed it was possible but they wouldn't discuss their plans in any way.
Each 10,000 tons of ore should produce almost $5,000,000 CDN of revenue with a gross margin of almost $2,000,000. The projection I made of 55,000 tons would produce revenue of about $27,000,000 with a margin of over $10,000,000 CDN. What does $10,000,000 gross profit suggest for a stock valuation? Sure isn't 18 cents, is it? More like $4, I think.
These numbers are why I believe that War Eagle merits investment on the strength of Tres Marias alone. If Mac works out for us then we have a whopper on our hands. The suggestion of a profit of over $25,000 CDN per day based on 200 t/day is unheard of in a junior stock. I think that the market is there, that the ore is there and that the economics are excellent. If War Eagle were to produce only 100 t/day then I would think that they are missing an opportunity. If anybody disagrees with this then I've included the numbers for 10,000 tons/year so that any number you choose could easily be used in your calculations.
Next up, what part will sulfide ore play in War Eagle's future? Will the oxide ore serve to develop the sulfide ore potential, to move War Eagle into continuous germanium production? And what kind of value would the Tres Marias assets place on War Eagle stock?
This is one interesting play !!
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