Turning lead into gold – Galena’s Abra trick

Turning lead into gold is the oldest trick in the big book of dodgy science (alchemy), but in outback Western Australia there really is a company developing a lead and silver mine with early hints of gold and copper to follow.

Galena Mining (ASX: G1A), which takes its name from the Latin word for lead, has started construction of the Abra mine located roughly 100 kilometres north-west of Sandfire Resources’ (ASX: SFR) high-grade but fast depleting DeGrussa copper and gold project.

At first glance Galena and Abra are uninspiring. The company is small, with the stock market value of around $100 million. Lead is the most basic of industrial commodities and one which has been sidelined by the rush into more fashionable battery metals such lithium and nickel.

One of the main uses of lead is in conventional lead-acid batteries which are being superseded by lithium-ion batteries.

Silver, Abra’s other metal, has suffered a sell-off over the past three months, falling from around US$28 an ounce to US$22/oz.

Hidden gem

But, behind the unimpressive façade of a dull metal in a remote location are hints of a hidden gem which investors have yet to recognise, as evident in Galena’s 43.5% share price fall from $0.39 to $0.22 since the start of the year.

First clue to Galena having a brighter future is the price of lead, which has suffered a slide over the past 30-days, but no worse than copper or nickel as China’s economic slowdown and the possible collapse of the Evergrande property group weighs on sentiment.

At US$0.98 a pound, lead is trading close to its average price of the past 10-years and comfortably up on the US$0.72 of 18-months ago.

Given that Abra is forecast to produce its lead at a cash coast of US$0.44/lb the mine should be comfortably profitable.

Supporting the lead price is a shrinking stockpile of the metal with material in the warehouses of the London Metal Exchange declining sharply over the last 12-months from around 135,000t to 52,750t – an encouraging downward trend though one that does not account for hidden stocks held by consumers, especially Chinese manufacturers.

Another problem for lead miners is that an estimated 50% of the metal used in conventional batteries, plumbing, paint and refined petroleum comes from recycled metal which theoretically puts a cap on the price of freshly mined material.

Promising news for Abra

So much for the bad news about lead because it is outweighed by what might be best called the promising news, that includes:

• Galena’s close ties with one of Japan’s biggest lead and zinc refiners, Toho Zinc, which also owns CBH Resources, operator of the Endeavour and Rasp zinc mines in NSW. Toho has bought a 40% stake in Abra and will be a major buyer of its lead-silver concentrate.
• The high probability of a share-price re-rating as construction of Abra accelerates with early site works underway and underground development scheduled to start soon.
• The re-rating could be a re-run of the way emerging gold miner Calidus (ASX: CAI) has seen its share price rise by 20% since our story on 12 August Calidus vs Capricorn, which highlighted the effect of declining project construction risk as building work nears completion and first metal is in sight.
• A bullish analyst report from Petra Capital, a stockbroker close to Galena, which reckons the company is heading towards a target price of $0.48, more than double its current $0.22, and
• The lure of a gold and copper structure beneath the lead/silver zone.

Abra’s time to shine

Abra, as some readers might remember, is not a new discovery.

It was first reported 40 years ago but the lack of sex appeal in lead, plus the remote location and more investor interest in other commodities (especially gold, iron ore and nickel) meant that Abra’s day was postponed, until now.

Galena’s plan is to spend $170 million developing a mine yielding 1.2 million tonnes of ore a year over a minimum 16-year life producing 95,000tpa of lead, plus 805,000 ounces of silver.

The US$0.44/lb cash cost estimate for the project is based on an assumed lead price of US$0.92/lb, a silver price of US$16/oz and an exchange rate of US$0.70.

Galena, in its presentations, cites a study by Wood Mackenzie, a leading commodities research firm, which describes Abra as the world’s lowest cost primary lead mine.

Funding for the development has come from Toho’s buy-in plus a $143 million debt facility from resource finance specialist Taurus.

If all goes to plan, and it’s the uncertainty in that comment which explains why Galena is trading at a discount today, the mine will repay its debts in two years, enabling Galena to earn (before interest and other charges) an estimated $114 million a year from year three.

Lead to gold

Turning Abra from a lead mine into a gold mine is what might be called the blue-sky appeal of Galena with first sniffs of a gold and copper zone revealed in deep drilling under the lead-silver zone with encouraging grades such as 12m of 6.72g/t gold from 706m and 10.33m at 1.32g/t gold plus 1.63% copper from 631m.

A combination of zones containing different minerals is not unusual in a deposit formed during volcanic activity when hot fluids precipitate their mineralisation at different stages of the cooling process and depending on the contact with other rocks.

It’s the deep geology of Abra which holds the potential for a lead mine to become a gold mine with Galena planning more deep drilling from the Abra mine as it is developed.