Ascendant: Free Cash Flow in a Rising Zinc Market

T.ASND, Ascendant Resources, zinc, Honduras

For Ascendant Resources (T.ASND) , 2017 was an extremely successful turnaround year. The Company’s El Mochito zinc, lead and silver mine located in Honduras has been in continuous operations for 70 years but, over the course of recent years, suffered from underinvestment and some neglect from its previous operator. With its recently released 2017 full year production results and 2018 guidance, it is now clear Ascendant is well positioned to build on the strong operational successes of 2017 with tremendous long-term opportunity remaining at El Mochito yet to be fully harnessed.

“Upon acquiring the El Mochito mine in December 2016, we implemented a rigorous optimization program aimed at restoring operations to former historic levels,” said Chris Buncic Ascendant’s President & CEO. “Within less than a year, our operating team has taken what was an undercapitalized and underperforming mine and turned it into a free cash-flow generating operation with record production rates. Producing at approximately 1,250 tonnes per day following the acquisition, we’ve increased production over 80% throughout 2017 to roughly 2,400 tonnes per day in December.” Cost reduction was also a major focus for the company throughout 2017 as the optimization program aimed to maximize value per tonnes mined. With the addition of new mining equipment, improvements made to the underground infrastructure and changes in the labour force and mining methods, Ascendant was able to successfully decrease direct operating costs by more than 30%, setting the stage for further expected reductions in 2018.

“A major focus for us in 2018 will be increasing head grade to the mill which will ultimately drive our value per tonne higher, improving our overall contribution margin,” said Buncic. “We expect our ore grades to improve in 2018 as production shifts toward higher grade areas within the mine and with the addition of conventional mining activities within smaller but higher-grade ore zones. This has already begun in January.”

In addition to the expectation of higher grade ore to the mill to drive value and improve contribution margins, the arrival of the remainder of the new mining equipment in the first half of 2018 will further help to streamlining the mine’s maintenance procedures and ultimately drive costs down further throughout the year.

Which brings Buncic to the crux of the El Mochito story. “Through strategic investments and an overhauling optimization program, we were able to transform an unprofitable mine into a positive free-cash flowing operation in less than 12 months, a major accomplishment for any mining company,” said Buncic.

In its January 11, 2018 press release, Ascendant was able to announce its first quarter of free cash flow at its El Mochito mine in Honduras with US$8.0 million in cash exiting 2017. The Company also provided 2018 production guidance of 93 – 109 million lbs of zinc equivalent metal, a 41% – 65% increase in annual contained metal production as compared to 2017 and announced projected EBITDA of US$32 – US$40 million and free cash flow of US$14 – US$20 million.

In this press release Buncic is quoted as saying, “With a year of strong operational success behind us, El Mochito has proven capable to be a cornerstone asset with great opportunity to generate significant free cash flows for years to come. It is difficult to effectively stress what an incredible accomplishment we have achieved this year.” He continues to say, “In 2018, Ascendant will continue to build on the successes of 2017 as we pursue further operational improvements, increasing head grade to the mill leading to improved value per tonnes milled while improving the contribution margin through a significant focus on cost-cutting to drive profitability.”

While further optimization efforts provide a positive future outlook for Ascendant, exploration provides additional significant upside potential for investors. The Company has been very active on the exploration front with an extensive 33,200-meter program carried out in 2017 and an additional 40,000 meters of work planned for 2018. As Buncic explains, “Exploration work to-date has demonstrated the potential for greater tonnage at higher grades, and we look forward to providing a resource update in the second quarter.”

The update he refers to is a fresh NI 43-101 technical report that will address the important question of the projected mine life at El Mochito. “This is a 70-year-old mine,” said Buncic. “Essentially the resource has been relatively continuous along several intersecting faults which makes exploration at El Mochito an easier prospect. There was very limited exploration work undertaken by previous owners in 5+ years which we had viewed as a great opportunity when we acquired the mine.”

“We began our 2017 exploration program early last year and have since released results with grades and intercepts any zinc explorer would be envious of,” said Buncic. “We are confident that with the results being indicated from our drilling, El Mochito should continue to produce for many years to come.”

Ascendant has been lucky with the price of zinc. “When we took over the mine,” said Buncic, “zinc was trading at around US$0.70 a pound and more recently the price of zinc has hit decade fresh highs of US$1.63 a pound.”

“This price rise has made things easier,” said Buncic. “We’ve always believed in the thesis of shrinking zinc supply without new investments being made to replace the capacity coming offline, but the price had been repressed by ‘shadow’ inventories coming to market for longer than expected. Those seem to have been cleared and we expect higher prices for zinc for at least two to three-year price now as a result.”

“Longer term we want to have a mine which can operate profitably at any zinc price,” said Buncic. “We have a lot of regional exploration opportunity within our current 11,000-hectare land concession and plan to explore more of that this year.”

For Ascendant shareholders, the combination of free cash flow, a fresh resource estimate and rising zinc prices should all be very good news. News which, as yet, the market has not really understood. “Right now,” said Buncic, “we are trading at about 1.6 times our cash flow guidance while peers trade at 4 times cash flow.”

With Ascendant shares trading at $1.05 the company’s shareholders are well positioned in the event of a runup in the zinc price and a successful exploration program culminating in a NI 43-101 should also move the market. While the shareholders wait, Ascendant’s free cash flow will be piling up in the bank.

Leave a Reply

Your email address will not be published. Required fields are marked *