25-March-2020:  Suspension of Operations at Woodlawn

Heron had significant debt and trouble with grades and costs along with a falling zinc price recently, so this announcement does not come as a surprise to me.

In their December 2019 Quarterly Activities Report and Appendix 5B - released on January 31, 2020, Heron made it clear that they are still struggling.  They still have ramp-up issues including lower than expected recoveries, and while things always seem to be improving - they're still not producing to plan, and they're still not where they want to be.

The most alarming bit is what I've highlighted below from their "Corporate" section on page 2 of the report:

Corporate:

• Cash:
  • Heron held A$59.25 million in cash (including bonds of A$7.88 million) at 31 December 2019.   
  • Capital Raise: On 4 October 2019, Heron announced a A$91 million funding package in response to a projected cash shortfall due to delays in construction and production ramp-up prior to the quarter. On 8 October 2019, the Company announced the successful completion of the Institutional component of the entitlement offer (EO) which raised approximately A$11.5M.  On 25 October 2019, the Company announced the successful completion of the Retail component of the EO raising a further A$23.9M bringing the total capital raised to A$35.4M.  Shareholders approved the final component, being US$34.9M in Convertible Notes, at Heron’s AGM on 5 Dec 2019. All funds were received by 31 December 2019.  
  • Following underperformance in the quarter against the updated ramp up plan, the Company has also initiated preemptive discussions with its lender, key shareholders and other capital providers regarding additional potential sources of finance.
• Appointment of new CEO: On 15 Jan 2020, Heron announced the appointment of Mr. Tim Dobson as the new CEO.  Tim is currently Senior Vice President Metals for Sherritt International in Canada and former President of Ambatovy in Madagascar.  He has over 30 years’ technical and executive experience in organisations such as Placer Dome, Lihir Gold and Polymetals.  [plus further details]

Having only just raised significant capital in October, the company has already approached its lenders for more cash due to continued underperformance.  I'm not sure what sort of reception they would have received, but I'm guessing it would NOT have been smiles all 'round. 

Additionally the significant spread of the new Covid-19 coronavirus - and the concerns over how long it will take to bring it under control - particularly in light of the dozens of additional countries reporting new cases now on a daily basis - is significantly driving down the prices of base metals (due to a lower global growth outlook - and possibly a global recession) and companies that are already struggling are going to have a very tough time surviving in that environment - where the prices of the commodities they produce are falling sharply.

I don't mind investing in zinc, copper, nickel miners, etc. when those base metal prices fall sharply, but only the companies who are firing well - who have good recoveries, high grades, low costs, and very solid balance sheets.  It seems to me that Heron have none of those positive attributes, particularly a solid balance sheet.  Instead they have poor recoveries, high costs, and heaps of debt, debt which they are unlikely to be able to service unless things radically improve for them from here - and fast.  For this reason, I am avoiding Heron at this time.

Another company that is looking very, very risky (although possibly not QUITE as risky as Heron) is New Century Resources (NCZ) who have fired up the old Century zinc mine in Queensland and (like Heron) are mostly processing old tailings that were left from previous years of production (using more modern technology that is supposed to be able to produce much better zinc recoveries than in previous decades).  NCZ is likewise having trouble ramping up to full nameplate capacity with their plant as well as also not achieving decent recoveries.  Both companies have managed to ramp up individual elements of their plants to capacity at various times, but they can't seem to get ALL of their plant working at speed at the SAME time.  Lower recoveries than expected (not extracting enough zinc from their ore slurry) always results in higher costs per tonne produced - because the processing costs stay the same but the end product (that they can sell) is reduced. This is a real killer when the zinc price is falling at the same time. 

NCZ closed at $0.115 (under 12c) yesterday (28-Feb-2020), down -87% from their 12-month high of 91c (and down -92% from their 3-year high of $1.51).

HRR closed yesterday (28-Feb-2020) at $0.069 (just under 7c), also down -87% from their 12-month high of 53c (and down -94% from their 3-year high of $1.16).

As you can see, there are remarkable similarities in their performance, or underperformance.  I don't hold any HRR (although I certainly have in the past), but I do hold a VERY small legacy parcel of NCZ - which I'm quite prepared to lose 100% of if they go to the wall.  I just think HRR are closer to that outcome at this point than NCZ are.  Both are EXTREMELY high risk !!

13 June 2019:  https://www.miningnews.net/base-metals/resourcestocks/1365111/woodlawn-makes-strong-return-after-20-years

Straw #2 (of 2):

From MiningNews.Net:

[2nd half of the article follows - see Straw #1 for the 1st half]

Taylor said the deposit didn't get the attention it deserved from the previous owner due to capital constraints. "For example, we added about one million tonnes when we found the Kate Lens in 2013 by investigating a conductor that showed up in a downhole EM survey. Kate sits at about 350m below surface and is within the existing mine footprint. Development came within about 90m of the lens, but simply missed it."

The opportunity is best summed up the fact the current reserve envelope extends only 30m below than the deepest historical development at about 620m. Multiple lenses of the high-grade mineralisation remain open at depth.

Then there is the near-mine and regional potential, which looks much more exciting than back in the 1990s because remote sensing technology can now penetrate much deeper.

Woodlawn was discovered in 1970 because it outcropped and was clearly seen in shallow induced polarisation (IP) surveys. In the following decades, there was plenty of follow-up exploration in the surrounding covered terrain, using IP and electromagnetic (EM) surveys. But even by the 1990s, the best systems still struggled to penetrate more than 150m.

Modern exploration technology is a different story. Heron recently completed a high-resolution survey over almost 10 square kilometres immediately north of the Woodlawn mine, using modern IP equipment capable of penetrating to depths of up to 700m. The survey also measured conductivity response with a conventional EM survey and magneto tellurics.

Fortunately for Heron, Woodlawn's style of mineralisation responds to both EM and IP. EM is good at picking up the massive sulphides of copper such as chalcopyrite, while IP is better at picking up broader mineralisation.

The result of Heron's new survey was three genuinely stand-out anomalies - Bucklands (starting less than 200m along strike from the mine), Bucklands North (about 2km north of the mine) and Murphy's (about 700m northeast of the mine). These are coincident IP and EM anomalies, except for Bucklands North, which is IP only.

A 2,100m program of three diamond drill holes began in late May to test each of these new targets. Bucklands North and Murphys are Woodlawn-sized, so a big intersection of massive sulphides could be transformational for Heron.

Taylor is cautious about getting carried away with such thoughts, and is focused on getting production up to and stabilised at nameplate throughputs and recoveries.

"We are still at early stages, but starting to make good headway. Things are turning, and we are very close to that point in time where we start talking sensibly about a whole range of things like throughputs, recoveries and product qualities," Taylor said.

The production start marks the end of a long return journey for Woodlawn, but there may be many more chapters yet if exploration results live up to their potential.

--- ends ---

Disclosure:  I did hold HRR for a few years, but have exited recently when the dispute with their main construction contractor, Sedgman (owned by CIMIC, ASX:CIM) was disclosed.  My preferred main zinc exposure currently is via Red River Resources (RVR) (and some S32), until it becomes clear that the issues between Sedgman and Heron are fully settled, the Woodlawn underground ore processing commissioning has been succesfully completed, and I consider that HRR has become substantially derisked. 

Often the best times to own these types of companies are (1) when they are making very positive exploration announcements, (2) when they are building their plant, and (3) once the plant has been fully commissioned and is producing at nameplate capacity or better with no major issues.  The worst time to own them is often when they are going through their commisioning phase and issues occur - i.e. between (2) and (3) - and that risk is magnified when the company is in dispute with their construction contractor - who is in charge of the commissioning and of rectifying any issues that do occur. 

I do recognise that HRR has plenty of potential upside, but I also feel more comfortable to stay on the sidelines at this point, with a view to possibly re-initiating a position in HRR when the commissioning has been fully completed and they're clearly firing on all cylinders.

13 June 2019:  https://www.miningnews.net/base-metals/resourcestocks/1365111/woodlawn-makes-strong-return-after-20-years

Straw #1 (of 2):

From MiningNews.Net:

Woodlawn makes strong return after 20 years

TWENTY years after its premature closure, the high-grade Woodlawn zinc-copper mine located between Canberra and Goulburn is back in production just as world zinc stocks approach a 12-year low.

Woodlawn was never a headline grabber, being in the unfashionable business of zinc and dwarfed by the likes of Mount Isa and George Fisher. But Woodlawn churned out strong cashflows every year for former owner Denehurst, which mined the deposit as an underground operation in the late 1980s and 1990s. A previous owner had mined it as an opencut from 1978.

The final insult came in 1998, when Denehurst fell into administration following a disastrous investment in the Metropolitan coal mine on the outskirts of Sydney. Woodlawn was closed by the administrator, with the plant auctioned off and the mine sold to TriOrigin of Canada.

The long journey back to production began in 2004 when TriOrigin spun Woodlawn into ASX-listed TriAusMin, which merged a decade later with cashed-up explorer Heron Resources. A driving force behind the mine's redevelopment through much of that period has been ex-WMC mining engineer, Wayne Taylor, who led TriAusMin and became Heron's CEO at the time of the merger.

"It has been a long road back to production, and there is still work ahead as we ramp up output over the next 15 months," Taylor said.

"But it is satisfying to see Woodlawn back in business again, and in much better shape than when it closed. We have already added significant reserves and built a state-of-the-art process plant that can achieve significantly higher recoveries."

The new Woodlawn mine has a production rate of 1.5 million tonnes per annum, with feed drawn from reprocessed tailings and underground ore. The plant produces three concentrates, with steady state annual production of 40,000t of zinc, 10,000t of copper, 12,000t of lead, 900,000 ounces of silver and 4,000 ounces of gold.

Production began last month with reclaimed tailings from a hydraulic mining operation fed into the new flotation treatment facility. Tailings processing is steadily ramping up, with processing of ore from underground to follow as soon as engineering contractor Sedgman has completed commissioning. Underground mining began late last year and is delivering feed to a stockpile at the crushing circuit.

Taylor acknowledges the ramp up will be watched closely, given the high-risk within the industry for projects to underperform at this stage, but says a lot of work has gone into making the new Woodlawn successful.

"We always laid out a 15-month plan for ramping up production. That's more conservative than many other projects of this size. And we have taken a low-risk approach. We have the benefit of being able to run on reclaimed tailings while we build a stockpile of underground material - that allows us to adopt a very progressive ramp of the underground feed rather than trying to run hell for leather early on to keep up with a very hungry mill."

The high-grade, low-cost nature of Woodlawn also provides a lot of comfort for investors.

The 2016 feasibility study for the A$232 million redevelopment found the project would sit well inside the bottom half of the cost curve for global zinc producers. The study determined a payback period of just 2.3 years and a post-tax internal rate of return of an impressive 32%.

The compelling financial case attracted three high quality private equity funds - Greenstone, Orion Mine Finance and Castlelake - to contribute $104 million towards total equity funding of $145 million for the project.

The project is also benefiting from long-term strength in the outlook for zinc. In March, stocks on the London Metal Exchange dropped to less than two days of global consumption, their lowest point in 12 years. The feasibility study was based on a zinc price of US$1.01/pound or US$2,226/t, significantly below the current price of about $2,524/t and the 2019 peak of almost $2,900/t.

"The zinc price is still quite healthy," Taylor said. "Overall sentiment has been impacted by ongoing discussion about a trade war between China and the US, but the physical market is tight. There is not a lot of metal around and stocks continue to get chipped away. Some forecasters are suggesting the second half of 2019 could see a jump in prices from where we are today."

With production ramping up, Heron is increasing its focus on adding reserves to extend Woodlawn's mine life beyond the current 9.3 years.

This mine life is based on underground reserves of 2.8Mt at 14% zinc-equivalent and tailings reserves of 9.5Mt at a still highly respectable 6% zinc-equivalent.

Underground drilling by Heron prior to the feasibility study turned up a significant new lens of ore and there are excellent prospects for reserve extensions.

...

Continued in Straw #2 (of 2)

08-May-2019:

Production commences at Woodlawn

Corporate Presentation - RIU Sydney

Re-release - Drill targets adjacent to Woodlawn - JORC table

07-May-2019:

New high potential drill targets adjacent to Woodlawn Mine

18 July 2019:  Heron Resources Corporate Presentation - Noosa Mining Conference

29-April-2019:  Heron has this morning released their March 2019 Quarter Activities Report - which can be read here.

I was keen to read what they had to say about their dispute with their main EPC contractor, Sedgman (part of CIMIC Group, ASX:CIM).  This is what HRR have said in their report today:

Sedgman Claim: Progress claims were received from Sedgman, Woodlawn EPC Contractor, in February and March which exceeded the agreed guaranteed maximum price contract value, both of which were rejected by the Contract Superintendent. No progress claim has been received in April.

Interesting.

In other highlights:

PLANT CONSTRUCTION

• Overall EPC completion at 99% and process plant commissioning at 77%
• Construction work completed
• Commissioning with reclaim tailings ore from Tailings Dam South on a 24 hour basis
• Concentrate production imminent

UNDERGROUND

• 1.3km of underground development completed
• Raiseboring of the primary ventilation shaft completed from surface
• First ore from underground delivered to ROM

RETREATMENT

• Hydraulic mining transitioning to production mode

24-Mar-19:  Update from State One Stockbroking - see here - released post-HRR's recent announcements about their EPC contractor (Sedgman, a subsidiary of CIMIC Group - ASX: CIM) invoicing them $50 million above and beyond the agreed GMP (guaranteed maximum price) contract amount.  Heron has rejected most of those excess claims.  Sedgman then increased their claims - see here - and Heron has now put Sedgman on notice that Liquidated Damages (LD’s) now apply.  LD's are compensation payments that have been previously agreed upon between the parties and are written into the contract.  They usually apply if certain milestones are not met in full and/or on time or if the contractor does not fulfil their obligations to a pre-agreed standard.

Heron continues to hold $10.8m in bank guarantees from Sedgman, but that is clearly a lot less than the variation claims of over $50m that Sedgman are asking for - above the $109m GMP contract price.  Project developers such as Heron use GMP (Guaranteed Maximum Price) contracts to provide cost certainty, and that clearly hasn’t worked here.

State One still has HRR as a "Speculative Buy" (or Spec Buy) and has reduced their price target from $1.40ps (per share) to $1.35ps, which is still 100% above where Heron closed on Friday - at 67.5 cents - and 103% above the 66.5c that HRR was when State One wrote this report.

State One notes Heron's 4th February announcement that the progress claim dispute was not influencing construction, commissioning or production activities, however they quite reasonably suspect that the protracted nature of the dispute has had (or is having) some impact on the principal/contractor working relationship.

On a more positive note, zinc and copper prices have recovered from their January 2019 lows - and on 12 March 2019, Heron announced:

• First underground development ore delivered to the ROM pad
• Underground development advance exceeding plan,
• Hydraulic mining commissioning well advanced,
• Overall process plant completion at 98% as at end of February,
• Process plant commissioning at 63% as at end February, and;
• First concentrate production was now scheduled for early in the June 2019 quarter.

Disclosure:  I hold Heron (HRR) shares, but I have reduced my exposure by around half since the Sedgman dispute became public knowledge.

Update:  22-Sep-2019:  I sold out of Heron entirely a couple of months ago, and they've now subsequently been suspended from trading while they try to negotiate further funding from their senior lenders and largest shareholders which is proving difficult as they are clearly in breach of their existing lending covenants.  It doesn't look particularly good at this point.  Hopefully, they can secure the short-term (working capital) funding they need and the commissioning is succesful, and the ramp-up to nameplate capacity is smooth, and Sedgman withdraw their claims for almost $50m in variations and additions on top of the original $109m fixed-price EPC contract for building the Woodlawn plant.  That would be ideal.  Probably unlikely, but ideal.  For now, I remain on the sidelines with this one.

25-Sep-2018:  Heron announces that their mining contractor, Pybar, has commenced underground mining at Woodlawn - see here.

They also announced that overall EPC completion stood at 73% at August 31st, and that they remain on-track for year-end commissioning.

Zinc was the only metal to rise strongly overnight.  Copper slipped a little to give back some of the past couple of days' gains, and nickel fell a couple of percent.   This is mostly driven by Trump's tweets, and whether the trade war between the USA and China is escalating or not, at any given time.  There is upside if these trade issues can be resolved without a further escalation, but there is clear downside if we get a full blown trade war and it negatively affects the global growth outlook.  China have more to lose than the USA, as they export far more to the USA than they import from them, so it certainly in China's interests to try to keep a lid on this rather than escalate the tensions. 

And at some point one would hope that his own administration will manage to pull Trump back from his fantasy world in which he's the consumate deal maker and his main weapons are threats and trash talking.  That might have worked in business, but it can backfire badly when applied to countries, continents and world leaders who might sometimes regard economic considerations as secondary to honour, dignity, and their own citizens' views of them as either strong and credible leaders, or weak and easily bullied.  Trump has publicly linked his success (whether he is doing a good job or not) with the US stock market, and he claims that he must be doing well, because stock prices keep rising.  Apart from that being a very simplistic view, if he pushes us into a global recession, or even causes global growth to slow down, the market's reaction could be savage indeed, and at some point hopefully somebody will explain that to him.

------

That was all written a year ago - it's now 17-Sep-19, a year later, Trump is still tweeting away, but Heron are in a voluntary trading suspension which they may never emerge from.  They need more cash just for working capital and they are about to breach their lending covenants.  Their future is in the hands of their largest shareholder and senior lender.  I sold out a few months back at around 60c.  They susbsequently dropped to 38c before this trading suspension that they are in.  They also have a major dispute over variation claims and costs with their EPC contractor, Sedgman, who are claiming additional costs of A$49.9M - over and above the agreed A$109M Guaranteed Maximum Price (GMP) EPC (Engineer/Procure/Construct) contract sum that formed the basis for the construction of the Woodlawn Project.  That suggests that the project cost about 146% of the originally agreed price - or that the costs blew out by about 46% - according to Sedgman.  Heron have rejected all but around $223K of those $49.9M in variation claims, so the two parties are poles apart in that dispute.  My understanding is that the working capital deficiency that Heron is experiencing is entirely seperate to the Segman claims and that if Heron end up having to pay some of that extra $49.9 million to Sedgman, they would be REALLY broke - meaning they would need a LOT more money than they currently think they need to continue as a going concern.  For now their future is in the hands of their senior lender and largest shareholder, which I thought was Castlelake, but CommSec is suggesting is now Citicorp (part of CitiBank).  It's one or the other.

HRR Corporate Presentation at the Diggers & Dealers Conference in Kalgoorlie, August 2018

The presentation title is "Building an Australian Zinc Producer" and contains some information on the fundamental drivers of the zinc price, including demand drivers and supply expectations.