ASX’s next zinc producer about to fly

Sixteen months ago, Heron Resources (ASX: HRR) secured A$240m infunding – via a $140m equity issue and a US$76m debt package - to develop the Woodlawn Zinc-Copper Project (50km NE of Canberra). As at end-August 2018, the processing plant (1Mtpa capacity underground ore – 1.5Mtpa reclaimed tailings)and associated infrastructure was nearly 75% complete with commissioningscheduled to commence by the end of 2018. In late September 2018, miningcontractor Pybar commenced underground activities, while contracts for all keyactivities - tails mining, concentrate offtake (3 years), port and haulagelogistics, power and water treatment etc., are in place. In 1Q 2019, weforecast that HRR will be one of only four zinc-focused producers listed on theASX. Although prices for zinc - primarily used to galvanize steel - havesoftened in recent months, Zn has comfortably outperformed its base metal peergroup over the past five years. We expect that continued robust demand fromChina and developing economies in SE Asia, in conjunction with historically lowstockpiles and a lag in new supplies, will help to support prices at currentspot price levels as HRR enters first production.

 Valuation: A$1.40ps with upside potential

Our base-case scenario assumes a mining inventory of 12.3Mt –equivalent to the 2016 estimated Mineral Reserves - and a 10-year LOM, with 77%of ore sourced from Reclaimed Tailings (6% ZnEq) and 23% of ore sourced fromUnderground (14% ZnEq). Predicated on our mining schedule we forecast averagepost ramp-up output of 32ktpa Zn, 5ktpa Cu, 10ktpa Pb, and 10kozpa AuEq(Au+AuEq from silver), with metal output split almost 50/50 between the two oresources. Note: LOM metal output between the two ore sources is equal withrelatively higher ZnEq grade underground ore offsetting lower u/g tonnage.