Glencore’s arrival on the Group Eleven share register is likely to be a game-changer, in more ways than one
The first is as an unequivocal endorsement of the potential of Group Eleven’s Stonepark zinc project in Ireland. Stonepark is contiguous with Glencore’s own long-standing development at Pallas Green, and although the tonnage at Stonepark, as things stand, remains considerably lower - the grade is higher. The attractions for Glencore are obvious, and it perhaps shouldn’t surprise anyone that in the middle of October the commodity giant subscribed for shares equating to around 11% of the equity of Group Eleven, pumping a very welcome C$1mln into the company in the process.
Except that in the context of the wider industry, it is surprising. By and large the majors have been remarkably reticent in putting forward cash for deals on exploration ground for years now, as the mining bear market has rumbled on, metals prices have struggled, and worries about the wider global economy have persisted.
There have been obvious exceptions. Newcrest’s participation in Greatland Gold’s Australian project and the ongoing changes of ownership around the T3 copper project in Botswana are two obvious examples. In Australia where markets have run hotter than in Canada or London, there has generally been more activity.
But to see a major company like Glencore sniffing at and then taking a bite of a small five million tonne project like Stonepark really makes one sit up and notice. After all, zinc hasn’t had a particularly good run of it lately, even if stocks do remain tight and predictions of surplus have yet to materialise.
So, what is it about this deal? Is it, perhaps, that the Stonepark project is so good that Glencore felt constrained to break a precedent and part with, what for it is relatively paltry amount of money?
Or is it that exploration market in general is on the cusp of heating up, and that this represents the first of a crop of new deals that are likely to come through as the final quarter of 2019 ends and 2020 opens up a new decade of investment opportunities.
The truth, as is often the case with matters like this, is somewhere in between. Yes, the market does look to be improving for exploration juniors like Group Eleven, and there may be better times ahead. On the other hand, that improvement looks likely to be spotty, or patchy for a long time to come, with majors likely to allow themselves plenty of time to be discerning and to secure favourable terms.
Which brings us back to Glencore’s acquisition of 11% of Group Eleven. There’s no doubt that there’s more to this than just the preliminary round of a tidying up exercise for Glencore. For one thing, it’s worth remembering that Group Eleven is in any case no stranger to heavyweight investors. Teck and MAG Silver already loom large on the share register, so it’s not as if the company has had any trouble getting people to take this project seriously.
Indeed, the presence of those two other heavyweights should be extremely reassuring to existing investors, who can be assured that the arrival of Glencore onto the scene doesn’t mean that everyone else is about to get muscled out. On the contrary, if the Stonepark asset ever does go into play, it’s easy to conceive of a situation where there might be two or more bidders. In that sense, the arrival of Glencore completes a virtuous circle.
But it also speaks to the Glenore view of the geology at Stonepark. As it stands the resource there amounts to 5.1mln tonnes grading 11.3% combined zinc and lead. It’s a good rule of thumb in the Irish zinc scene that to make a mine work you really need at least 10mln tonnes grading 10% zinc and lead, or higher. So Stonepark could do with a boost to the tonnage, but the grade is fine. On the other hand, Pallas Green, on current numbers, has 45mln tonnes at 8% zinc, so the tonnage is fine, but the grade could do with a boost.
Now, the Pallas Green grades are probably not material to the Glencore share price, so it may be true that the full picture there isn’t in the public domain. But even so, there was clearly grounds for a good discussion if nothing else.
What moved it on, though, is the potential that Stonepark offers for upside. The asset sat for a long while inside the John Teeling vehicle Connemara Mining, at a time when the dearth of funding available to juniors seriously hampered progress. A change of management at Connemara – and a name change too, to Arkle Resources (LON:ARK) – and the arrival of Group Eleven onto the scene, has transformed the picture.
Group Eleven has managed to put serious money into exploration work in the short time it’s been in control and perhaps even more importantly has been able to formulate some intriguing new geological propositions.
“Stonepark is part of the same geological system as Pallas Green,” says Bart Jaworski, the chief executive of Group Eleven.
“This area is called the Limerick area and is very much in its infancy in terms of exploration.”
Jaworski cites in particular a hole drilled by Group Eleven earlier this year, which penetrated under the volcanics which underly both Stonepark and Pallas Green.
“We discovered a 200 metre thick hydrothermal system. It could be the outer edge of a new zinc system. After we announced that hole, we started to get a lot more attention from industry specialists.”
One of those paying attention was Glencore, and the kind of attention it was prepared to lavish on Group Eleven can be gleaned from the 140% premium it was prepared to stump up to get in on the action.
But if Glencore was keen to get on board, Jaworski was no less keen to have them.
“There’s no better investor for us than Glencore,” he says. “It’s the best partner we could have had in terms of the natural fit here.”
And with the backing of Glencore, he can afford to broaden the company’s horizons somewhat.
“2020 will be a very active year for us. Stonepark will be our key focus and work will consist of drilling and probably some geophysics. But we won’t be focusing on the existing resource itself. We’re thinking much bigger picture. We want to find a significantly larger, new deposit.”
Based on the drilling that took place this year, there’s every possibility that if a new deposit is identified it could turn out to be bigger than Stonepark.
“That’s the real prize for us,” says Jaworski.