Connemara Mining set to benefit from Minco-Xtrata zinc deal

Connemara Mining (LON:CON) looks set to benefit from yesterday’s news that Minco (LON:MIO) has conditionally agreed to sell its stake in the Pallas Green zinc project in Ireland to joint venture partner Xstrata (LON:XTA) for $19.4m in cash.  Broker Optiva Securities reckons it will have a positive impact on Connemara’s own zinc prospect, adjacent to Pallas.

Optiva analyst Jason Robertson says the value of the Minco-Xtrata transaction is “much lower” than anticipated and has occurred earlier than expected, being some six years away from the potential mine start‐up point.

In explaining why the deal value has undershot expectations Robertson says: “Essentially Minco has been out‐spent by Xstrata in proving up its resource and decided to exit now, retaining some cash rather than have its Pallas Green interest diluted any further.

By contrast, Connemara Mining, which is exploring zinc prospective permits at Stonepark, right next door to Pallas Green, in partnership with Teck of Canada, “is in a more favourable position to Minco on several levels”.

For instance, Connemara is funded to at least the end of 2012 to meet joint venture commitments and as a result is unlikely to find itself in a position where it is forced to sell at a low price.

Robertson adds: “Although Stonepark is an earlier stage project than Pallas Green, from the results we have learnt so far from exploration work, it would seem that Connemara’s licence area contains a higher zinc grade and is at a shallower depth.

“Indeed given Stonepark’s location to the south of Pallas Green, it was interesting to find out from yesterday’s RNS on the Pallas deal that Minco believes the higher grade zones lie 500 to 800 metres to the south of current drilling at Tobermalug and Knockroe.”

Robertson also reminds investors that Connemara has zinc prospects elsewhere in Ireland, beyond the Limerick Stonepark permits, that are 100% owned.

As for Xtrata,  Robertson notes that its expanded drilling campaign for this year and move to gain 100% control over Pallas Green shows that the major is taking the project “very seriously” with an eye on future development.

Previous studies have indicated Xstrata/Minco ground holds a 24 million ton reserve grading 10% combined zinc and lead.

The analyst says that despite the disappointment of the low sale price for Pallas, in the long run the deal is good news for the eventual development of Pallas Green/Stonepark into a world class mine.

To this end Optiva continues to rate Connemara Mining as a ‘buy’ with a 50p price target.

Last month Connemara revealed that its full year losses grow slightly as it continued to progress its exploration work in the Limerick area.

Full year pre-tax losses for the year to December 2010 came in at £299,600 versus £269,900, with operating losses rising to £301,750 from £283,270.

John Teeling, chairman of Connemara, assured in the statement that good results are continuing to flow from drilling in the Stonepark area in particular.

Over its current 2011 year, Connemara and Teck will drill 65 holes to better define significant zinc discovery in the Stonepark area.

The drill programme for Stonepark has two objectives: close in drilling to better define Stonepark/Stonepark North; and distant drilling from 1 kilometre to 10 kilometres away to try to get an understanding of the geology and the potential size of an orebody.

Connemara holds 16 licences in the Limerick area.

Teeling said: "The Limerick discovery remains a work in progress. Results are very good but not yet definitive. It remains an exploration play. The current intensive drilling will provide a clearer picture by the end of 2011."

He added that not only is Connemara is fully financed for current exploration plans but that the company overall is funded through 2011 and 2012 on current expenditure proposals.