Rathdowney Resources considered "standout" in junior zinc space, says Collins Stewart

Junior zinc play Rathdowney Resources (CVE:RTH) received Friday an initial "buy" recommendation and a target price of C$1.05 per share from equity research firm Collins Stewart - implying more than 220 percent upside from the current share price.

The mining company is developing a zinc asset called Olza, located in Southern Poland, with the work focused on verifying a substantial historical resource of 77million tonnes averaging 6.2% zinc plus lead, registered with the Polish state. In total 70 kilometres of drilling is planned, which started last June.

Rathdowney is due to release a maiden NI 43-101 resource at Olza in late in the second quarter or early in the third, followed by an update by the end of the year, which will form the basis of the preliminary economic assessment (PEA).

Olza is located in a traditional mining area with "excellent infrastructure", said the Collins report, and a nearby zinc smelter. In 2010, Rathdowney was granted two exploration permits in Poland, Rokitno and Zawiercie, which form the Olza project.

Rathdowney also holds a number of exploration projects in the Irish Midlands zinc district, where it has assembled a land portfolio comprising some 1,600 square kilometres in six project areas. Early stage exploration over the past two years established 45 drill-ready zinc-lead targets, with initial drill testing starting last April.

"We view Rathdowney as a technically sound, low risk, relatively low capital intensity zinc play, located in an investor friendly jurisdiction with excellent infrastructure and existing smelting facilities nearby," said Collins Stewart analyst, Andrei Kroupnik.

"We expect shares to increase on the back of the company defining a substantial NI 43-101 resource in 2012."

Zinc companies are coming into focus this year, as forecast increased demand for the metal from emerging economies such as China, combined with an expected supply deficit on the closure of a number of big mines, has many analysts forecasting a price surge for zinc in the medium-term.

"Whilst the upcoming zinc shortage has gone largely unnoticed in the market, the M&A and other corporate activity has accelerated, with large producers, such as Nyrstar and Glencore looking to secure future sources of production," the Collins Stewart report said.

Indeed, this means many large producers will be zeroing in on zinc juniors with compelling assets such as Rathdowney Resources.

Collins Stewart said Rathdowney is one of the standouts in the junior zinc space for several reasons, including a large potential resource base, "excellent location and low political risk", existing mine and smelters nearby, and "exceptional technical capability".

The financial advisory firm said Olza's 77 million tonne historical resource would make the zinc/lead deposit "globally significant". Collins Stewart said the "excellent correlation" between recent drill results and historical drill data gives the firm "great confidence" that much of the historic resource will be converted to NI 43-101 compliant status.

"As a result of our recent site visit to Olza, we have little doubt in the quality of the resource estimation work undertaken by the Polish geologists. The initial focus is on a higher grade part of the system with a historical resource of 20Mt averaging 8.3% Zn + Pb, which will form the basis of the scoping study," the report noted.

In December, Rathdowney reported positive drill results from its Olza zinc-lead project northwest of Krakow, confirming mineralization over 650 metres in one area of the property. Significant results from the program included four metres grading 9.74 percent zinc, 0.19 percent lead, and 49.0 grams per tonne (g/t) silver, in hole OLZ-025.

This project is also supported by 180,000 metres of Polish State drilling, and is located in the well-known Upper-Silesian zinc mining district, where mining operations have been taking place for decades. Collins Stewart noted that Poland is also a stable democracy, and a "mining friendly" jurisdiction, as it is "one of the better countries for mining globally".

The property is situated only 25 kilometres from the Boleslaw smelter, which is currently processing zinc from the state-operated Pomorzany mine nearby, which is due to close in 2015-2016. As such, Olza is in prime position to be the main supplier of zinc to this smelter, Collins said, with an operating rail spur running through the Olza resource to the smelter.

The report stated: "As envisaged by Rathdowney, Olza would be a simple extension of the same mining and processing operations which have been occurring in the region for decades, with the opportunity to incorporate modernized mining equipment and techniques. This significantly reduces the technical risk."

"With the cost of mining and processing at Pomorzany known, the degree of confidence in the project economics at Olza are high, considering its relatively early stage."

Kroupnik also took note of Rathdowney's "impressive team" to drive the Olza project forward, with several of the key technical staff seconded from Hunter Dickinson (HDI), a global mineral resource group with a "good track record" of developing mining projects over the last 25 years.

Experienced management in Poland is also a strong point for Rathdowney Resources, which has just under C$23 million of cash in the bank.

"We view Rathdowney as an attractive acquisition target, once the confidence inits potentially very large resource base in Poland is gained," Collins Stewart concluded.

Further potential M&A activity in the zinc sector could also put more spotlight on the company’s large potential resource base.

Collins Stewart applied a 50 discount to its valuation for Rathdowney Resources, reflecting risks associated with resource conversion, as well as the completion of technical studies. The valuation also assumes a one million tonne per year operation at Olva, beginning in the first half of 2017, and a conservative capital cost assumption of $150 million - given all the infrastructure is already in place.

Rathdowney was changing hands at around 32 cents Friday afternoon, implying an 84 percent discount to Collins Stewart's NPV - a discount that the firm expects to contract as Olza's resource base builds.