")

Canadian Zinc--Silver Potential

Silver Stock Report

by Jason Hommel, Oct 23, 2003


    Canadian Zinc (CZN.TO and CZICF.PK) was up 22.37% today (October 22, 2003) to break out to a new high of $0.93 CAN. Zinc and silver prices continue to go up, hitting 42 cents/lb. for zinc, and $5.11/oz. for silver. Canadian Zinc has zinc, of course, and also plenty of silver.

    Canadian Zinc announced on Oct. 16th an expansion of the previous private placement at $0.50 CAN/share, from $2.5 million to $7 million, which was obviously still oversubscribed judging by reports by brokers and judging by the share price action today which was well above CAN $0.50/share.

    Why is there such excitement about Canadian Zinc? It could be that this was the mining operation financed by the Hunt brothers, who were key silver players in the run up to $50/oz. silver back in 1980. The mine was 90% complete in 1980 as the project had $50 million in infrastructure set up back then. At today's prices, the value of the existing mill and the rest of the buildings may well exceed $100 million.

    The share structure will be 65 million shares fully diluted after the recent private placement. At the closing price of $.93 CAN, this gives a market cap of CAN $60.45 million. The share structure can be found from the following three sources, combined.

       1. The company web site, which lists 44.2 mil fully diluted as of March 31, 2003 at www.canadianzinc.com/about/admin.shtml
       2. 900,000 options granted to insiders, as indicated in the press release Sept. 16th: www.canadianzinc.com/press/docs/PR03.09.pdf and
       3. The recent private placement expansion announcement www.canadianzinc.com/press/docs/FinancingOct1603a.pdf of 11.6 mil units at 1.5 shares/ unit, for a total of 17.4 million shares, and 2.5 million flow through shares. The total is 44.2 + .9 + 17.4 + 2.5 = 65 million shares.

    Canadian Zinc has some of the highest grades of ore in the world, with 12% zinc, 10% lead, and over 6 ounces of silver per ton over 11 million tonnes in "zone 3" of 12 zones.

    (The company has mineralization across 12 zones, but has a pre-feasibility study that concentrates on zone 3, which is obviously the largest and richest target. So there is a lot of exploration potential here that is not considered in the following.)

    For zone 3, this works out to the following:

    12% zinc/ton; = 240 lbs. zinc/ton x 42 cents/lb. = $101/ton for the zinc.
    10.1% lead/ton = 202 lbs. lead/ton x 27 cents/lb. = $55/ton for the lead.
    6 oz. silver/ton x $5.11/oz. = $31/ton for the silver.
    0.4% copper/ton = 8 lbs. copper/ton x 90 cents/lb. = $7/ton for the copper.
    Total: $194/ton.

    (Metal prices from www.metalprices.com)

    The company gives several indications of the profit potential of this ore body at their web site. From the news release at www.canadianzinc.com/press/docs/PR03.09.pdf CZN indicates they will have a "cash operating margin of $3.30/oz. silver, or $240 million over the life of the mine." ... "over 18 years". $240 million / 18 years = US $13.3 million/year.

    Another estimate can be found at www.canadianzinc.com/welcome/index.shtml Here CZN says, "Recent work reviewing economics of operation in light of current smelter terms and last years drilling indicates that project, with a cash break-even price of 19 US cents per pound of salable Zinc, would be profitable even at today's prices (34.5 US cents per pound zinc.) This makes the mine highly profitable at any normal pricing scenario, with production in excess of 125 million pounds of salable Zinc per year."

    Doing the math on that comment works out to the following: $0.42/lb current zinc price - $0.19/lb. "break even" cost = $0.23/lb. profit. 125 million pounds x $0.23/lb. profit = US $28.75 million/year.

    Yet a third statement indicating an estimated profit potential can be found at www.canadianzinc.com/welcome/index.shtml#4

    Here, the company writes, "...CDN$20 million to upgrade the mine and mill and a further CDN$21 million to be invested by a road partnership to build an all weather access road to the mine from the Liard highway. Payback of this investment is estimated to be within 2 years in any normal metals pricing scenario, and the mine has a current known life of approximately 18 years."

    This works out to be: CAN $41 million x 0.76 = US $31.16 million in two years, or $15.58 million/year, which is within the range of the other two estimates.

    The potential profit range, as I infer from company statements, is between US $13.3 million/year and US $28.75 million/year.

    At a conservative PE ratio of 10, this gives a market cap target range from US $133 million to US $287.5 million.

    If we divide those targets by the 65 million fully diluted shares, that gives us a share price target of between US $2.04/share and US $4.42/share.

    Currently, the US price is $.93 CAN x 0.76 = US $0.70/share.

    The permitting is in place, which was announced on Sept. 16th, which is when the stock price really began to move up strongly. See http://biz.yahoo.com/ccn/030916/b286e2eed11e145bccb2f4bc6c1ad4ad_1.html

    The money received from the ongoing (and likely oversubscribed) private placement will be used for a final bankable feasibility study, and perhaps a bit more drilling. The mine may reach production probably sometime within a year from now, or less.

    The company is debt free, and with the recent private placement, well financed. A conservative approach may be to wait until the recent private placement closes before deciding to invest. A more aggressive approach might be to go with the trend, and buy in now.

    In the meantime between now and if and when the mine reaches production, investors will enjoy price exposure to the price movements of zinc and silver.

    Disclaimer:

    I have not been paid by CZN to write this article. I own shares of CZN.

    For more information, contact:
    www.canadianzinc.com
    Canadian Zinc Corporation
    Suite 1202 - 700 West Pender Street
    Vancouver B.C. Canada V6C 1G8
    toll free: 1-866-688-2001 direct: (604) 688-2001
    fax: (604) 688-2043 e-mail: czn@canadianzinc.com
    John Mcpherson, investor relations.
    John Kearney, president. 416-362-6686