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Message: Kaiser/bottom fish pick....copper-zinc and REE Indium

Kaiser/bottom fish pick....copper-zinc and REE Indium

posted on Jan 03, 2010 09:54AM

Lithic Resources Ltd reported a new 43-101 resource estimate for the 100% owned Crypto zinc-copper-indium deposit in Utah on November 19, 2009 which incorporates all the drilling done during the past two years. Although Lithic has more than doubled the gross metal value of the sulphide portion of the deposit to about US $3 billion using $1.02/lb zinc, $3.14/lb copper and $233/lb indium and a 3% zinc equivalent cutoff grade, the market gave the resource update a thumbs down, knocking the stock down $0.03 on the day the news came out. Once again this represents an opportunity for bottom-fishers, because in my view the news is better than what I had expected and gives the project development critical mass. First of all, the resource estimate survived the scalpel of Steve "Dr Death" Ristorcelli of Reno based Mine Development Associates, who has a reputation for very conservative resource estimates that often shrink the ounces or pounds in the ground offered by earlier estimates. The historic non 43-101 compliant estimate reported by Cyprus consisted of 5.4 million tonnes of 8.7% zinc for the sulphides and 2.8 million tonnes of 7.0% zinc for the oxides with a gross metal value of $1.5 billion, or rock values of $192/t for the sulphides and $154/t for the oxides. The new 43-101 compliant resource estimate using a 3.0% zinc equivalent cutoff grade (based on $0.80/lb Zn, $2/lb Cu, and $500/kg In) came up with 5,800,000 indicated tonnes of 4.44% zinc, 0.309 % copper and 48.8 g/t indium and 13,805,000 inferred tonnes of 4.84% zinc, 0.372% copper and 37.4 g/t indium for the sulphide zone, representing a gross metal value of US $2.97 billion and a rock value of US $152 per tonne. (Using a 6% zinc equivalent cutoff the sulphide resource came in at 8,708,000 tonnes of 7.57% zinc, 0.41% copper and 46.3 g/t indium for a rock value of US $222 per tonne and gross metal value of $1.9 billion.) The shallower oxide resource, which is accessible to open pit mining, was estimated at a 1% cutoff and came in at 1,114,000 indicated tonnes of 4.54% zinc, 0.263% copper and 10.31 g/t indium, and 4,644,000 inferred tonnes of 3.373% zinc, 0.165% copper and 12.55 g/t indium, representing a gross metal value of US $594 million and a rock value of $107 per tonne. All mineralization was diluted to minimum dimensions of 2 m by 2 m by 3 m.

The 30:70 split between the indicated and inferred resource was largely due to the fact that the historical work did not include indium assays. As a result the inferred category has been assigned a lower indium grade than the indicated resource, which additional infill drilling is expected to equalize. The higher grade inferred zinc resource can in turn be viewed as being equivalent to an indicated resource. As it currently stands the sulphide based indium resource of 1.7 million lbs represents about 150% of global demand as reported by the USGS on the basis of refinery sales, with a potential 25% boost if the inferred indium grade does end up matching the indicated grade once the resource has been upgraded. MDA's Steve Ristorcelli and Paul Tietz have constructed a detailed block model for the Crypto deposit. I asked them about the correlation between indium and zinc. The indium is contained in the sphalerite lattice and would report to a zinc concentrate generated through flotation. The indium grade does not correlate with zinc grade in a linear fashion, with the highest indium grades (100 g/t plus) typically occurring with 1-3% zinc grades, and lower with the higher zinc grade. However, the higher indium grade sphalerite has a spatial association with higher zinc grade sphalerite, meaning that where the skarn mineralization has a higher zinc grade there will also be a higher indium grade nearby. The entire system is enveloped by a low grade indium halo and it is suspected that the higher grade indium concentrations may have been created through a later stage hydrothermal pulse. Good news from a mining perspective is that the higher grade zinc zones are clearly outlined within the overall zinc resource, which, while having a complex geometry, lends itself to a variety of mining plans and methods. This opens the possibility for an underground mining plan which could target higher grade ore to achieve a rapid payback. Although Lithic has not yet published a report on metallurgical studies done on both the oxide and sulphide zones, MDA included the indium grade in the resource estimate on the basis of preliminary communications that the indium does report to the zinc concentrate. The oxide resource was estimated on the basis of a 1% zinc equivalent cutoff grade because the entire oxide resource fits within an open pit cone. While the zinc sulphide appears to pose no metallurgical issues, Lithic is still awaiting a final report on bench scale studies on the oxide mienralization.

In comparison to other indium bearing deposits the Crypto deposit stands out as a very promising candidate for development as a zinc mine with a significant indium by-product credit. Indium is primarily recovered as a by-product of refining zinc concentrates, with the zinc concentrate producer rarely getting credit for the indium content. Indium is also present in tin ore, but poses recovery problems in this form. China produces 58% of annual indium supply largely as a by-product of its zinc production, followed by Japanese and Korean refineries at 11% and 9% respectively. Canada produces about 9% of annual supply, mainly through Teck's Trail smelter which processes zinc concentrates from Red Dog. Any of the large zinc producers which own their smelters such as Votorantim, Teck or Hindustan Zinc would be potential bidders if Lithic can bring Crypto to the feasibility stage. Alternatively, because the indium content is known Lithic would be able to strike a deal whereby it receives the indium credit from a non-producer smelter.

A technical report will be filed on SEDAR within 45 days, which should provide us with additional details about the nature of the project. The next task for Lithic is to raise US $6-$8 million for a major drilling program designed to upgrade and expand the Crypto resource as well as test some peripheral targets and continue with metallurgical studies. Of particular interest is the 650 metre lateral extension from the main zone to the 3 m snippet of skarn mineralization intersected by an old hole beneath the Utah silver mine workings at a depth of 889 metres which graded 7.65% zinc, 3.5% copper, and 0.1% molybdenum. A program for 2010 would involve some infill holes into the main Crypto zone to collect material for expanded metallurgical studies, and some exploratory holes along the strike of the Crypto zone to see if additional skarn mineralization exists. The company also needs to conduct a scoping study to establish the cost structure for a dual mining operation that open pit mines the oxide resource and underground mines the sulphide resource, which could be accomplished in 2-3 months at modest cost. At an initial glance the project looks quite robust; a 50% drop in the price of zinc to $0.51/lb would drop the rock value to $99 per tonne, which should still be enough to support an underground mining operation. Failure to expand the resource would not kill the economic potential of Crypto, but success would allow a mining operation to scale from the 2,000-3,000 tpd rate to a 4,000-5,000 tpd rate. If the 2010 program does not produce any negative results, the next stage would be an underground drilling program whose result would be the basis for optimizing an underground mining plan. Given that the project is owned 100% by Lithic with no royalties, that it is located in the mining friendly state of Utah, that the global $3.5 billion in situ resource is substantial and open to expansion, that the rock value at $152 per tonne is robust, that the elevated indium content makes Crypto's development attractive from a security of supply perspective, especially given the project's location in the United States where the capacity to develop solar power matches that of China, and that the market is currently assigning an implied value of only $5 million based on 39.4 million shares fully diluted and a $0.125 stock price, Lithic offers superb speculative value for an ultimate project value of $200-$500 million. As of September 30 Lithic still had $800,000 working capital, so there is no immediate need to finance. What the company is missing at this stage is a full-fledged team to drive the story forward. While Chris Staargaard works on this task bottom-fishers should take advantage of Lithic's cheap stock price which is due to a legacy perception that Lithic is doomed to perpetually miss the boat. Although the original recommendation was an extreme risk buy below $0.10 made on December 24, 2008, the resource estimate has removed substantial risk from this story, and we are now converting Lithic to a top priority buy at current prices. If the company can plug in the missing management pieces and secure support from a solid group of financial backers, we would be prepared to issue a Good Absolute Spec Value Buy with a short term target in the range of $0.50-$1.00 where it would be reasonable for Lithic to raise the money it needs for its 2010 plans.

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