Arc Minerals: Zambia Review

As we head into the rainy season, let's reconsider the bottom line

Good Morning Team.

I’m at Mines &Money for most of this week so please expect limited updates - if there are any companies presenting at the conference that you’d like me to touch base with, send a message and I’ll be happy to set up a chat.

As we go into the rainy season in Zambia (and be thankful it started early, the drought-ridden country relies on hydropower and definitely needs the water) it’s time to take a step back and consider the Zambian JV - and where it could go next.

Note: this is a review article designed to put all the essentials into one place for new investors to consider. If you have any questions, you can contact me directly on Twitter or LinkedIn.

I’m easy to find.

Let’s dive in.

JV terms

• There are five directors of the JV vehicle: Anglo retains three directors and Arc Minerals two. As all JV decisions are made by simple majority vote, Anglo is 100% in charge of all executing the exploration strategy.

• The JV went unconditional on 10 November 2023 (circa a year ago), with a $3.5 million cash payment to the Unico subsidiary. The next $1 million cash instalment has just landed.

• Anglo American initially holds a 70% ownership interest and ARCM the remaining 30%.

There are three phases to the Joint Venture:

Phase 1

Anglo has the right to retain an ownership interest of 51% by funding exploration expenditures equal to $24 million on or before the date that is 180 days after the third anniversary of the Effective Date and making cash payments to Arc Minerals subsidiary Unico (67% owned) totalling up to $14.5 million as follows:

• $3.5 million upon signing of the Joint Venture Documents (Effective Date).

• $1 million on the first anniversary of the Effective Date (just paid)

• $1 million on the second anniversary of the Effective Date.

• $1 million on the third anniversary of the Effective Date.

• $8 million by the Phase I End Date.

As there has been limited exploration in the first year, investors can assume that years 2+3 will see significant activity for Anglo to meet their commitment.

Phase 2

With Phase I completed, Anglo American will then have the right to retain an additional ownership interest of 9%, for a total ownership interest of 60%, by funding $20 million of additional exploration expenditures within two years of the Phase I End Date.

Phase 3

Following the completion of Phase II, Anglo American will have the right to retain an additional ownership interest equal to 10%, for a total ownership interest of 70%, by funding $30 million within two years of the Phase II End Date.

Zambian copper licences

Here’s the basics of what makes Arc’s licenses special:

1. ARCM’s Zambian licenses cover some 870 square kilometres located inside the North Western Province, within the Domes region of the Zambian Copperbelt, near world-class producing mines including First Quantum Minerals’ Sentinel and Kansanshi mines and Barrick’s Lumwana mine.

2. These licences are some of the last Domes areas to be explored in detail and are within the trending arm of the major geological structure known as the Lufilian Arc (Copperbelt), on the western flank of the Kabompo Dome. The Copperbelt is home to all the major copper mines in Zambia, which accounts for more than 80% of Zambian copper production.

3. The assets were previously explored through an Equinox Minerals and Anglo American Joint Venture during the late 1990s as part of the Kabompo Project.

4. ARCM’s areas under license encompass nine of 30 exploration ranked targets, including the top seven ranked targets.

5. FQM’s Sentinel copper mine — which produces over 250,000 tonnes of copper per year — was originally ranked number 22 of the original 30 targets. At the time, it had an exploration target size of six million tonnes of ore, but this was eventually upgraded to a gigantic one billion tonnes.

6. It’s also worth noting that these licences are very close to large producing mines already, and this gives some operational optionality for future development.

Now to technical detail.

The Central African Copperbelt metallogenic province is situated within the metasedimentary rocks of the Neoproterozoic Katanga Basin. The earliest sedimentary layers were deposited in a series of confined rift basins and were later covered by widespread, organic-rich marine siltstones and shales. These layers, referred to as Ore Shale, contain the bulk of the Copperbelt's ore deposits. Above this ore-rich horizon is a vast sequence of mixed carbonate and clastic rocks, known as the Upper Roan Group.

The Roan Group has since evolved into a northerly-directed, thin-skinned, thrust-and-fold orogenic system called the Lufilian Arc, formed by the convergence of the Congo and Kalahari cratons. This curved metallogenic province is divided into two distinct districts: the Zambian Copperbelt and the Congolese (or Katangan) Copperbelt.

ARCM’s Zambia copper assets are located in the Domes region on the western edge of the Kabompo Dome, which is situated to the southwest of the Copperbelt. Areas under licence include 19906-HQ-LEL, 23004-HQ-LEL, 23005-HQ-LEL and 28700-HQ-LEL.

This area shares the same geological stratigraphy and structural setting as First Quantum’s Sentinel and Barrick Gold’s Lumwana deposits.

These deposits are exceptionally attractive. Consider Sentinel, the nearest deposit to Arc’s licenses. It is a stratabound, sediment-hosted sulphide deposit located within a structurally thickened, northwest-dipping carbonaceous meta-pelitic rock called 'Kalumbila phyllite.' Copper mineralisation at Sentinel is primarily restricted to this highly deformed phyllite unit.

The orebody spans approximately 11 kilometres in an east-west direction, with mineralized horizons dipping 20 to 30 degrees northward, parallel to the dominant foliation. The main copper-bearing mineral is chalcopyrite, which typically appears within bedding/foliation-parallel quartz-kyanite carbonate millimetre-scale veinlets. The deposit currently has a Measured and Indicated resource estimate of 761.7 Mt grading 0.45% Cu, sufficient for another 12 years at the current production rate of 59 Mt/yr.

The idea is that the Anglo-Arc Minerals Joint Venture will find something at least as good, if not better.

Concerning exploration, ARCM has already drilled some 22,000 metres, taken 75,000 soil samples and flown 10,000 line kilometres of airborne geophysical surveys covering the entire licence area by the end of 2023.

During the last rainy season, Anglo conducted a geological technical review of the project, and has decided a work programme including:

• LiDAR Survey to assist in determining the surface outcrop positions with precision

• Detailed geological mapping, spectral and pXRF analysis of samples collected providing a deeper understanding of the geological context of the area in relation to the stratigraphic horizons of interest

• Core Diamond drilling in areas that are deemed prospective to host copper and nickel mineralisation

• Further ground-based geophysics to understand the underlying basin and sub-basin geometry

Recent exploration

Let’s now consider the recent update on exploration activities at the Arc Joint Venture with a subsidiary of Anglo American in Zambia:

• Copper mineralisation observed at all targets drilled

• Priority target confirmed

• Alteration consistent with known deposits in the Domes Region with copper mineralisation observed

• Three new targets identified and drilled

• Drilling at fourth target underway

Nick von Schirnding, Executive Chairman of Arc Minerals, commented:

‘I am very encouraged by the progress made during the drilling campaign by our JV partner, Anglo American, notably the identification of a new priority target and the fact that drilling is set to continue into the wet season.

One new target in particular, close to Muswema, has moved to the top-ranked priority and exhibits alteration mineralogy comparable to known deposits within the Domes Region, with visible copper mineralisation observed in the core.

I look forward to reporting back on assay results from the core sent to the laboratory as they become available.’

This new priority target’s lithologies have been compared to ‘known deposits in the Domes Region’ - almost certainly Enterprise and Sentinel - and this may be the beginnings of the Tier 1 asset we are all waiting for.

Most importantly, from what I understand, this target is very close to the local road - which opens up the possibility of continuing to explore through the rainy season.

It’s also worth remembering the size of the Zambia JV: it covers 870 square kilometres - New York City is about 783 square kilometers - there’s tons of tenure to explore and we’ve only really just got started. This is a multi-year exploration program where the circa $90 million total may barely scratch the surface of the potential .

And now we have another top ranked target.

Consider the three targets in the RNS:

Cheyeza Target

• Drilling started 1 km east of the known oxide occurrence at Cheyeza.

• The first hole targeted a copper-nickel anomaly identified through recent soil sampling.

• Copper mineralisation over a 45m thickness in the saprolite zone.

• Pending lab results, the hole shows potential to expand the known oxide mineralization at Cheyeza.

A few things to unpack here: a 45 metre intercept of copper mineralisation suggests a substantial mineralised zone, which is encouraging for potential resource estimation. For context, 10-20 metres is fairly common in Zambian exploration.

Better yet, a saprolite zone is generally weathered, so typically contains oxidised materials. This is good news on two levels; copper in the intercept is likely to be easier to extract than normal - and as the drillhole is a whole kilometre from the previously known oxide occurrence, this is strong evidence of a large, connected mineralised system at Cheyeza.

What’s needed now is presumably an infill hole between the two.

Nkwazhi Target

• Two holes drilled between Cheyeza and Muswema to explore a thickened Lower Roan unit.

• The first hole intersected 20m of copper mineralisation at the base of the Upper Roan.

• Anomalous nickel was detected in a marker talc-schist unit in the Lower Roan; no further mineralization observed below this.

• The second hole, drilled 400m away, did not intersect any mineralization.

The lower Roan formation is well-known as a host for copper mineralisation, so this target was very promising. However, my perception is that while 20 metres of copper mineralisation might indicate copper is present near the Lower Roan boundary (alongside the nickel in the talc-schist unit within the Lower Roan), the bottom line is that no mineralisation below this zone means you are likely only going to see localised enrichment rather than a broad zone of mineralisation.

This is confirmed to an extent by the second hole which intersected nothing - the area may warrant another hole or two, but it looks like this target may not deliver. 20 metres of copper mineralisation is encouraging, but you need to replicate this at another hole.

Target South-East of Muswema

• Located 4 km southeast of Muswema, targeting a second order soil geochemical anomaly.

• Initial drilling encountered lithologies and alteration similar to known deposits in the Copperbelt's Domes Region.

• Observed copper mineralisation with multiple generations of chalcopyrite in the drill core.

• This target is prioritised for follow-up drilling due to encouraging initial findings.

This target may be what we’ve all been waiting for. What David Wood was talking about all those years ago. Anglo is the one calling the shots, so must have seen something in a ‘second order’ soil geochemical anomaly that was not there in the primaries - and this target was clearly the reason why senior personnel were called out to inspect the ground.

To make life easier…

Lithologies = rock types

Alteration = changes in the rock due to chemical reactions

The basic point is that we are seeing multiple generations of chalcopyrite, meaning copper mineralisation was formed in different stages during the formation of the rock. This means an ongoing, rich, mineralising process - exactly what happened at Enterprise and Sentinel.

For context, the presence of multiple generations of chalcopyrite aligns with these major Domes Region mines’ geological history of tectonic activity and hydrothermal processes, that have contributed to the formation of their significant mineral resources.

And as we do not have assays, then clearly this information must be visible.

For some context, early generation chalcopyrite would form during the initial cooling of hydrothermal fluids rich in copper and sulphur, associated with the early stages of volcanic activity or the movement of magma. Subsequent generations would form due to changes in pressure or temperature, or the introduction of new fluids that modify the chemistry of the mineralising environment.

The early generations would likely host larger crystals while later generations could show finer-grained textures (due to faster cooling or changes in fluid chemistry). Later generations might also be coloured differently as they would contain inclusions of other minerals, or show other signs of alteration.

You need multiple generations to get the grade you need, as it implies that the deposit has been active over a significant geological time, allowing for a substantial accumulation of extensive, complex and more easily recoverable copper.

No wonder it’s being prioritised for follow-up drilling.

There is very real chance this target is the jackpot.

But it’s not just been drilling. The JV boasts:

‘an extensive soil sampling programme was completed along traverses and focussed on the basin margin and in particular the Lower Roan. Over 12,000 samples were collected and analysed with the principal aim being to better understand the architecture of the Roan stratigraphy, source rocks and vectors to potential reductants.’

The information garnered from this soil sampling program, integrated with historical data has resulted in a more robust surface geological map for the basin and has supported the current drill targeting.

I’d imagine that during the rainy season, Anglo will use these samples to come back with pinpointed new targets - and tens of millions in expenditure to burn through to meet its commitments.

Joint Venture Comparison

On a bottom line calculation, Anglo will pay a total of $88.5 million for the privilege of working with ARCM — covering 70% of the JV. This makes 100% of the project ‘worth’ $125.4 million, ARCM held 67% of the project before Anglo came on board, so you can make a very good argument that ARCM’s stake is worth 67% of $125.4 million, or $84.7 million.

Of course, you also need to consider the potential upside — whether Anglo unearths the next Sentinel mine, or even a mid-tier copper resource.

It’s easy to jump to Greatland Gold as the easiest comparator; both companies exploring hugely prospective tenure with a major funding the exploration. GGP eventually went on to generate a 70-fold return (before dropping back), and of course, long-term holders in Arc Minerals are hoping for a similar performance.

It’s also worth looking at other JV deals in Zambia between a junior and a major:

Perhaps the closest comparator was the JV between Rio Tinto and Midnight Sun Mining, where Rio could earn 75% of the Solwezi licences by investing $51 million including $3 million in cash payments. This was terminated by Rio Tinto in June 2022 as the major was not satisfied that a Tier 1 deposit was there.

However Midnight Sun then agreed a JV with KoBold Metals to explore the Dumbwa target in Zambia, whereby KoBold must expend $15 million in exploration and make cash payments totaling $500,000 over 4.5 years to Midnight Sun to earn a 75% interest in the project. This should be formally completed later this month.

Midnight Sun has a 506 square kilometre license area, smaller and arguably worse situated than Arc’s (though still very prospective), and a JV worth roughly one sixth that of Arc’s - yet it sports a circa £43 million market capitalisation - more than double Arc’s and is itself arguably still undervalued.

Then there’s FQM and African Pioneer, where FQM can acquire 75% of four exploration licences in return for at least $2 million in exploration and bringing the assets to mine development ready status, including a technical report detailing a 300 kiloton contained copper resource.

There are also many small scale exploration deals — Rio Tinto and Zamare for $3 million, Xtract Resources and Cooperlemon, and Tertiary Minerals and Kobold.

Jubilee Metals and IRH have also agreed a circa $50 million JV to process waste copper dumps close to Konkola - though this is a processing and not an exploration venture.

The bottom line is that the cash payments to Arc Minerals stand out as outlandishly large, and the size of the JV deal agreed is also very substantial. There is nothing better out there.

I know because I’ve checked.

It’s worth pointing out that these smaller JVs are also exploring very prospective tenure, much of which is extremely promising. But the size of the investment at ARCM’s licences suggests that Anglo American (which cannot at this juncture afford to gamble with investment), may have reasons to suspect world-class copper is in the ground based on information which may not be publicly available.

Should Anglo unearth a decently sized mid-tier copper resource, which may be too small for the major but nevertheless attractive to a mid-cap miner, then the share price should still re-rate significantly from here.

But if Anglo discovers the jackpot, and all that investors hope for comes true, then you might be about to witness one of the AIM market’s great stories.

In further good news, Anglo American may soon be expanding the scope of the Joint Venture. In a recent investor call (hosted by yours truly) Arc’s Chair noted:

‘The Zambian government and our competitors out there are very well aware that what we’re sitting on is one of the best, most exciting, you like, copper deposits in the world.’

And Anglo knows it. We’ve already had information on the soil sampling and new priority target - but it has been confirmed that senior Anglo geologist David Wood was ‘really impressed by what he was seeing.’

Anglo started drilling on 7 August and news of this new priority target came back exactly three months later. What are the chances they would hit a possible Tier 1 target so early into the campaign?

But beyond this, the Zambian Ministry of Mines has created an SPV which will allow operators to take on more prospective licenses, but with the Zambian state owning a percentage from the onset.

Given that there are two available licenses adjacent to the ARCM-ANGLO JV, and that Zambia’s President is ‘glad to note the renewed interest by Anglo American Corporation, to invest in our mining sector, after close of 20 years of their exit,’ during the recent visit of the major’s CEO to the country. the hope is that these two licenses will be taken on by Anglo.

It’s worth noting that Anglo may also get involved in a producing mine - I have speculated Konkola in the past - but there are others. Anglo did not send their CEO and top lawyer out for no reason.

But if Anglo do take on these two additional licenses, it would be very good news for Arc. It has been confirmed that any license with a boundary within 5km from the JV would be swallowed into it - and Zambia is unlikely to let Anglo take on new licenses without additional exploration spend commitment.

For Anglo, BHP are able to make a renewed bid from 29 November, so one hopes that if the defensive play is Zambia, an announcement will be coming rapidly.

The bottom line

Sentinel and Kansanshi are together worth $10 billion according to multiple media reports that Mitsui is taking a 20% stake at that valuation.

So with a working mine, a Tier 1 is worth $5 billion. Sentinel cost circa $2 billion to build, so a similar Tier 1 find would be worth circa $3 billion. Arc has exposure to 30% of any find - and while you can argue the toss a thousand ways…

at a £20 million market cap, you’re not going to get better risk-reward anywhere.