SRA fights to keep its head above water

Third quarter results from Strategic Resource Acquisition (SRA) (SRZ-T) haven’t reversed the company’s dire fortunes; they’ve only made them worse.

While SRA’s losses weren’t as severe for the period — it lost $1.1 million for the quarter compared to $2.7 million for the same period last year –delays and operational problems at its Mid-Tennessee zinc mine at Gordonsville, Tenn., continued to shake the market’s faith in mine’s economic viability.

Toronto-based SRA has lost close to 99% of its share price since July 2007 when it was trading in the $6.70 range. On Aug. 15 — the day financials werereleased — its shares were trading for just 9.5, down 35% for the day on 1.1 million shares traded.

The precipitous drop comes within the context of falling zinc prices. The metal closed at 74 per lb. in London on Aug. 18, down 50% from prices in May of this year, which is helping to fuel investor retreat from the base metals complex on the whole.

Ironically, however, SRA’s losses would have been worse were it not for the company’s zinc put options that allowed it to make money from zinc’s falling price.

Still, the long-term health of the company will require zinc prices to recover, especially considering that SRA is currently producing the metal in concentrate at a cost of US$1.67 per lb.

Such metrics, when combined with debt obligations, have thrown into doubt the company’s continued solvency.

In its management discussion and analysis document, SRA laid out the severity the situation.

“The company estimates that if it is unsuccessful in raising additional financing and/or refinancing its short-term debt, it will not have the sufficient cash to remain operating beyond October 2008,” it reads.

SRA, which currently has $12 million in cash at hand but a working capital deficiency of $4.5 million, says it needs to raise a total of $40 million.

The straits the company finds itself in are partly the result of a confluence of negative factors on the mining side of the operation: poor equipment availability and performance translated into lower tonnes blasted; an unproductive workforce that yielded just 54 tonnes per shift compared to the 72 tonnes that was estimated; and higher dilution than expected because higher-grade areas weren’t ore made it into the facility. SRA now says its rod mill will have to be supplemented with a ball mill to allow the flotation cells to function fully.

Put all of this together and it adds up to a lowering of production guidance for the year.

SRA now says production will come in at 750,000 tonnes, or 25 million lbs., of zinc for the year — a ways off from its previous estimates of 1.8 million tonnes, or 100 million lbs., of zinc.

And costs at the mine are rising. In 2007, SRA estimated that capital expenditures to develop the mine would come in at $98 million, but in June of this year it revised that to $130.8 million.

And then therearethe mining and milling costs of US$1.67 per lb. after royalties, freight and smelting costs. SRA says it will need ramp up to 7,500 tonnes per day by late 2009 to get total mining costs down to 85 per lb. of zinc.

At that level of production it would be producing 147 million lbs. zinc in concentrate per year, or 125 million lbs. of payable zinc, for 10 years.

But whether the company will be around long enough to get there is unclear. For the third quarter it milled only an average of 2,700 tonnes per day.

To get production up and costs down, SRA will not only have to be also have to hope its dewatering and rehabilitation program go smoothly at its two higher-grade areas: Cumberland (which is behind schedule) and Elmwood. And it will have to get quick results from its workforce training program.

As for solvency, the company has commitments for $83.3 million, with $27.2 million of that is due in less than a year. Its board of directors is considering funding strategies.

The Mid-Tennessee project has an indicated resource of 12.5 million tonnes grading 3.35% zinc and an inferred resource of 6 million tonnes grading 3.43% zinc, both using a zinc cutoff grade of 2%.

SRA bought the project for $15.6 million in 2006 and raised roughly $150 million which it put into rehabilitation, equipment and operations. The mine had been in continuous production from 1975 to 2003.

If there is some positive news for SRA, it comes in the form of germanium and gallium.

The two metals, which are sought-after by the semi-conductor, mobile and solar industries, are present in tailings from its zinc concentrate and are leachable.

SRA has two prelimnary deals with possible buyers of the metals, and plans to start getting revenues from their sale in late 2008. It says such sales could generate roughly $10 to $15 million in additional revenue which would further reduce