Making Money on Miners, Part IV

In dividing-up the “evolution” of a mining project into seven specific phases, these individual phases are not equal increments – in terms of either the amount of time required, or the amount of money spent. Rather, they mark milestones in the development of a mining project which tend to lead to upward revaluations of the company, and (with regard to several of these phases) an “upgrading” of the company's status as a mining company.

A miner with a resource estimate completed on its mineral deposit is deemed “more advanced” than one which merely has a collection of drilling intercepts. A company with a “feasibility study” under its belt (along with a resource estimate) is closer to production than a company with a resource estimate alone. As these companies inch closer and closer to production, two other factors emerge. The “discounting” of these mineral assets is reduced as a company gets closer to generating actual revenues from a deposit, and the level of risk in investing in a company declines – since there are now less things that can go wrong.

The trade-off for this decline in uncertainty and risk is a commensurate decline in the potential up-side for these companies. The earlier-stage companies are clearly much riskier, but offer investors more potential gains – as all of these developments (and the upgrades in valuation which usually accompany them) still lie ahead in the life of this company.

This is why experienced investors in this sector balance their holdings between earlier-stage companies and producers/near-producers. We hold the former to provide us with the highest growth potential, while we hold the latter to reduce our overall level of risk – while still providing superior returns versus most other sectors.

Part III of this series left off as I presented many of the fundamentals associated with the “resource estimate” stage of development. Assuming a company has obtained encouraging results with their resource estimate (i.e. an adequate resource to potentially justify the capital costs of a mine), it is now ready for the detailed, technical process of doing an economic assessment on the viability of a mining project. Different terms are used to describe this phase, representing (in part) technical studies with different levels of depth of analysis.

A less-rigorous analysis of the economic and technical parameters for a particular project is often referred to as a “scoping study” or “pre-feasibility study” (PFS), but different terminology is used in different jurisdictions. Whatever it is called the objectives are the same.

Primarily there are two aspects to these economic and technical evaluations. One branch of analysis focuses on the metallurgical issues which exist with regard to actually extracting the metal(s) contained in the ore, given the existing geological matrix of the deposit.

Modern metallurgical techniques mean that most ores can now be processed with relatively high “recovery” rates of the metal(s) contained (i.e. the percentage of the total amount of metal which is successfully extracted). However, depending on the geological quirks of the deposit, there is considerable variation in both the cost of extracting the metal(s) and the amount of toxic waste produced from the extraction process.

Typically the two factors go together. Ore deposits which are more costly to process are also the most likely to resort to more heavily-toxic extraction methods. However, here we see new technology making mining “greener”. A good example is the recent innovation of using ‘ore-eating' bacteria to partially sever the chemical bond which binds the valuable metal(s) to the waste-material in the rock, in certain types of mineral deposits. Once these bacteria have ‘eaten' their fill, the ore is now suitable for normal processing, using much less-toxic reagents.