Evolution of a Mining Equity

For the average investor, even the seasoned one, investing in a mining company is often dramatically different than any other equity. Usually, one looks at financials – specifically cash flows, dividend yield, P/E ratios, etc. but most mining companies have only outgoing cash and debt. This article attempts to explain the different phases of the mining company, from exploration to production.

To begin, there are three general phases of all mineral companies. I say minerals, as this not only applies to metals (gold, silver, zinc, nickel, lithium etc.) but also to the likes of phosphate, potash, graphite, coal etc. Energy is a bit of a different animal, so that will not be covered here. They all begin in the exploration stage, followed by development and finally production. What one must also understand is that most of the junior or micro- and small-cap exploration companies, desire not to advance further, but rather “prove up” enough resource to be either:

Acquired

Sell the particular asset

Joint venture the asset to another company

It is in this phase where equity is the basis of cash – for the investor, take note of dilution. There is no product being sold and nothing produced except for data. Focusing on this phase, the potential site is surface sampled and then trenched. More often than not, the initial site has been surface sampled, meaning that a prospector and/or geologist has already identified potential in the property. Aerial surveys are also conducted to see magnetic or other anomalies. The purpose is to establish drill targets.

It is in this initial phase that the most dramatic movement of the stock happens. It may be appropriate to say, “surprises are welcomed” at this point.

Fast forward a few long months even years and a resource has been established (or hasn’t, at which point the company focuses on other assets, finds new targets or well doesn’t – and hopefully the investor realized this and salvaged what he/she could!) This is broken down in the following, in terms of drill spacing:

Proven & Probable – 10 meters

Measured – 25 meters

Indicated – 50 meters

Inferred – 100 meters

This chart demonstrates the greater confidence of the drill results.

Once this is all established the company heads toward the development stage. Similar to the exploration stage, equity is the main source of money. It is at this point that the equity will begin to recede. This is a natural function of administration. There is less news flow and a great deal of delay comes into play…permits, metallurgical tests, feasibility and scoping studies all take time. Mine development schematics, water, power, the backing of the government and most importantly the local population are all significant issues.

Anyone of the aforementioned can halt a project permanently. Also of consideration is where is the ore going to be processed. Is a mill going to be on site (is this going to cost a billion dollars?). Will this be sold as concentrate, shipped to a smelter or would dore bars (in the case of precious metals) be poured?

After all ‘T’s are crossed and ‘I’s are dotted, the production begins. Here debt and cash flow become the driving sources of money for the company. Labour and input costs become a going concern, as does safety and production. Once production does begin the equity tend to reverse direction and advance as there is a product and cash flow. However it is now subject to market expectations, which may excite or disappoint. After all of these phases have been through their trials and tribulations, the market begins to realize that the company has a declining asset and the onus of responsibility to constantly replace mined assets becomes the largest issue. The cycle begins anew, with either exploration or acquisition being the method to continue existence.