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Visualizing the Life Cycle of a Mineral Discovery

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Visualizing the Life Cycle of a Mineral Discovery

Visualizing the Life Cycle of a Mineral Discovery

Mining legend Pierre Lassonde knows a little bit about mineral exploration, discovery, and development. Drawing from decades of his experience, he created the chart above that has become a staple in the mining industry—the Lassonde Curve.

Today’s chart of the Lassonde Curve outlines the life of mining companies from exploration to production, and highlights the work and market value associated with each stage. This helps speculative investors understand the mining process, and time their investments properly.

Making Cents of Miners: The Stages of a Mineral Discovery

In the life cycle of a mineral deposit, there are seven stages that each offer specific risks and rewards. As a company proves there is a mineable deposit in the ground, more value is created for shareholders along the way.

  1. Concept

    This stage carries the most risk which accounts for its low value. In the beginning, there is little knowledge of what actually lies beneath the Earth’s surface.

    At this stage, geologists are putting to the test a theory about where metal deposits are. They will survey the land using geochemical and sampling techniques to improve the confidence of this theory. Once this is complete, they can move onto more extensive exploration.

  2. Pre-Discovery

    There is still plenty of risk, but this is where speculation hype begins. As the drill bit meets the ground, mineral exploration geologists develop their knowledge of what lies beneath the Earth’s crust to assess mineral potential.

    Mineral exploration involves retrieving a cross-section (drill core) of the crust, and then analyzing it for mineral content. A drill core containing sufficient amounts of metals can encourage further exploration, which may lead to the discovery of a mineable deposit.

  3. Discovery

    Discovery is the reward stage for early speculators. Exploration has revealed that there is a significant amount of material to be mined, and it warrants further study to prove that mining would be feasible. Most speculators exit here, as the next stage creates a new set of risks, such as profitability, construction, and financing.

  4. Feasibility

    This is an important milestone for a mineral discovery. Studies conducted during this stage may demonstrate the deposit’s potential to become a profitable mine.

    Institutional and strategic investors can then use these studies to evaluate whether they want to advance this project. Speculators often invest during this time, known as the “Orphan Period”, while uncertainty about the project lingers.

  5. Development

    Development is a rare moment, and most mineral deposits never make it to this stage. At this point, the company puts together a production plan for the mine.

    First, they must secure funding and build an operational team. If a company can secure funding for development, investors can see the potential of revenue from mining. However, risks still persist in the form of construction, budget, and timelines.

  6. Startup/Production

    Investors who have held their investment until this point can pat themselves on the back—this is a rare moment for a mineral discovery. The company is now processing ore and generating revenue.

    Investment analysts will re-rate this deposit, to help it attract more attention from institutional investors and the general public. Meanwhile, existing investors can choose to exit here or wait for potential increases in revenues and dividends.

  7. Depletion

    Nothing lasts forever, especially scarce mineral resources. Unless, there are more deposits nearby, most mines are eventually depleted. With it, so does the value of the company. Investors should be looking for an exit as operations wind down.

Case Study: The Oyu Tolgoi Copper-Gold Discovery, Mongolia

So now that you know the theoretical value cycle of a mineral discovery, how does it pan out in reality? The Oyu Tolgoi copper deposit is one recent discovery that has gone through this value cycle. It exemplifies some of these events and their effects on the share price of a company.

  1. Concept: 15+ Years

    Prospectors conducted early exploration work in the 1980s near where Oyu Tolgoi would be discovered. It was not until 1996 that Australian miner BHP conducted further exploration.

    But after 21 drill holes, the company lost interest and optioned the property to mining entrepreneur Robert Friedland and his company Ivanhoe Mines. At this point in 1999, shares in Ivanhoe were a gamble.

  2. Pre-Discovery/Discovery: ~3 years

    Ivanhoe Mines and BHP entered into an earn-in agreement, in which Ivanhoe gained ownership by completing work to explore Oyu Tolgoi. A year later, the first drill results came out of drill hole 150 with a headline result of 508 meters of 1.1 g/t Au and 0.8%. To get a sense of how large this is, imagine the height a 45-story building, of which a third of story is copper. This was just one intersection of an area that could stretch for miles.

    Wild speculation began at this stage, as steadily improving drill results proved a massive copper-gold deposit in Mongolia and drove up the share price of Ivanhoe.

  3. Feasibility/Orphan Period: ~2 years

    In 2004, the drilling results contributed to the development of the first scoping study. This study offered a preliminary understanding of the project’s economics.

    Using this study, the company needed to secure enough money to build a mine to extract the valuable ore. It was not until two years later, when Ivanhoe Mines entered into an agreement with major mining company Rio Tinto, that a production decision was finalized.

  4. Development: 7 years

    By 2006, the Oyu Tolgoi mineral deposit was in the development phase with the first shaft headframe, hoisting frame, and associated infrastructure completed. It took another two years for the shaft to reach a depth of 1,385 feet.

    Further development work delineated a resource of 1.2 billion pounds of copper, 650,000 ounces of gold, and 3 million ounces of silver. This first stage of development for Oyu Tolgoi made Mongolia the world’s fastest growing economy from 2009 to 2011.

  5. Startup/Production: Ongoing

    On January 31, 2013, the company announced it had produced the first copper-gold concentrate from Oyu Tolgoi. Six months later, the company stated that it was processing up to 70,000 tonnes of ore daily.

  6. Depletion: Into the Future

    The Oyu Tolgoi deposit will last generations, so we have yet to see how this will affect the value of the mine from an investment perspective.

    It’s also worth noting there are still other risks ahead. These risks can include labor disruptions, mining method problems, or commodity price movement. Investors will have to consider these additional conditions as they pan out.

  7. The More You Know

    Mining is one of the riskiest investments with many risks to consider at every stage.

    While most mineral discoveries do not match it perfectly, the Lassonde Curve guides an investor through what to expect at each stage, and empowers them to time their investments right.

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Mining

How to Avoid Common Mistakes With Mining Stocks (Part 5: Funding Strength)

A mining company’s past projects and funding strength are interlinked. This infographic outlines how a company’s ability to raise capital can determine the fate of a mining stock.

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Funding Strength

A mining company’s past projects and funding strength are interlinked, and can provide clues as to its potential success.

A good track record can provide better opportunities to raise capital, but the company must still ensure it times its financing with the market, protects its shareholders, and demonstrates value creation from the funding it receives.

Part 5: The Role of Funding Strength

We’ve partnered with Eclipse Gold Mining on an infographic series to show you how to avoid common mistakes when evaluating and investing in mining exploration stocks.

Part 5 of the series highlights six things to keep in mind when analyzing a company’s project history and funding ability.

Funding Strength

View all five parts of the series:

Part 5: Raising Capital and Funding Strength

So what must investors evaluate when it comes to funding strength?

Here are six important areas to cover.

1. Past Project Success: Veteran vs. Recruit

A history of success in mining helps to attract capital from knowledgeable investors. Having an experienced team provides confidence and opens up opportunities to raise additional capital on more favorable terms.

Veteran:

  • A team with past experience and success in similar projects
  • A history of past projects creating value for shareholders
  • A clear understanding of the building blocks of a successful project

A company with successful past projects instills confidence in investors and indicates the company knows how to make future projects successful, as well.

2. Well-balanced Financing: Shareholder Friendly vs. Banker Friendly

Companies need to balance between large investors and protecting retail shareholders. Management with skin in the game ensures they find a balance between serving the interests of both of these unique groups.

Shareholder Friendly:

  • Clear communication with shareholders regarding the company’s financing plans
  • High levels of insider ownership ensures management has faith in the company’s direction, and is less likely to make decisions which hurt shareholders
  • Share dilution is done in a limited capacity and only when it helps finance new projects that will create more value for shareholders

Mining companies need to find a balance between keeping their current shareholders happy while also offering attractive financing options to attract further investors.

3. A Liquid Stock: Hot Spot vs. Ghost Town

Lack of liquidity in a stock can be a major problem when it comes to attracting investment. It can limit investments from bigger players like funds and savvy investors. Investors prefer liquid stocks that are easily traded, as this allows them to capitalize on market trends.

Hot Spot:

  • A liquid stock ensures shareholders are able to buy and sell shares at their expected price
  • More liquid stocks often trade at better valuations than their illiquid counterparts
  • High liquidity can help avoid price crashes during times of market instability

Liquidity makes all the difference when it comes to attracting investors and ensuring they’re comfortable holding a company’s stock.

4. Timing the Market: On Time vs. Too Late or Too Early

Raising capital at the wrong time can result in little interest from investors. Companies in tune with market cycles can raise capital to capture rising interest in the commodity they’re mining.

Being On Time:

  • Raising capital near the start of a commodity’s bull market can attract interest from speculators looking to capitalize on price trends
  • If timed well, the attention around a commodity can attract investors
  • Well-timed financing will instill confidence in shareholders, who will be more likely to hold onto their stock
  • Raising capital at the right time during bull markets is less expensive for the company and reduces risk for investors

Companies need to time when they raise capital in order to maximize the amount raised.

5. Where is the Money Going? Money Well Spent vs. Well Wasted

How a company spends its money plays a crucial role in whether the company is generating more value or just keeping the lights on. Investors should always try to determine if management is simply in it for a quick buck, or if they truly believe in their projects and the quality of the ore the company is mining.

Money Well Spent:

  • Raised capital goes towards expanding projects and operations
  • Efficient use of capital can increase revenue and keep shareholders happy with dividend hikes and share buybacks
  • By showing tangible results from previous investments, a company can more easily raise capital in the future

Raised capital needs to be allocated wisely in order to support projects and generate value for shareholders.

6. Additional Capital: Back for More vs. Tapped Out

Mining is a capital intensive process, and unless the company has access to a treasure trove, funding is crucial to advancing any project. Companies that demonstrate consistency in their ability to create value at every stage will find it easier to raise capital when it’s necessary.

Back For More:

  • Raise more capital when necessary to fund further development on a project
  • Able to show the value they generated from previous funding when looking to raise capital a second time
  • Attract future shareholders easily by treating current shareholders well

Every mining project requires numerous financings. However, if management proves they spend capital in a way that creates value, investors will likely offer more funding during difficult or unexpected times.

Wealth Creation and Funding Strength

Mining companies that develop significant assets can create massive amounts of wealth, but often the company will not see cash flow for years. This is why it is so important to have funding strength: an ability to raise capital and build value to harvest later.

It is a challenging process to build a mining company, but management that has the ability to treat their shareholders and raise money can see their dreams built.

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How the World’s Top Gold Mining Stocks Performed in 2020

The GDX is an ETF that tracks the performance of the top gold mining stocks. How did the GDX and its constituents perform in 2020?

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GDX and Top Gold Mining Stocks Performance 2020

How Top Gold Mining Stocks Performed in 2020

Gold mining stocks and the GDX saw strong returns in 2020 as gold was one of the most resilient and best performing assets in a highly volatile year.

But picking gold mining stocks isn’t easy, as each company has a variety of individual projects and risks worth assessing. This is why the GDX (VanEck Vectors Gold Miners ETF), is one of the most popular methods investors choose to get exposure to players in the gold mining industry.

While the GDX and gold miners can generally offer leveraged upside compared to gold during bull markets, in 2020 the GDX returned 23%, just a couple of points shy from spot gold’s 25.1% return.

This graphic compares the returns of gold, the GDX, and the best and worst performing gold mining equities in the index.

Understanding the GDX ETF and its Value

The GDX is one of many index ETFs created by investment management firm VanEck and offers exposure to 52 of the top gold mining stocks.

It provides a straightforward way to invest in the largest names in the gold mining industry, while cutting down on some of the individual risks that many mining companies are exposed to. The GDX is VanEck’s largest and most popular ETF averaging ~$25M in volume every day, with the largest amount of total net assets at $15.3B.

In terms of its holdings, the GDX attempts to replicate the returns of the NYSE Arca Gold Miners Index (GDM), which tracks the overall performance of companies in the gold mining industry.

How the Largest Gold Miners Performed in 2020

As a market-cap weighted ETF, the GDX allocates more assets towards constituents with a higher market cap, resulting in larger gold mining companies making up more of the index’s holdings.

This results in the five largest companies in the GDX making up 39.5% of the index’s holdings, and the top 10 making up 59.3%.

An equally-weighted index of the top five GDX constituents returned 27.3% for the year, outperforming gold and the index by a few points. Meanwhile, an equally-weighted index of the top 10 constituents significantly underperformed, only returning 18.4%.

Newmont was the only company of the top five which outperformed gold and the overall index, returning 37.8% for the year. Wheaton Precious Metals (40.3%) and Kinross Gold (54.9%) were the only other companies in the top 10 that managed to outperform.

Kinross Gold was the best performer among the top constituents largely due to its strong Q3 results, where the company generated significant free cash flow while quadrupling reported net earnings. Along with these positive results, the company also announced its expectation to increase gold production by 20% over the next three years.

The Best and Worst Performers in 2020

Among the best and worst performers of the GDX, it was the smaller-sized companies in the bottom half of the ranking which either significantly over- or underperformed.

K92 Mining’s record gold production from their Kainantu gold mine, along with a significant resource increase at their high-grade Kora deposit nearby saw a return of 164.2%, with the company graduating from the TSX-V to the TSX at the end of 2020.

Four of the five worst performers for 2020 were Australian mining companies as the country entered its first recession in 30 years after severe COVID-19 lockdowns and restrictions. Bushfires early in the year disrupted shipments from Newcrest’s Cadia mine, and rising tensions with China (Australia’s largest trading partner) also contributed to double-digit drawdowns for some Australian gold miners.

The worst performer and last-ranked company in the index, Resolute Mining (-36.9%), had further disruptions in H2’2020 at their Syama gold mine in Mali. The military coup and resignation of Mali’s president Ibrahim Keïta in August was followed by unionized workers threatening strikes in September, slowing operations at Syama gold mine. Outright strikes eventually occurred before year’s end.

How Gold Mining Stocks are Chosen for the GDX

There are some ground rules which dictate how the index is weighted to ensure the GDM and GDX properly reflect the gold mining industry.

Along with the rules on the index’s weighting, there are company-specific requirements for inclusion into the GDM, and as a result the GDX:

  • Derive >50% of revenues from gold mining and related activities
  • Market capitalization >$750M
  • Average daily volume >50,000 shares over the past three months
  • Average daily value traded >$1M over the past three months

Gold mining stocks already in the index have some leeway regarding these requirements, and ultimately inclusion or exclusion from the index us up to the Index Administrator.

What 2021 Will Bring for Gold Mining Stocks

The GDX has had a muted start to the new year, with the index at -2.3% as it has mostly followed spot gold’s price.

Gold and gold mining stocks cooled off significantly following their strong rally Q1-Q3’2020, as positive developments regarding the COVID-19 vaccine have resulted in a stronger-than-expected U.S. dollar and a rise in treasury yields.

This being said, the arrival of new monetary stimulus in the U.S. could spur inflation-fearing investors towards gold and gold mining stocks as the year progresses.

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