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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 2: Business Plan)

Investing in mining stocks may seem like luck of the draw, but the sector can be de-risked by asking the right questions. Here we look at the business plan.

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The Business Plan

Everyone loves to talk about creating the next great mining business, but are they willing to put that talk into action?

There is real money and real management behind every company—but surprisingly, not every company has a concrete strategy to build a business and create value for shareholders.

Business Plan, or Lack Thereof?

Today’s infographic comes to us from Eclipse Gold Mining and it shows you how to avoid common mistakes when evaluating and investing in mining exploration stocks.

Specifically, we look at five ways that potential investors can detect the presence and viability of a mining company’s business plan.

The Mining Business Plan

Visit Part 1 of “Common Mistakes With Mining Stocks” on Team by clicking here

So, what should investors be looking for, when it comes to examining the business plan of a mining exploration company?

#1: Clear Vision vs. All Hope & Dreams

A company should articulate a clear vision rather just simply following the trends and hoping for the best. A long term vision for a business plan is critical as it will be guiding and reminding stakeholders of the company’s purpose through the thick and thin.

Signs of a Clear Vision:

  • The company is actively reaching out to investors
  • Projects can be profitable at today’s commodity prices
  • Provide detailed timelines of work
  • Funds committed to work

A clear vision in business will give the company a direction to aim for, allowing everyone to work quickly towards objectives.

#2: Sense of Urgency vs. Wait & See

Time is money, especially in mining. Companies need to build value fast to finance at higher share prices so that early shareholders do not get diluted. A company needs to make concrete decisions that drive towards value creation.

Signs of a Sense of Urgency:

  • “Time is now” mentality
  • Decisive actions
  • Sense of purpose
  • Solution-oriented thinking

It is expensive to maintain a company, especially one that does not yet produce income. Expenses add up quickly and that is why management needs to make sure they focus their efforts and money on activities that generate value for shareholders.

#3: Laser Focus vs. Spray & Pray

The mineral exploration business is tough and each project requires the undivided attention of managers. Smart companies maintain incredible focus to de-risk their projects while others spread themselves thin with multiple projects.

    Signs of a Laser Focus:

  • Properties with a focused vision towards production
  • Specialized management experience aligned with the project
  • Aligning management skill sets with each phase of a project

In order to assess whether a company has the right focus you have to see whether the company is aligning its human assets with its physical assets and a goal in mind.

This focus will help to clarify the story for investors.

#4: Tell the Story vs. Hiding Behind the Science

Communication and business acumen are the key to take a project to market. Mining requires massive amounts of geological knowledge, but that is not the investor’s job to handle. They do not want to want to know the subtleties of geochemistry—they just want to know whether they can make money from those rocks.

Companies that hide behind a wall of geological slides may not have not a real story to tell, and they may be pulling investors into funding their own science projects. At the same time, investors need to make sure that the data being presented matches the story being told.

Signs of Telling the Story:

  • Aware of risks, and communicating those risks
  • Clear understanding of local geology
  • Data from drill results back up the story
  • Consistent message

If a company cannot communicate effectively, how are they going to deal with other, more complicated aspects of a mining business plan?

#5: Endgame in Mind vs. Kicking the Can Down the Road

A journey begins with a single step, but without a business plan and commitment, there will never be an end in sight. Quality companies foresee how their project will come together to generate both liquidity and an exit plan for shareholders. There are several clues investors can use to tell if a company is moving towards its goals.

Signs of the Endgame in Mind:

  • List of accomplished goals
  • Clear vision of future goals and exit strategy
  • Plan for liquidity events for shareholder

The goal in investing is to make money. If shareholders are not making money, what is the point? If a company has no plan, it has no hope.

Making the Right Decisions

Understanding the characters that create value for mining companies is the first step, and the second step is assessing whether there is a viable business plan at hand.

While the risks are high, an effective plan is the first step towards reducing risks and providing shareholders with value.

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Golden Bulls: Visualizing the Price of Gold from 1915-2020

We break down gold’s three major bull markets over the last century. This includes the current one, in which gold has hit 8-year highs.

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Golden Bulls

Golden Bulls: Visualizing the Price of Gold from 1915-2020

Some people view gold as a relic, a thing of kings, pirates, and myth. It does not produce income, sits in vaults, and adorns the necks and wrists of the wealthy.

But this too is just myth.

In fact, as a financial asset, gold’s value has shone over time with periods of exceptional performance, one of which may be occurring now.

Today’s infographic comes to us from Sprott Physical Gold Trust and outlines the history of the price of gold from 1915 to 2020 and three bull markets or “Golden bulls” since 1969, using monthly data from the London Bullion Market Association.

But first a little history…

The Gold Standard

*All figures are in USD

During the early days of the American Republic, the U.S. used the British gold standard to set the price of its currency. In 1791, it established the price of gold at $19.75 per ounce but also allowed redemption in silver. In 1834, it raised the price of gold to $20.67 per ounce. The price of gold would retain a nominal value through depressions, civil wars, and wars.

However, $20 today is not the same as $20 in the past. The U.S. dollar may have been convertible at a set price, but the amount of goods that it could buy varies year to year based on inflation. So for example from 1934 to 1938, one ounce of gold would cost $34, but $34 today would purchase a small fraction of an ounce of gold.

While the price of gold may appear cheap in the past, adjusted for inflation it is not as low as you would think. Governments would set the price of its currency against an asset to ensure the stability of prices, however if there would be too many claims against the underlying asset, that asset would run out and the currency would become worthless.

This threat would force the hands of governments to change the standards, as currency became more common and gold reserves more scarce.

An Era of Government Intervention

In the wake of the 1929 stock market crash, investors started redeeming U.S. dollars for its equivalent value in gold, removing currency from the economy. In order to stem the flow of funds into gold and the depletion of government gold reserves, in 1933, President Franklin D. Roosevelt limited the private ownership of gold to discourage hoarding and encourage investing. In 1934, Congress passed the Gold Reserve Act which prohibited the private ownership of gold and nominally raised the price of gold to $35 per ounce.

In 1944, the victorious Allied powers negotiated the Bretton Woods Agreement, making the U.S. dollar the official global reserve currency. The United States ensured an ounce of gold would be worth $35 in its currency⁠—at least until the onset of a stagnant economy in the early Seventies led to the official end of any real gold standard.

Golden Bull #1: December 1969 – January 1980

In 1969, the U.S. gold standard had risen to $42 per ounce in nominal terms, however a period of economic volatility would challenge and change U.S. monetary policy.

On August 15, 1971, President Richard Nixon mandated the Federal Reserve to stop honoring the U.S. dollar’s value in gold at a fixed value, abandoning the gold standard. In 1974, President Gerald Ford would once again allow the private ownership of gold bullion. Energy crises, soaring inflation, and high unemployment stagnated the economy.

By January 1980, the price of gold reached $2,234 per ounce in today’s dollars amidst an environment of double-digit inflation. Federal Reserve chairman Paul Volcker fought this inflation with double-digit interest rates which in turn slowed the economy, causing a recession.

The interest-rate-induced recession would herald in a new global economic boom that defined the Eighties and Nineties. The price of gold dropped to $753.96 per ounce by June 1985, as the economy improved.

From December 1969 to January 1980, gold rose from $285 to $2,234 per ounce, an increase of 684% over 122 months, in inflation-adjusted terms.

Golden Bull #2: August 1999 – August 2011

Expanding household incomes and ever declining interest rates under Federal Reserve chairman Greenspan pushed gold further down to a low of $377.44 per ounce by the end of April 2001.

Loose monetary policy and a reduced tax on capital gains spurred speculative investments into the new internet economy through a growing retail brokerage market and the emergence of venture capital. The tech bubble would eventually pop as these companies were unable to build sustainable businesses and investor money dried up.

Over the year of 2000, investors rushed to exit their speculative tech investments resulting in several market crashes. Then in September 2001, 9/11 happened, marking the beginning of a new era. Gold steadily rose during this period.

In 2008, the Global Financial Crisis shook financial markets and left a recession. Policy makers and central bankers embarked on a controversial policy of quantitative easing to support financial markets. The price of one ounce of gold reached new highs by the end of August 2011, as worries on debt levels mounted for the U.S. and other countries.

From August 1999 to August 2011, gold rose from $394 to $2,066 per ounce, an increase of 425% over 145 months, in inflation-adjusted terms.

Golden Bull #3?: November 2015 – May 2020

In the aftermath of the GFC, the Federal Reserve stoked an economic recovery with cheap money, seeing gold track to a low of $1,050 per ounce by December 2015. It was not until the election of a peculiar American president in 2016 that gold would rise again.

Pressure to increase interest rates, an aging debt-fueled economic recovery, a trade war with China, and the recent COVID-19 crisis has once again provoked economic uncertainty and a renewed interest in gold. With interest rates already at historic lows and quantitative easing as standard operating procedure, global economies are entering unprecedented territory.

There is still little insight into the direction of the economy but since November 2015 to May 2020, the price of gold has risen from $1,146 to $1,726 per ounce, 55% over 55 months.

Gold Going Forward

In an era of tech startups, ETFs, and algorithmic trading, many people consider gold to be a shiny paperweight—however, its performance over time against other assets shows it is far from this.

In 1915, an ounce of gold was worth $488.66 per ounce in today’s dollars and as of May 15, 2020, $1,751 per ounce. Gold has proven its value over time as companies, countries, and governments come and go.

“Golden Bulls” are no periods for idle idol worship. Gold will always be gold, in myth and in fact.

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