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| | A Smart Delegate's Guide to Investment Conferences
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| | A Smart Delegate's Guide to Investment Conferences featuring Exploration Juniors
You are at a conference featuring exploration companies working on projects which they hope one day will be a mine. Some projects have bigger targets than others. Some projects are more advanced than others. The companies are all publicly traded, so you can buy shares at the prevailing market price. The exploration companies have no revenue producing assets so you cannot use textbook methods such as price-earnings ratios to value the company.
How do you avoid feeling bewildered and intimidated?
The absolute first step is to realize that you are not here for the exhibitors. The exhibitors are here for you, the delegate. They are here to convince you that they offer the best speculative value on the conference floor. They can tell you anything they want, it does not matter unless they answer your questions. You call the shots, you make the decisions, you bear the responsibility.
The exhibitors want nothing more. They are not like the briefcase exhibitors, the promoters roving the conference floor who did not pay for a booth, who are looking for victims to whom they can pitch their story. Avoid them like the plague. The exhibitors have representatives on hand to answer your questions. The better your questions, the better they will serve you. If your questions go beyond what the representative is able or willing to answer, an appointment can be made to have a higher-up meet you at the booth.
Now the real question, how do you decide whether or not to buy one of these juniors?
Although exploration juniors have no real value in cash flow terms, they are trying to create real value by demonstrating the existence of an orebody that can be put into production. The company's stock price will eventually reflect what that orebody turns out to be worth in real value terms. How much money you make depends on what price you pay now and what price you get down the road.
Speculation in exploration plays involves the following thought process:
1) What is the company trying to accomplish?
2) What will the stock be worth if the company succeeds?
3) How much money would I make if I buy now and the company succeeds?
4) How does the reward payout compare against the failure risk?
That sounds good in theory, but how do go about getting answers to these questions?
The trick lies in asking the right questions to which a company representative should be able to provide answers.
The exhibitor profile available through ExhibitorResearch provides basic facts that answer all the questions in Steps One and Two. Bring it with you if you can. The whole purpose of ExhibitorResearch.com is to let you screen the companies online in advance of the actual conference. The conference floor is no place to figure out which dozen of the couple hundred exhibitors you should visit. Do that at home, or visit the ExhibitorResearch booth to get a printout.
Exhibitor Research Checklist
Step One - how is the market valuing the company?
1) What is your fully diluted capitalization?
2) What is your stock price?
3) What would it cost a major to buy the entire company right now? (Also called the fully diluted market capitalization which equals fully diluted capitalization times stock price.)
Step Two - what is the flagship project and how is the market pricing it?
4) What is your flagship project?
5) What is your net interest in the project?
6) What is the market saying the entire project is worth (IPV) right now (implied project value = fully diluted market capitalization divided by net interest)?
Step Three - what is the flagship project's potential?
7) What sort of deposit do you hope to find or are developing?
8) What would the best case discovery be worth once in production?
9) What would the stock price be if you achieve the best case scenario (best case value times net interest divided by fully diluted capitalization)?
Step Four - understanding the project's potential
10) What are the target metals?
11) What would a deposit need to look like to be worth the dream target?
12) What stage in the exploration cycle is the project at?
13) How do the geological fundamentals compare to the dream target?
Step Five - what is being done to change the present situation?
14) What needs to be done to push the project toward the dream target?
15) When will the next work program be completed?
16) How much will the next work program cost and is it funded?
17) What sort of results do you need to keep the dream target alive?
Step Six - other important issues
18) What is the nature of your title to the project?
19) What are the political risks associated with the location of your project?
Step Seven - what if your flagship project turns into a dud?
20) What other projects are you working on (repeat steps 2-6)?
Step Eight - questions for yourself
21) Did the company representative understand the project?
22) Is the dream target reasonable in light of the known geological fundamentals?
23) If you were to assign success odds to the project, how do those odds compare to the gain the stock price would undergo?
24) What do you think is the price trend for the key target metals?
25) Do you understand the project, are you comfortable with the sincerity of management's explanation of the project, and do you believe management's goals are plausible?
Bottom-line Thought: Nobody knows what a project's actual outcome will be. The trick is to identify an outcome that is within the realm of probability, not just a possibility.
Note: the more sophisticated your experience with exploration juniors the greater will be your ability to probe a company representative's answers to your questions. But be careful of the slippery slope of pretentiousness. When the answers start to confuse you, stop the discussion and either force the representative to clarify the response to your satisfaction, or switch to a new question whose answer you know you will understand. As a delegate you are very much like a jury member of whom only common sense is expected. Once you start pretending to understand the representative's responses when in fact you do not, you have forsaken your advantage as a delegate.
Using the Concepts and Terms of ExhibitorResearch to your advantage
The heart of ExhibitorResearch is the Interactive Search Menu which allows you to reduce the long conference exhibitor list to a short list of companies with projects that meet your investment criteria. The Interactive Search will not produce a shopping list, but it will allow you to focus your research as a delegate at the conference. The following is intended to clarify the concepts and terms incorporated into the search choices and which underlie the above exhibitor research checklist.
Capitalization and Price Search Parameters
This criteria set can be used to identify companies trading within a price range and within a range of shared outstanding or fully diluted. The market value of a company, also known as the market capitalization, is defined as the number of shares issued multiplied by the stock price. Share capitalization refers only to the number of shares issued, that is, the number of shares that can vote and participate in the company's assets.
In the case of junior exploration companies it is not generally appropriate to use issued share capitalization in assessing the value of the company. The proper number to use is the fully diluted capitalization, namely all the shares that would come into existence if a company turned into a major success. Unlike with established blue chip companies, the fully diluted capitalization of speculative companies can be substantially bigger than the issued share capitalization. Successful junior companies rarely turn into major companies. These days they usually get acquired by a larger company for cash or shares in the bigger company. To get 100% of the junior's assets the bigger company must acquire all the issued shares of the junior. When a bid is made for 100% of a company, all dilutionary shares in the money at the bid price will get converted into issued stock. Usually this includes all the options and warrants.
Where do these dilutionary "shares" come from? Speculative companies fund their operations not from cash flow, but rather through the issue of new shares from treasury. These equity financings often include warrants entitling the holder to buy a certain number of shares at a fixed price over a set time period. The number of outstanding warrants can equal 100% of the stock outstanding. Insiders are also granted options to buy shares at fixed prices; these options can represent up to 20% of issued shares. Sometimes capital is raised through debt that is convertible into shares and warrants. There may also be other share classes that are convertible into common stock. Sometimes a company's title to a project is conditional on future staged issuance of shares. Should the project become the basis for a junior's success and attractiveness to a larger company, all those shares will eventually have to be issued to secure title.
The price paid by a major company to acquire an orebody discovered by a junior will thus be the fully diluted market capitalization of the junior, or, fully diluted share capitalization multiplied by stock price. How much a major will be willing to pay will depend on the value it hopes to extract from the junior's assets. That value will depend on the cash flow the asset will eventually generate, which in turn depends on the size of the orebody, future commodity prices, mining plan, and project economics. Unlike the case of venture capital companies which develop new technologies or widgets for which there is no limit in terms of how much can be produced and sold, resource exploration companies discover and develop an asset that has physical limits and gets depleted over time as it is mined. Figuring out what an orebody is worth to a major that wants to put it into production is fairly straightforward. The major comes up internally with a value, compares it with the cost to buy the entire junior, and makes a takeover bid at a price that does not exceed what the major thinks the project is worth. That price is not the stock price, but the price of the entire company, namely the fully diluted market capitalization.
Because we assume that a takeover bid will happen only if the junior delivers a success so big that the resulting stock price will exceed the conversion cost of all dilutionary items such as options and warrants, we use "full" dilution whether or not the securities are presently in the money.
Capitalization Search Strategies:
The price, market capitalization, shares issued and fully diluted capitalization parameters relate to the company as a whole. The rest of the parameters are project specific. The capitalization search can be used to isolate companies within certain price or capitalization ranges. It is a matter of investment style whether an investor prefers low or high priced stocks, small or big capitalizations. Obviously the lower the stock price and smaller the capitalization, the greater the upside potential if any of the projects meet with success. The tradeoff, however, is frequently in the form of poor market liquidity. Your style will ultimately depend on the amount capital you are willing to risk in this speculative class of securities.
Location Parameters
The location parameters refer to the geographical location of specific projects. By specifying location in your search you are implicitly addressing title, permitting and political risks. Some countries or general regions present greater risks than other. By title risk we mean the enforceability of contractual ownership rights with the jurisdiction of the project. By permitting risk we refer to the possibility that social opposition or institutional corruption may block project development. By political risk we refer to the possibility that civil strife may disrupt a project, to vulnerability of political upheaval that results in new government policies, and to policy instability within the established government.
The general location parameter consists of 14 broad regions that allow a person to limit the search to projects in South America or Africa, for example. Certain countries such as Mexico or Canada where many juniors tend to have projects have been given their own general group category. The country parameter is self-evident. The state or province parameter applies only to Canada and the United States. The "specific region" parameter is a catchall category designed to flag local regions. There is no consistency in the way specific regions are assigned to projects. This is the place to look for area play style names such as "James Bay" or geological domains such as "Cortez Trend" or "Abitibi Belt" which have evolved into common usage. The parameter lists for the country, province/state and specific region searches only include names for which projects belonging to the exhibitor companies exist.
Location Search Strategies:
Make selections in only one location parameter list. Use the general, country and state/province parameters to isolate political, title and permitting risk. Use the specific region parameter to isolate "geologically" defined regions.
Project Specific Parameters
The project specific parameters allow one to isolate projects based on target commodity, exploration stage and how the market is currently valuing the project. What follows is a fairly detailed explanation of the underlying concepts.
Commodity Group
Each project is assigned a commodity group, of which there are ten. There is overlap between the Commodity Group and Target Commodity parameters in that one could select all the base metals in the Target Commodity list and generate almost the same project list as generated by selecting the Base Metals group. The Commodity Groups save the user the trouble of guessing what group a target commodity belongs to, and the Target Commodities let the user focus on specific metals.
The Fossil Fuels group includes oil, natural gas, tar sands, coal and coalbed methane projects. Alternative Energy includes projects such as hydroelectric, geothermal, solar and wind energy. To qualify for this group the project must be seeking to produce energy. A nuclear energy project would qualify as alternative energy, but a uranium project would fall into the Base Metals group, which includes the major base metals such as copper, zinc, nickel, lead, cobalt, iron and molybdenum. The Specialty Metals group includes minor metals such as beryllium, vanadium, tantalum, titanium, antimony, gallium, rare earths, and lithium. The Industrial Minerals group includes non-metallic minerals of any sort where the mineral cannot be supplied in a generic form. The Diamonds group is self-evident. The Gemstones group includes all gemstones except diamonds. The Gold & Silver group includes only gold and silver. The Platinum Metals group includes platinum and palladium along with more obscure platinum group elements such as rhodium. The only hybrid group is the Polymetallic group, which flags those deposits where the target metals combine metals from the Gold & Silver or Platinum Metals groups with metals from the Base or Specialty Metals group. Copper-gold porphyry and most VMS deposits end up in the Polymetallic group.
Target Commodities
These are the metals which are the exploration focus of a project and are usually linked to the deposit style the company is seeking. The more advanced a project, the more specific and relevant will be the target metals associated with the project. It is not possible to search for projects which feature only the selected metals. The search identifies all projects in which the selected metals are listed as target metals. All the target metals related to a project are displayed in the search results as well as in the company profile which displays all current company projects. The target metals are arranged in order of importance for the project when such order is identifiable. For advanced projects the order reflects the metal's portion of the deposit's rock value.
Implied Project Value Parameter
The implied project value (IPV) is an important number that describes how the market is pricing a project on a 100% basis. It is commonly misunderstood as a subjective number suggesting what the project is actually worth. As described above in the capitalization parameter section, the implied project value is generated by a simple equation whose inputs are indisputable facts:
IPV = fully diluted capitalization times stock price divided by net project interest
The ability to understand the IPV number is something of an IQ test. You need common sense to understand the concept, and basic algebra to know that there is nothing mysterious or subjective about it. You may disagree that it is important, but to confuse it as a subjective valuation of a project's intrinsic worth is akin to arguing that one plus one does not equal two.
The IPV number is never smaller than the fully diluted market capitalization of the company, and will be larger if the net interest is less than 100%. To appreciate the importance of the IPV you need to put yourself in the shoes of a major mining company looking to acquire a deposit.
A major is almost never interested in buying out a junior whose projects are still at an early exploration stage. A major would only consider farming into an early stage project through an agreement that allows it to earn a direct interest in the project. At the same time a junior with early stage projects is unlikely to be interested in selling out 100% to a major because there is no way to ascertain whether or not the price is fair. The suspicion will reign that the major knows a lot more about the project than the junior, and because the early stage project could harbour a world class deposit, shareholders will be reluctant to tender their shares. But once a project is sufficiently advanced so that tonnage, grade and project economics are quantified, a major might consider acquiring an interest in the project by buying out the entire junior company in order to obtain the junior's stake in the key project. At the same time the junior's shareholders are receptive to a buyout because exploration has eliminated most of the mystery associated with an advanced project.
The price the major would have to pay is the fully diluted market capitalization of the junior. But in doing so the major would only acquire the junior's net interest in the project, which may be less than 100%. The IPV equation converts the price paid by the major to buy out the junior into what it in effect is paying for 100% of the project. The willingness of the major to buy out the junior will depend on what its internal calculations indicate the project is fundamentally worth. That fundamental worth is a subjective value generated by a broad array of assumptions such as capital costs and future metal prices.
The IPV is important to speculators in junior companies because it allows one to compare the market's valuation of a project with whatever subjective number the speculator comes up with by crunching the project specific numbers. Because the IPV refers to the project on a 100% basis it is easy to compare one company's project IPV with that of another company.
An important assumption behind using the IPV in deciding whether or not to buy the stock is that if a project should ever reach a stage where a major would consider acquiring it by buying out the junior company, all other projects in the company's portfolio will be considered near worthless. And whatever cash would end up in the junior's treasury as a result of full dilution would be negligible in comparison to the cost of buying out the entire company.
An investor in an exploration junior has two simultaneous hopes. The first is that the stock price will go up as exploration shape gives shape to a deposit within the project. The second hope is that the project will eventually acquire a real value which justifies a buyout of the entire junior company.
The first hope is frequently fulfilled, though to profit the investor will need to sell his or her shares in the company and lose participation in the fulfillment of the second hope. The second hope, however, is only rarely fulfilled. A junior company should consider itself lucky if one of its projects turns into a fundamental winner that attracts a buyout from a major. It is thus prudent to assume that whatever cash a junior may presently have will get used up in the effort to turn one of its exploration projects into a winner.
Important Note: the IPV ceases to be important when a junior ends up with more than one very advanced project. For example, when a junior has an operating mine and another project being pushed toward production, the values of the projects are additive, not exclusive. In other words, the market value of the company represents the real value of both projects. When the projects are all earlier stage it is a horse race expected to culminate with a single winner. The IPVs of the individual projects are not additive. When the projects have the same net interest the IPV is identical for all, but when the net interests differ, the relevant one is the project on which the investor pins his hopes. The others are backups that become relevant if the lead horse stumbles and breaks a leg.
Net Interest
The net interest is what a company will own in a project if it turns out to be so good that all parties exercise their contractual rights to obtain their maximum interest. In defining a company's net interest we assume this best case scenario because the project will otherwise not be of interest to a major company. We do not include revenue based interests such as gross royalties or net smelter returns because these do not share in the economic value of a deposit; such royalties are payable on gross production whether or not the mine is profitable.
Ideally a junior owns 100% of a project with no underlying royalties, net smelter interests or net profit interests. This situation only occurs when a junior acquires a project directly by staking in countries where the government does not retain an interest. The governments of most third world countries usually retain some sort of interest in mineral properties. These government retained interests are sometimes not clearly disclosed by a company because the government will theoretically "purchase" its share. The "purchase" value, however, is never a market value established through competitive bidding, so we treat them as absolute interests in the project.
Many projects are acquired by juniors from third parties through option agreements that can be quite complex. Property acquisition agreements are the reason many juniors have a net interest in a project less than 100%. Farmouts by juniors to other juniors or majors also result in lower than 100% net interests. Some property options allow a company to earn various interests in stages. We take as the net interest the maximum interest a company can earn as a result of its own decisions.
In a standard staged earn-in agreement a company can decide to earn a bigger interest by performing the associated obligations. However, sometimes the underlying owner has the right to make a decision such as whether or not the earn-in partner will fund the costs of putting the project into production. This can occur when a junior has optioned a property to a major which, for example, could earn 60% by meeting certain spending requirements, at which point the junior can decide whether to continue with a 40% working interest, or drop to a 30% carried interest in return for the major funding all subsequent costs. In such a case we would leave the junior's net interest at 40% on the assumption that in the event a world-class deposit is found a 40% working interest is worth more than a 30% carried interest to a third party with deep pockets.
Some property agreements allow a junior to earn 100%, but the underlying owner retains a right to back in for a majority interest. For example, a major may farm out a project with an existing deposit to a junior 100% because the deposit is below the major's minimum size threshold, but retain the right to back in for a majority interest in case the junior finds something much bigger on the property. When the back-in decision is entirely that of the other party, we use the net interest that the junior would retain if the back-in right is exercised.
Much trickier are back-in rights tied to physical thresholds such as tonnage, contained metal or economic value of the deposit. If the junior finds something that exceeds the threshold, it could lose control of the project and end up with a reduced interest. The junior thus has a disincentive to risk exploration funds on high risk high reward targets. In such cases we will create two project entries, one marked with the maximum net interest and one with the lower net interest in the event of a back-in. Such situations will be identifiable through a percentage embedded in the project name (ie Moonshot 100%, Moonshot 40%). Which of the two gets flagship status will depend on the project's current status and management's strategy.
Type of net interest
A net interest is classified as a working interest (WI) which means the owner contributes its share of exploration costs, a temporarily carried interest (TC) which means that the company is not presently required to provide its share of costs but will eventually have to do so, and a fully carried interest (FC) which means that the owner is carried through production.
Project Priority Status
One project for each company is designated the flagship project and marked by a star symbol ( ). A flagship project is the project which is currently the company's top priority, which is either the project management currently calls its top priority, or failing that, the project that is either most advanced or receiving the most exploration dollars. Other important projects are designated as secondary and marked by a dot symbol ( ). Projects of lesser importance are designated as simply active and are not flagged by any symbol.
Sometimes the flagship status of a project is obvious, but at times a junior may have several equally important projects and management may be reluctant to designate any as the flagship. In such cases where spending plans and exploration stage are similar flagship status is given first to projects where the junior is operator, and failing that, to the project that figures most prominently in a company's news releases and corporate literature. It is usually safe to assume that the project which dominates the exhibitor's booth wall is the current flagship project.
Project priority status is important because it helps investors identify the flagship project about whose potential he or she should become familiar and whose information flow will be the focus of the market. The secondary projects are important to identify because they are candidates to replace the flagship if results disappoint, or even displace the flagship if better than expected results are delivered. It is generally a good sign when a junior has several secondary projects in addition to the flagship project. The flagship and secondary projects are the ones where work is underway whose outcome could change the stock price. Active projects are those which the company is keeping alive in anticipation of changes beyond management's control, such as metal prices and market conditions, actions partly under management control such as a farmout to other companies, or which are still early stage and not in a position to deliver market moving results.
Project Priority Search Strategy:
If you are searching only on price and capitalization parameters and do not want a list displaying all the company projects, select "Flagship only". Select "flagship and secondary only" when you just want to see the important projects that meet your location and project specific criteria.
Exploration Stage Parameter
The evaluation of an exploration junior involves comparison of the current fully diluted market capitalization to what a project might ultimately be worth if it goes into production. And what it would be worth depends on tonnage, grade, commodity price, capital cost, mining plan and operating cost. The cost side of the equation consists of fairly well known variables applied by mining engineers to the particulars of a deposit. These are known before exploration even begins. The revenue side of the equation takes shape as a project progresses through the exploration cycle. The ultimate outcome has the greatest uncertainty at the earliest exploration stage and the highest certainty when in production. Where a project is in the exploration cycle determines how much is known about the potential value of the project. The value of a producing mine or one near production is calculated through the discounted cash flow model.
Discounted Cash Flow Valuation method: future stream of annual cash flow (gross revenue minus operating cost and taxes) discounted to the present value, less the capital cost.
The three questions asked throughout the exploration cycle are 1) how is the orebody shaping up in terms of revenue potential, 2) how does the emerging orebody's revenue potential compare to the cost side of the equation, and, 3) is it worthwhile to push the project to the next exploration stage?
Step Four in the Exhibitor Research Checklist involves visualizing what the company hopes the project will turn into (what John Kaiser calls the "dream target"), and visualizing what is present right now.
Where a project is in the exploration cycle tells you how much is known about the project. At the earliest grassroots stage all you can visualize is the idea of a deposit. As exploration generates targets you can start to visualize the physical outline of a deposit, the "footprint". As drilling starts to delineate a deposit the footprint becomes more concrete and the "value" of the deposit starts to emerge through grade. When the deposit has been drilled off and you have a pretty good idea about the deposit's gross value, you shift your visualization efforts to the cost side of the equation. By this stage the freedom of everybody's speculative imagination has become constrained by a body of hard facts. The infill drilling, metallurgy and prefeasibility stages make the deposit side revenue numbers and the mining side cost numbers more concrete. Beyond the prefeasibility stage the project's value undergoes a switch from "speculative" to "real". But until the project is actually in production generating the projected cash flow, the market will price the project at a level below its ultimate value as a cash flow producing asset.
The market's valuation of a project, as reflected by the implied project value (IPV) throughout the exploration cycle, will have the greatest volatility during the discovery delineation stage when nobody knows for sure how big the deposit will get. How high the market will push the IPV depends on the degree an emerging deposit appears to exceed the economic threshold, which itself is at this stage still loosely defined. Many projects never pass the economic threshold and simply fall by the wayside, forcing the market to shift its attention to other projects. Where management does not offer a good substitute project shareholders abandon the company which either disappears or undergoes a reorganization involving a rollback and refinancing. Some projects do pass the economic threshold, at which point the market speculation shifts to the ultimate scale of the project. Yes, it will be a mine, but how big will it be and what will it be worth. During the speculative discovery frenzy major new discoveries often achieve an IPV that exceeds what the project ultimately proves to be worth when it finally goes into production. It is a virtual certainty that the IPV of a project during the exploration stages beyond discovery delineation will at some point be lower than the peak achieved during discovery delineation.
Comparing how the market is presently valuing a project (IPV), with what it might ultimately be worth, is essential to deciding whether now is a good time to buy the stock. A shrewd speculator will also consider what might change in between which would alter the way the market perceives the project's potential. That is why the answers to the questions in Step 5 are so important. Always keep in mind that most projects never become a mine, but many do come close, and in doing so these projects provide significant profit opportunities to speculators who bought earlier in the exploration cycle or during an IPV lull in the current stage.
The exploration cycle search parameter used in conjunction with implied project value ranges is a powerful tool for isolating projects whose potential the market is not recognizing. To use this tool you need to understand the exploration cycle and how deposits get valued. The following description pertains to a typical metal exploration cycle. Diamond and fossil fuel exploration goes through similar stages which have different names.
Grassroots Stage
A project is "grassroots" when the exploration target is still conceptual, meaning that although the company has one or more target models in mind supported by the project's geology, no specific target has yet been developed. During grassroots exploration the company prospects and maps the property to better understand the local geology, conducts "geochemical" surveys such as soil sampling to identify areas anomalous with the target metals, and conducts geophysical surveys to identify structures that may host mineralization. The purpose of grassroots exploration is to generate local targets worthy of closer investigation. Here are some questions investors can ask about a grassroots project: Does management have a clear idea about what sort of deposit they hope to find? Is the geology supportive of the target model? Are there any regional deposit examples of the target model? What are those worth? What would be a world class example? And a final test would be to ask the company representative to describe the revenue and cost side of the equation defining the value of world class example. If management does not know what makes a world class example of their target model tick, how can they judge the progress of their own exploration efforts?
Target Drilling Stage
A project moves to the "target drilling" stage when the data sets generated by grassroots exploration identify a target worth drilling. The target does not have to have a drill on it or even be drill-ready for the project to be classified as this stage. Trenching and more detailed geophysical surveys may still need to be done. What counts is that a focus has emerged which allows investors to start asking about a "footprint". During the grassroots stage management can "dream" about finding any size of deposit. The plausibility of the "dream" will be greatest if its scale matches that of known deposits hosted by the regional geology. But once a target comes into focus an investor can start to see physical outlines which represent tonnage limits. The "footprint" is the tonnage limit of the target. Tonnage alone does not define the potential value of a deposit, because grade is needed to estimate the revenue potential of a deposit. Sampling of surface mineralization may give an indication of grade, but these grades may be distorted by enrichment, depletion or selective sampling. More important is the relationship between the target's "footprint" and the style of deposit management is seeking. The problem with the "footprint" during the target drilling stage is that it is two-dimensional until drilling reveals the third dimension that allows tonnage estimates. The objective during the target drilling zone is to identify a zone where the combination of grade and tonnage footprint suggest a significant deposit. Investors evaluating a project at the target drilling stage need to ballpark the tonnage potential of the target, which is done by calculating the volume of the target using metres, and then multiplying the volume by the specific gravity of the "mineralized" host rock. This basic equation of "length" times "width" times "depth" times specific gravity is a fundamental concept every investor in exploration juniors should understand. A company representative should be able to provide a specific gravity range for the target zone.
Note: 43-101 disclosure rules forbid a company from publishing or even talking about ballpark ultimate project values using back-of-the-napkin techniques. Company representatives can only point out the dots. It is up to the investor to connect the dots so that a "deposit" begins to take shape.
Discovery Delineation Stage
A project moves into the discovery delineation stage when target drilling delivers an intersection with a grade that in conjunction with the target's tonnage footprint indicates a potentially economic deposit. The project now has a focus for extensive drilling. Discovery delineation drilling involves stepping out from the discovery hole to map the limits of the mineralized zone and the behaviour of grade throughout the zone. As the zone evolves information is generated which allows targeting tools to be refined. A deposit does not always conform to the target outline defined by the earlier exploration stage. For base and precious metals projects the discovery delineation stage involves the greatest amount of market speculation because not only does the drilling program give shape to the orebody, but information gleaned about the nature of the target allows the perceived scale of the footprint to change. During this stage of the exploration cycle speculators closely monitor drill results, assess how they are conforming to the target footprint, and re-evaluate whenever management publishes fresh information about the target.
Infill-Drilling Stage
A project shifts to the infill drilling stage when delineation drilling has identified the economic grade limits of a deposit. By now the best case revenue potential scenarios have been identified and the market knows the upper value limit of a deposit, which is always less than the gross value of contained metals. At this stage management brings to bear scoping studies, which provide the cost side of the equation for a mining plan suitable for the scale of the deposit. A scoping study will reveal the minimum tonnage and grade threshold a deposit must have to justify development as a mine. A mine is typically developed with at least a ten year mine life. Infill drilling involves drilling closer spaced holes within the known limits of the deposit to better define the grade, allow a resource calculation and provide a database for the design of an optimal mining plan. A basic principle in any mining plan is to mine where possible the highest grade material first (ie the "starter pit") so as to pay back the upfront capital costs as soon as possible. The basic definition of an orebody's value is the stream of future cash flow discounted to the present value less the capital costs. In the discounted cash flow model the sooner cash flow is worth more than the later cash flow even when the annual amount is identical, so it makes sense to have the higher cash flow early in the mine's life. Because infill drilling is unlikely to make the deposit significantly better than it already looks ("sweet spots" between delineation holes sometimes improve the deposit somewhat, but more often than not infill drilling shrinks a deposit), the speculative value of the project is less defined by the hopes and dreams of the market, and more so by the number-crunchers. Many projects thus get stuck at the infill drilling stage without further work being done because the deposit is perceived as marginal. Such deposits end up in "inventory" as "sleeper" deposits waiting to be awakened by higher metal prices. But if the revenue potential suggested by delineation drilling and the project economics indicated by scoping studies indicate economic potential, infill-drilling will proceed. Infill drilling and resource calculation is a very technical process about whose outcome speculators can only guess. Once a project reaches the infill drilling stage there is little to do but wait for the resource calculation and a decision on what to do next.
Bulk Sampling and Metallurgy Stage
Although bulk sampling and metallurgical studies usually start in conjunction with infill drilling, the project can stay stuck at this stage long after infill drilling has been completed and a resource calculation delivered. Bulk sampling may be done to boost confidence in the grades obtained through infill drilling, but it is also done to identify the recoveries of key metals in the deposit. Fire assaying of drill core measures virtually all of the metal present in a sample, but only a portion of that grade may be recoverable at commercial mining scales. Sometimes the mineralization is metallurgically so complex that it is not physically possible to extract it commercially. Sometimes it is possible to develop a process to obtain a reasonable recovery at a commercial scale, but at a prohibitive cost that wipes out the project's economics. Metallurgical studies identify the optimal process for recovering the metals. Problems will reduce the revenue potential of a deposit through lower recoveries, and boost the cost side of the equation through more expensive extraction processes. The metallurgical stage never makes the project better; it is a hurdle that must be overcome and with minimal damage to the value of the deposit. Projects stuck at this stage need either significantly higher metal prices that overcome the cost obstacles, or a metallurgical breakthrough that reduces the cost or boosts the recovery. Junior companies sometimes acquire quite cheaply existing deposits with historical resource calculations that suggest a high value orebody. One of the first questions to ask about such deposits is whether or not there are any metallurgical issues.
Prefeasibility Stage
A company initiates a prefeasibility study in order to define the specifics of putting a deposit into production. Sometimes this involves additional drilling to upgrade the resource, but usually the extra drilling is oriented toward establishing the physical parameters of building a mine. The prefeasibility study involves mine engineering so as to establish the actual costs of developing the mine, the processes for recovering the metals, and environmental baseline studies. When a prefeasibility study is complete it will present the best mining plan for the deposit with the associated costs. The study will be the basis for a decision to proceed with formal permitting and a feasibility study.
Permitting and Feasibility Stage
One would think that a feasibility study would be done before permitting, but the permitting process often reveals the need for changes in the development plan that may impact feasibility and the ultimate decision to proceed with mine construction. A project may die at the permitting/feasibility stage because of fundamental opposition to a mine, or because the cost of meeting permitting conditions overwhelms the project's economics. When there is no fundamental opposition to a mine, the interaction between permitting and feasibility fine-tuning of the mining plan eventually leads to a point where the regulators receive a modified mining plan they are prepared to approve. A project can get stuck in the permitting stage if management refuses to submit a new mining plan that conforms with the requirements of the permitting authorities. It is easy to turn the latter into a scapegoat if weak metal prices have hurt the economics of the proposed mine.
Construction Stage
Once a mining permit has been received and the company remains interested in developing the mine, construction will begin. This can take several years, depending on the scale of the project and seasonal constraints. This stage is also assigned to a project where a shut-down mining operation is in the process of being upgraded or rehabilitated with the intent of resuming production. Another name for the construction stage is "pre-production". Mines that have been shut down for economic reasons are treated as prefeasibility stage. If a decision is made to put a mothballed mine back into production and no new permitting is required, the project jumps to the "construction" stage.
Production Stage
Once a mine has been commissioned and is in full scale production the market will monitor to see if the mine produces according to projections in the prefeasibility study. At this point the valuation of the project will shift from discounted cash flow method to market related price-earnings or price-cash flow ratios.
Summary: If you made it all the way to this point of The Smart Delegate's Guide to Investment Conferences featuring Exploration Companies, you may be thinking that speculation in exploration juniors involves an awful lot of information gathering effort and no small amount of brainwork. That would be a correct observation, which is why conferences also feature many talks and workshops presented by people such as analysts and newsletter writers who do this research on a full time basis. We hope that you will be able to put research strategy of The Smart Delegate's Guide into practice, but an even greater hope is that you will emerge with a conceptual understanding that puts you in a strong position to evaluate the research and conclusions of those who have done the work. There is not enough time for one person to research every company, so there is much to be gained from everybody else's research, provided you understand how the research process works.
(Contributed to ERC by John Kaiser of Kaiser Bottom-Fish Online) |
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