Let me say the obvious; the state of the junior mining market is not great these days. The number of financings is down and it seems there are a lot of companies out there trying to get their piece of the financing pie. People say there actually is a fair bit of private equity funding available but only for the right projects.
I have heard from geologist colleagues that financing grass-roots exploration is extremely difficult to acquire unless company management has had past successes and is well connected to the money scene. I’m told that 43-101 resource estimates alone don’t generate much excitement and for projects to be “on the radar” they need to be advanced to at least the PEA stage. Investors want some vision of what the project will look like.
In the recent past I have become familiar with some junior mining company that were always struggling for cash while others seemed to have no problem in getting at least some funding to continue their efforts. The biggest differences between these two situations were; (a) the top level management in place, (b) the type of project they had, and (c) if their path forward plan made logical sense.
Management is what it is, although companies generally do attempt to bring in experienced people with track records on either the executive level or the Board of Directors level. Experienced management can hopefully establish if their projects will have a high probability of success or if the project is going to be a hard sell. This will determine whether they should continue to spend money on the project.
In my experience, when in the financing mode, it is important that company management have the ability to present an orderly, practical, and realistic path forward for the project to demonstrate what they will do with the money. I have participated in due diligence meetings and listened to a management team tell us they will have a resource estimate this year and be in production in two years. Those around the table look at one another knowing that they will be lucky to have a feasibility study completed by that time and lucky to have their environmental permits in place. It does not help the perception of a management team (or the project itself) if the path forward is unrealistic and unattainable, unless the management team have done it before. Similarly low-balling cost estimates and presenting fantastic NPV’s will fool no one with experience and ultimately may do more harm than good towards credibility.
My bottom line is that in order for a project (and the management team) to get serious attention from potential investors is to make sure there is a realistic view of the project itself and have a realistic path forward. Even a good property can be tarnished by making the technical aspects look over-promotional rather than real. Make sure the right technical people are involved in the entire process and that company management are willing to listen to them. Clearly explain how the money will be spent.
The two key nature-driven factors in the overall economics of a mining project are the ore grade and the ore tonnage. In simplistic terms, the ore grade will determine how much incremental profit can be generated by each ore tonne processed. The ore tonnage will determine whether the total profit generated all the ore will be sufficient to pay back the capital investment for the project plus provide some reasonable financial return to the investor.
Focusing on the first factor of ore grade, in order to understand the incremental profit generated by each ore tonne one must first convert the ore grade into a dollar revenue value. This calculation will obviously depend on metal prices and the amount of metal recovered. For some deposits with multiple metals, the total revenue per tonne will be based on the summation of value from each metal, some of which may have different process recoveries and different payable factors.
I have created a simplistic interactive spreadsheet at this link (Rock Value Calculator). A screenshot is shown below. The user simply enters their data in the yellow shaded cells and the rock value results are calculated. One can zero out values for the metals of no interest.
Price: represents the metal prices, in US dollars for the metals of interest.
Ore Grade: represents that head grades for the metals of interest in the units as shown (g/t and %).
Process Recovery: represents the average percent recovery for each of the metals of interest.
Payable Factor: represents the net payable percentage after various treatment, smelting, refining, penalty charges. This is simply a rough estimate depending on the specific products produced at site. For example, concentrates would have an overall lower payable factor than say gold-silver dore production.
Insitu Rock Value: this is the dollar value of the insitu rock (in US dollars), without any recovery or payable factors being applied.
NSR Rock Value: this represents the net smelter return dollar value after applying the recovery and payable factors. This represents the actual revenue that could be generated and used to pay back operating costs.
The final profit margin will be determined by subtracting the operating cost from the NSR Rock Value. These costs would include mining, processing, G&A, and offsite costs. Typically large capacity open pit operations may have total costs in the range of $10-15/tonne while underground operations could be much higher.
My bottom line is that very early on it is important to understand the net revenue that your project’s head grades may potentially deliver. This will give sense for whether you are a high margin project from an operating cost perspective or whether the ore grades are marginal and higher metal prices may be required. The more one understands the potential economics of the different ore types, the better.
In a previous article (3. Site Visit – What Is the Purpose?) I briefly discussed the requirements for a site inspection to be completed by one or more Qualified Persons (“QP”) in a 43-101 compliant study. Unfortunately the entire study team does not participate in the site visit; however the next best thing may be a viewing with Google Earth. Here are the possibilities with Google Earth:
It can be used to fly-around the project area examining the 3D topography across the site.
It can be used to view regional features, regional facilities, land access routes, and existing infrastructure.
It has the capability to measure distances, either in a straight line or along a zigzag path.
It has the ability to view historical aerial photos (if they exist) to show how the project area might have changed over time.
It can import GPS tracks and waypoints. If a member of the study team has visited the site with a GPS, they can describe their route and their observations.