Over my career I have worked with large and small mining companies and seen how they studied projects and potential acquisitions.
Large mining companies have their in-house evaluation teams that will jump on a potential opportunity that comes around and start examining it quickly. These evaluation teams may consist of a specialized head office group supported by people temporarily pulled in from their mining operations.
They are experienced at what they do and can provide management with solid advice even if working with only limited data. This help management decide very early on whether to further pursue the opportunity or walk away immediately.
Early stage economics are normally part of this evaluation approach. Although they are not correct all of the time, more than often they save their company from wasting money on projects unlikely to fly.
However if you are a small mining company, what are your options?
You don’t have an in-house technical team sitting around ready to go. Management still needs to know if this project has a chance. If the project is early stage, sometimes management thinks its fine to take a gamble, acquire the project, and then put money into the ground rather than spending on early studies.
It is possible to do both
Management and the exploration team usually have a vision for their projects, even those projects with only limited information. Each person may have a different opinion on the potential size and scope of what may ultimately exist there. However the question is whether any of those visions have sufficient accuracy to warrant spending more shareholder money on the project.
Some of the junior mining management teams that I have worked with have found it beneficial early on to have a basic internal cashflow model on hand. If properly constructed, these are simple to tweak to examine “what-if’s” scenarios. Input the potential deposit size and mine life, potential head grades, expected metallurgy, and typical costs to see what the economic outcome is. Does this project have a chance and, if not, what tonnage, head grade, recovery, or metal price is required to make it work? The simple cashflow model can tell you all of this.
Early stage modelling adds value
The tangible benefits to very early financial modelling are:
It helps management to conceptualize and understand their project. If done honestly, it will reveal both the opportunities and threats to success.
It helps management to understand what technical parameters will be most important for them to resolve and what technical factors can be viewed as secondary. This helps guide the on-going exploration and data collection efforts.
Periodically refreshing the economic model with new information will reveal if the economic trends are getting better or worse.
Its not 43-101 compliant