What kind of mining stocks should you invest in? Explorers, Developers, Producers, Project Generators and Royalty-Streamers?
This article explores the different kinds of mining companies you can invest in, based on their development stage or business mode.The mining process begins at the exploration phase and ends at the production phase if a commercially viable project can progress through a myriad of hurdles.
It is estimated that less than 1% of exploration projects are successful in progressing to production, so it is important to understand what the various phases are in the mining process and the inherent risks associated at each stage.
As a mining project progresses through these phases more risk is mitigated at each phase (can be extreme at the exploration stage and high at the production stage).
Mining exploration is an extremely hit and miss business. Explorers are typically very small companies (often just a few staff) whose job it is is to either identify a completely new, unknown resource (greenfield explorer), or to further drill out an area where a resource estimate has been made with a view to adding more resource to the estimate (brownfield explorer). The final goal in the exploration process is to generate a technical report with documented resources deemed sufficient to move the project to appraise its economic viability.
Things to keep in mind when looking at explorers as investments:
- How active is the company in drilling out the resource? If a miner hasn’t embarked on a drilling campaign in years it might be worthwhile finding out when the next one is scheduled
- How much cash does the company hold in order to undertake further drilling, without having to raise money, either by issuing more share capital or going into debt. Many explorers simply raise money when funds dry up by issuing more share capital, which dilutes the worth of current investor’s holdings.
- How much experience does management have in progressing exploration projects – either to a sale of the property to a developer, or to progress the project to development and ideally production.
A mining developer has identified a resource and has either determined that the resource is expected to be able to be profitably extracted from the ground, or is working towards the same outcome via a preliminary economic assessment (the least detailed feasibility report), a preliminary economic assessment (the next detailed level of report), a definitive feasibility study, or at best a bankable feasibility study, which is a particularly detailed analysis of how much money a mining project is likely to make.
Once the mining developer is confident that the project will be profitable, it can either elect to sell the project to another miner if lacking the working capital to begin the permitting and build stage, or they can source the required funding to commence building the mine to production stage.
Things to keep in mind when looking at developers as investments:
- At what stage has feasibility been achieved? A PEA has a much higher margin or error than a PFS, which has a higher margin of error than a DFS etc etc
- Based on management experience are the likely to be able to source the funds to build a big plant with all of the required infrastructure, permitting, plant, roads/transport etc
- Buying into a project where the mine is already being built can significantly de-risk the project and provide a faster pipeline to rewards, however there is still no guarantee that the mine will be profitable
- If the resource being mined reduces in market price then the project may no longer be economically viable
Mining producers are typically defined as having achieved production, ideally commercial production, or are ramping up to commercial production. Producers successes are linked strongly to the cost of mining the resource, the market price at which they can sell the resource, and the free cashflow that they can generate to maintain their resources and reserves ie: keep the mine pumping.
Prospect generation is an interesting and flexible type of mining business that can mitigate alot of the exploration risk. They essentially generate potential target areas for future mines. These organisations will find land, and conduct exploration activities from channel sampling to airborne studies. They do this to determine if is any potential that warrants further exploration.
When a Prospect Generator concludes that it has found something promising it looks for a JV partner. This partnership typically includes an earn-in agreement the partner may make an up-front payment, as well as pay for drilling and further exploration work.
This business model means the project generator isn’t burdened by the project’s construction cost and can embark on other early stage projects. Many prospect generators therefore carry a large number of projects at any point in time, which reduces exploration risk by increasing the chances of having one or more or many successful projects “on the books”.
Metals streamers purchase a percentage of the company’s future production at a fixed price below market value. This provides immediate cashflow to the mining company and secures same at a predictable price.
Royalty generators are similar to prospect generators as above, only they don’t limit themselves to early stage projects.