The Junior Miner’s Long Walk through Holes and Headlines

The milestones that move a junior mining stock price

There is lingo in every field (medicine being a big sinner in this regard). Today I want to cover some basic mining lingo to help people who are newer to the world of resource exploration, speculation and investment. Please note that not all we analyze and write about is in this sector, but it is a big focus, in part because it is one of the few sectors that remains undervalued.

Most junior mining stocks attempt to achieve a series of project milestones, roughly in the order I present below.

Grassroots. A geologist stakes ground because a rock looked interesting after a conversation over beers. No resource, no revenue, nothing but a claim map and a story. Money disappears into optioning the property and maybe some helicopter fuel and renting rigs to begin exploratory drilling.

Occasionally early spectacular drill holes transform an unknown explorer into one of the hottest stocks on the exchange. The company then spends months or years proving that exciting holes weren’t a fluke before eventually publishing its maiden resource.

The drill rigs keep turning, core comes up, while the company burns through capital toward establishing the maiden resource. If the rock and assays cooperate, the company files an NI 43-101 resource estimate (National Instrument 43-101). This is the National Instrument by which Canadian-listed miners disclose ounces under a standardized format instead of via a press release. This is the first number an institution can underwrite. Before NI 43-101, you are buying hope. After, you own a defined resource.

Stocks sometimes (or commonly) sell off after a resource estimate, as published ounces bring market hype and hope back down to earth. And then the long trudge begins.

I’ll pause here to present some definitions.

A resource is metal in the ground with reasonable prospects for eventual economic extraction.

A resource splits into three confidence tiers: Inferred (wide-spaced drilling), Indicated (tighter drilling, enough for mine planning but not enough to get funding to build a mine) and Measured (drilling dense enough that geological continuity is no longer in question).

A Preliminary Economic Assessment (PEA) takes the resource and runs a rough economic model on it: assumed metal price, assumed recovery, assumed capex, accurate to roughly plus or minus 30-40%. The PEA rests on inferred resources, the lowest-confidence category, so treat the estimated IRR (Internal Rate of Return, the annualized return the project might generate) like the guesswork that it is. The PEA’s job is to answer the question: is this deposit big enough and accessible enough to justify spending more money finding out if it’s real? Half the juniors die here, when the PEA comes back mediocre and the budget runs dry.

A Pre-Feasibility Study (PFS) tightens the assumptions with better metallurgy, better cost data, accurate to roughly plus or minus 15-25%, and upgrades some resource to reserve category. Capital markets start taking the company seriously at this stage.

Time for another definition. A reserve is the subset of an Indicated or Measured resource that has survived an actual Pre-Feasibility Study or Feasibility Study with real mining, metallurgical, and cost assumptions applied. Indicated converts to Probable; Measured converts to Proven. But Inferred converts to nothing until more drilling upgrades it.

All of this, resource, reserve, everything between, gets signed off by a Qualified Person (QP). That title means something specific. A QP needs an engineering or geoscience degree relevant to mining, at least five years of directly relevant experience in the type of mining planned, and membership in good standing with a professional association that can discipline or expel him. A company’s own in-house geologist can be the QP on his own employer’s resource estimate, which is why every technical report has to state whether the QP works for the issuer.

Thus, a resource is what might be there. A reserve is what a company has proven economic, under a specific study’s assumptions. A reserve can support the building of a mine.

A Feasibility Study (FS) is bankable-grade engineering, accurate to roughly plus or minus 10-15%, the number a project finance lender will underwrite. NPV (Net Present Value, today’s dollar value of the project’s future cash flows), IRR, AISC (All-In Sustaining Cost, the total cost to produce and sell an ounce including sustaining capital), all independently reviewed before a financing term sheet gets signed. Companies routinely re-rate on FS day, because the FS converts an idea that might work into some reasonably trustable numbers that survived serious due diligence.

Permitting. Environmental Assessment (EA) filings, and potentially EIS (Environmental Impact Statement) filings, water permits, indigenous consultation, state and federal sign-off, the mostly non-productive stuff to get permission to create value. This can slow progress. I should be clearer: this does slow progress.

The financing decision. Equity, debt, streaming, royalty, or some combination of all four to build the mine. Big money. Dilution at this stage is the price of progress for anyone unwilling to fund it themselves.

Construction, then production. The most capital-intensive stage of the cycle.

As a company advances through these stages, risk shrinks and the universe of buyers legally or professionally permitted to own the stock expands. A pension fund cannot touch a PEA-stage story, but it can join in later, and the institutional money adds to the company valuation.

A major will be interested in acquiring an FS-stage deposit sitting next to its own built and functioning mill. But some companies move to production on their own. We presented one of those last week to our premium subscribers (join us here).

I hope this helps those of you who may have been stumped by lingo. Please feel free to add flavor, query, correct, or expand in the comments.

Sincerely,

John Hunt, MD
Editor, Doug Casey’s Crisis Investing