How to become a Gold Digger? Part 3 of 3

Making it Rain!

This morning I was reading the digital news before I logged-in for the day and I learned that gold was formed by a neutron star collision, resulting in pressurized debris that rained down onto our Earth— fresh from the Universe. This is why people are so starstruck with gold! 

As an industry, mining is extremely capital intensive and relies heavily on investments from the public to make their projects come to fruition.  These projects cost millions upon millions to fund.  But as an investor, it’s difficult to know how to differentiate a good project from one that can leave investors broke and jaded.  

Skim the corporate presentation and they will generally break this out for you. Here’s what you need to know:

Shares Outstanding:

Usually ranges from 60 Million to 150 Million

The shares indicate the ownership of the Company.

Be on the lookout for the fully diluted shares, such as stock options and warrants which when added together, contains all of the shares.  This is called: “fully diluted shares.”  Once these are exercised, they can dilute your holdings because more shares are added to the float for the buyers and sellers of the stock. It’s in your best interest to include those in your calculation. It will take more momentum for the stock to move up.

Working Capital

Money in the bank is good and this money is what is needed to pay for the expenses.  Use your judgement. If management doesn’t have enough money to complete the next phase of the project (see *Pipeline from part 2 of 3), they will likely do a capital raise.  This will involve diluting equity, so your shares outstanding will go up and this may cause the stock price to drop.

Debt

Look to see how much is owed and pay attention to the terms, because the debt will have to be paid back at some point and the interest rates and payments may be steep. Debt holders also get paid before you as a shareholder if the company defaults. If the terms don’t seem reasonable or achievable, this can be a red flag. If there’s no mention of debt in the corporate presentation, you can check the company’s financial statements.

Market Capitalization = 

Shares Outstanding 

X Share price

This will give you an idea of how much money is invested in the company already. It shows the value of the Company.  This is useful because you can compare the market capitalizations of similar companies to see where your junior gold company compares with other juniors.

During my many conversations with mining professionals, they described having a “gut instinct” as to whether or not the people they chose to work with would be synergistic.  One individual described his team as “only as good as its weakest member.”  This is very true.   because good people like to invest with good people. This is why the management team is the most important part of the project.  If they can’t properly execute, it won’t get off the ground.  

Now that you know the basics, before drilling down to the core of the quality of the resource and capital structure, assess management first and proceed down the checklist.  Remember, to keep the gold standard. Good luck with your digging and don’t forget to rock on!


How to become a Gold Digger? Part 2 of 3

Some Dig it, We Drill it!

I’m frequently asked why I have such a youthful glow to my skin.  “What’s your secret?”: they always inquire.  To the horror of ‘helicopter’ parents everywhere, I explain that my Dad is a geotechnical engineer and he designed mining tailings sites.  Back in the day, he used to bring my sister and I to his site visits, regularly.  Before toxins and pollution were of major concern, we used to play in the giant tailings, sand dunes which were comprised of uneconomical waste rock.  Therefore, I guess you could say that I was “resourceful” with my skincare regime.  

The objective of a junior mining company is to convert Mineral Resources to Mineral Reserves. With every step, when new data and research is obtained, the resource is modified into the next stage of the process.  

Every time a mining company publishes news to the public regarding their Mineral Resources, Mineral Reserves and Mining Studies, they have to be up to the Standards of Disclosure for Mineral Projects, called the (National Instrument 43-101).  1 The National Instrument 43-101 is a Canadian set of rules and guidelines to ensure that mining companies report their results in a transparent way to the capital markets.  It ensures that proper scientific methods and that “Qualified People” (QP) assess the results.  These people are the overlords of the mining project and they are generally geologists and engineers with professional designations and are qualified with over 5 years’ experience.  This technical reporting is a big deal.  It verifies the validity of the resource to ensure that sneaky people don’t shave down their ex’s gold jewellery and melt it onto a core sample.  

Good news makes the stock price rise and so you should be on the lookout for the following events to occur within the mining pipeline: 

Mining Pipeline

Environmental Study

In Canada, mining and the resource industry in general, are very important economic drivers for the economy.  It’s also very important that these companies operate in a socially responsible way. Although there is always room for improvement, as a country, we are lucky to have some of the highest environmental and safety standards and there are many benefits to the communities surrounding these projects. Before the project can begin, the team must consult with the First Nations communities and provide the ministry of environment with a satisfactory plan that any pollutants will be managed and contained. Licensing and permitting are also obtained during environmental due diligence.  

The Pre-Economic Assessment

The PEA accompanies Mineral Resources.  It’s a pre-economic study to see if the project is worthwhile pursuing before the real spending begins.  The Pre-Economic Assessment discusses everything in terms of Resources and this is the only report where you are allowed to include the Inferred Resources into your calculations.

Proven Reserves are actually there, Probable Reserves are most likely there given the calculations and data, while Inferred Resources  are there in an ideal world.  If you find more resources than the inferred estimate, the stock price can rise but keep in mind that technical reports must be validated by the qualified person before they can become actual “Mineral Reserves.”   

The success of the mining project depends on the assets that are in the ground and how capable management is to assemble a process to make its extraction cost effective.  After, there is a feasibility study to discuss the capital costs involved in the development of the project into a mine. 

Drilling

Companies will usually have a colourful map of their property with a legend showing their drill holes , often represented by  red dots.  The good ones with the most probability for gold are called “targets.”  They also draw horizontal and vertical lines through the holes. When they drill, they often drill on an angle.  Drill holes, although they seem quite simple in theory, are actually very pricy and can cost about $100,000 to drill one hole of core.  So, you have to be very precise where you choose to drill, or you could spend millions of dollars for nothing. 

Metallurgy Report   

This section often gets overlooked, but it is very important.  You can have the best gold reserves in the world, but if you can’t separate the gold effectively from the rest of the surrounding rock, then the project may no longer be feasible.  

For clarification, rocks are made up of minerals, which are inorganic, naturally occurring solid substances. In mining, ore refers to minerals (such as metals) that are economically valuable and can be extracted profitably. The ‘gangue’ minerals are everything else.  They are essentially economically worthless minerals that surround the ore. 

Once chemicals have been used to separate the gold from the other minerals, there is often heavy metal waste.  Also, some naturally occurring toxic elements exist with the gold in the earth’s crust, such as arsenic. 

Fortunately, new technologies are being developed because mining is crucial for the inputs to create all that we love: including cell phones, cars, planes, buildings etc.  There is a very cool science called 2bioremediation,  “that uses bacteria to remove the noxious ions from the environment.”  If you’re environmentally conscious, I encourage you to look into it.  

For gold recoveries, consensus prefers a rate of recovery of 75% or better.

Resource Estimation

Calculating the Production Rate for your Discovery

The economic feasibility of the project depends on the Production Rate of the project.  

Some Notable Benchmarks: 

  1. Drill Results: A grade of +2.00 g/t  over at least 1 metre in diameter. There is some method to the madness of drilling.  Usually, the geologist plots drill holes to identify the structure of the deposit.  There will be an average grade over a series of metres and this should also be 2.00g/t. 
  1. Depth: An open-pit  resource should ideally be located 200 metres or less and an underground mine should be no deeper than 500 metres.  There are some successful mines that are deeper, but they require additional construction and this will reduce the cost effectiveness of the operation.
  1. At least 500,000 ounces of recoverable gold (Au) over the life of the project. The reports usually break down the tonnes (t) and the grams per tonne (g/t).  You might have to calculate the ounces (oz) yourself.  This is how you do that:

The Formula is: 

Tonnes (Mt) X Grade (GramstTonne) / Conversion factor to Troy Ounces  31.1035  = Ounces (Moz)

  1. Ideally, the mine life should be at least 5 years at a minimum.

Pre-Feasibility Study also called (Preliminary Feasibility Study)

1This is the minimum prerequisite for the conversion of mineral Resources to Mineral Reserves.  At this point, management has determined the preferred mining method – either open pit or underground mining and pit configuration.  The mineral processing method is also established, meaning that the way they extract the gold from the ore will be identified.  There is also a financial analysis to assess the costs of the operation.  Everything has to be ready so that a “Qualified Person” can take a look at the work and rightfully determine if these Mineral Resources are worthy of conversion to Mineral Reserves. 

Feasibility Study

1The feasibility study is highly technical and has a lot of economic studies done to determine the appropriate development option for the mineral project.  It determines if it is worth the investment in the ground, for additional drill holes and eventual development to make the project feasible to sell into the market.  At this point, things get real and the resource is essentially audited by a professional to confirm that all of the resources are actually there as stated.  

This stage is imperative so that they can get institutions to provide them with financing, which requires sound capital structure.

These figures were provided by the mining executives that I’ve met over the last couple of years and can be used as a reference point for evaluation.  All projects are unique, so there is likely to be some deviation from the benchmarks.   When necessary, further research into the project may be required.

References:

1 www.cim.org,  The Canadian Institute of Mining, Metallurgy and Petroleum 

 CIM DEFINITION STANDARDS – For Mineral Resources and Mineral Reserves, 

Prepared by the CIM Standing Committee on Reserve Definitions, Adopted by CIM Council on May 10, 2014, 10/18/2017

2 Muibat Omotola Fashola,1 Veronica Mpode Ngole-Jeme,2 and Olubukola Oluranti Babalola1,*

Yu-Pin Lin, Academic Editor,  Heavy Metal Pollution from Gold Mines: Environmental Effects and Bacterial Strategies for Resistance, 13(11): 1047., Int J Environ Res Public Health. 2016 Nov; PMCID: PMC5129257; Published online 2016 Oct 26. doi:  10.3390/ijerph13111047; P.2,10/18/2017


How to become a Gold Digger? Part 1 of 3

I grew up in Sudbury, Ontario in the 1980’s, where mining was ingrained into our childhoods…  

Every morning before school—while eating breakfast— the local radio station would host a contest giveaway.  All you had to do was call in and provide a safety tip on-air.  If you were the lucky caller, the station would then send you an “Inco branded industrial grade backpack” (*Inco has since been taken over by Vale.)  The best part was that the backpack contained pretty packaged samples of copper flakes, nickel and pyrite—fool’s gold.  As I recall, the pyrite was shiny and very popular with the kids, myself included.

Since that moment, I’ve never lost my affinity for shiny things.  Over the years, I’ve met with hundreds of talented women and men in the mining industry who have executed on these projects. After listening to many presentations, here are some basic factors to consider when you’re evaluating a mining project to invest in. 

Identify your Mining Company

If you want to do a quick assessment, “google” the company’s name and go to their corporate website.  Most of this information will be located in the corporate presentation in a PDF document, where they highlight all of the best features of the project.  You can also go to www.sedar.com and you can look up further documents if you feel so inclined.  Canada is big on natural resources and hosts a medley of junior companies that go through a thorough and regulated listing process. You can find these companies on the Toronto Stock Exchange (TSX-V), the Toronto Venture Exchange (X) or on the Canadian Securities Exchange (CNX.)

Can you Dig it? 

There are 3 major categories of mining stocks: explorers, developers and producers.   True gold-diggers want big rewards for all of their trouble, and so, the focus will be junior explorers.  Junior explorers hope that they find a large deposit so that the developers and producers can take them over in a buyout. Geologists and investors get very giddy over undiscovered parcels of land with loads of unexplored potential because it’s like a treasure hunt for them and the payoff can be huge.  Most financial analysts do not cover the explorers, so it’s difficult to find research on them.  Junior exploration projects are hit or miss.  You can either win big or you can lose everything. 

Look at the Management Section: Super Important!

The first thing to do is to check out the management tab.  Under this tab, the Bios of the team are listed.  The team usually boasts about their previous achievements in this section.  The idea is that if they have a track record for success, they are likely to pull a good team together to replicate the process again.  

Mining is an expensive business, so look for a combination of competent business people, geologists, engineers and lawyers.  The CEO has to be a good marketer so that people are aware of the story.  Look for issued press releases and for those regarding trade shows and media appearances, as well as recorded interviews to assess their interactions.

Since it’s hard to meet these people in person, watching them on television or on some online podcasts can give you an indication as to whether or not they demonstrate passion for their company and if they are decent people. Notice how the executive responds to the interviewer’s questions.  If the executive is respectful, confident and knowledgeable, this is a good sign. If however, the executive is arrogant and condescending, you may want to shy away.  The mining circle is small and friendly.  If the leader of the Company displays toxic personality traits, they are likely to cause board and management disagreements. 

Location, Location, Location!

When it comes to an ideal mining location, the country should be politically stable and situated in a place with a positive mining track record, in the right geological environment.  I always like to hear how the team was drawn to the property. People like to hoard real estate—especially land.  Since the places I look for are known gold destinations, I like the stories where the land has been in the family of non-miners for a number of years until their heirs lost interest and decided to sell it.  

Just like when you buy a piece of real estate, it’s vital that your deposit is located on a good piece of property and you need to know the key development risks.  To eventually tap into the full potential of the resource, you need proper infrastructure, such as roads, water and electricity, as well as workers.  The more remote the property, the more expensive it is to get the resource out of the ground and into the proper outlets to sell the commodity.  For example, if you had to build electric power lines, it could cost at least $1.5 Million per KM.  Fortunately, you can go onto Google Earth and you can locate your project to see what’s around it in terms of infrastructure.  

Now that you’ve identified a company, have looked into management and found a good location, you can begin to mine your own business!


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