A bit of knowledge can go a long way at the PDAC 2018 Convention
Wes Roberts | March 2, 2018 | SmallCapPower: Mining Engineer Wes Roberts provides some brief guidelines so mining and resource investors can filter through the hype, information overload, or the “noise” experienced at the PDAC 2018 Convention, particularly when making the rounds of the Investor Exchange. Following this professional’s advice could increase your success with these type of investments, or speculations. This article was originally published last year and has been updated for 2018.
Quality of Management: We are always told that even more important than the quality and ‘prospectivity’ of a mineral asset that the capabilities and experience of management is the most critical link to success. This is certainly true and also reflected in the old adage that “mines are made and not found,” which means that a lot of hard work, and persistence is required by management to solve difficult problems to advance even the most prospective of mineral deposit through the stages of exploration, development, and construction to production. It’s also important to understand that presuming a project is lucky enough to mature and move forward on the mining cycle that management has to also evolve, changing its skill set to meet the challenges of each phase. Certainly, a discovery-stage project cannot have the same management requirements as, say, a project that is moving to the definitive feasibility stage of its growth.
The challenge for the average investor is how to determine and rank the quality of management. This is difficult even for someone like myself who has been in the industry for over 35 years and have seen several commodity cycles and have met and been associated with many mining promoters, engineers and geologists who have come and gone. When reviewing a mineral company, one of the first things I investigate are its board of directors, senior management and major investors. If I recognise just one name, it is easy to then contact that person and ask what the company is all about and know that I’m probably getting an honest explanation of the company’s status and potential. However, with so many companies attending PDAC and some with new names, new management and likely new projects it is very likely that I may not recognise anyone in the organization. Therefore, when attending the Investor Exchange and not being familiar with management, some of the questions that I would suggest asking the representative at the booth are as follows:
- Where did management come from and what mineral companies did they previously have involvement. Why and when did they leave? This question may bring up familiar names of companies and people that have good or bad reputations that can be used as a reference. It can be good to also see that management is perusing a deposit type and in a location that they have experience and thus can have a better potential of putting dollars into the ground rather than spend resources learning how to work in a new location and develop local capacity from scratch.
- Has management had previous experience in this commodity and type of mineral deposit? This question is aimed at getting a sense of how dedicated the team is to this project or is it a project they have just picked up because it is a “flavour of the day” and an easy stock promote. Good examples currently are companies promoting lithium and cobalt opportunities to get on the green energy train. It is important that management understand and are open with explaining the risks associated with the industry dynamics of the mineral or metal they are exploring. Be aware that many commodities, including rare earth metals, graphite, and lithium, have very sensitive supply/demand balances that can be severely disrupted by even the just one new mine coming on stream globally.
- What share of the company is owned by management? How did management earn their share in the company? It’s important that management own a significant portion of the company stock but more important to know how this was achieved. Actual cash invested from own sources (i.e. Mortgage personal assets) shows serious commitment over say picking up cheap shares in a RTO of a TSXV shell.
- What is the professional training of the CEO? Is he/she a geologist, engineer, banker/broker, accountant or lawyer? If not a geologist, how is this key role filled in the organization and what degree of authority (budget, issue of press release, etc.,) is given to the geological leader and team. These questions are important to learn how an exploration company operates when a non-technical professional is the CEO, which is common.
- What guidance and context is given to the geological team of the where the bar is set in terms of exploration goals (range of tonnage and grades needed for discovery success)? Geologists need the context behind what they are being asked to discover and that their goal is based on mineral economics and not for academic purposes.
- Has the CEO ever been to the project site? It’s surprising but the answer to this question sometimes is that the CEO has never been on site. This is even more puzzling when the CEO just has finished explaining how obvious the mineral potential is and that they plan to proceed immediately to production!
- Does the representative at the booth (CEO, Chief Geologist, IR person) use the “W” word as in this deposit is “World-class?” Maybe I’ve been in the business too long and I’m a bit jaded but I cringe when I hear the phrase “World-class.” Be sure to put them on the spot and ask what is meant by “World-class,” because these are strong promotional words and only worthy of generational discoveries such as Kidd Creek, Hemlo, and Voisey’s Bay.
- Ask what salaries have been paid in the past two or three years to management? If the answer is zero, then ask how much of current accounts payable is represented by accrued management salaries. During good times it was common for executives to award themselves large salaries and bonuses even for exploration companies with no other source of cash but through investor financing. Those days appear to be over but some executives still accrue excessive salaries in the hope that a change of control would result in a windfall payment. I believe that the right thing is to write-off these salaries and give the company a better balance sheet and also the potential to attract new money.
Mineral Asset: Generally mineral properties can be grouped into four stages – pre-discovery, post-discovery, advanced exploration, and development. The following discussion will help to classify the stage of the exploration company’s project to give a sense of where the asset sits in the mining cycle and the level of expertise that management must have to move the project forward. Ask where the representative thinks their project sits in the Mining Project cycle and compare it to what I define below:
Pre-discovery consist of very large scale and disburse exploration techniques (airborne and satellite) for the purpose of defining geological anomalies or targets from which to focus more detailed research, such as ground geophysical and geochemical surveys.
A property at pre-discovery stage should be prospected with an experienced “boots on the ground” exploration field geologist prior to any decisions regarding plans for diamond drilling. This could include stripping of vegetation and soils to expose the in-place rock surface, followed by mapping, and channel sampling perpendicularly across possible vein structures. Good channel sample work can give valuable unbiased insight into the nature of mineralization, geological environment and the potential extent of zones of interest. Chip samples of in-place rock exposures are helpful but less reliable than channel samples since providing less context of the extent and possibly continuity of a structure. A systematic gridded soil sampling program is also an important preliminary technique required to get a sense of the properties pre-drilling potential and clues for follow up investigations. However, a word of warning to putting too much weighting into assay results of chip samples and/or random grab samples of historical waste rock dumps and/or mine tailings. Chip and particularly grab samples can easily be biased as it is natural for the sampler to focus on a location with obvious visual indicators (shiny stuff!). I notice several juniors promoting high grade cobalt assays taken from waste dumps of historical silver mines located in Northern Ontario and Quebec. Cobalt in surface exposures or waste rocks oxidizes to a beautiful pink called “cobalt bloom” and thus can be identified by any amateur rock hound or mining promoter. These grades while being very rich give little context to the geometry, extent or homogeneous grade of a historical and undiscovered cobalt deposits, which are likely a silver or copper/nickel opportunity.
Companies at this stage will not have any mineral resources or mineral reserves and at best are diamond drill ready if targets have been logistically justified through grassroots field work. These companies typically have very low valuations since investment is historically minimal and probability of success very low.
Management skills required at the pre-discovery stage consist of identifying regional geological potential, securing ground positions through staking and/or deal making, raising venture financing, and implementing grassroots field programs aimed at anomaly prospecting, verification and testing. Investment at this early stage is primarily through friends, family and other private sources and in some cases through public markets. Even at this very early and benign of stage, it is important to lay the ground work for a positive and transparent relationship with the local community.
Ask what the policy and programs the company have in place to build trust and goodwill with the local community. What is the history of mining in the area and general understanding of the community of mineral exploration and exploration? It’s not satisfactory to just say that “we have a good relationship with the local community.”
A good friend of mine and CEO of a public gold exploration company recently was just one week away from closing a significant flow-though financing when he was informed by the local First Nations community (though a Toronto-based aboriginal lawyer) that cash payments would be required before consent of the winter drill program would be given. This came as a complete surprise as his opinion of the relationship was that a fair and mutual understanding existed from previous and regular engagement. As the cash payment was deemed excessive given the early-project stage, scope and budget planned, he had no choice but to cancel the financing and postpone the program until the following winter assuming an agreement could be reached. Ultimately, consent will be achieved by this junior if it follows the legal process, but the loss of momentum and focus has resulted in a significant loss to its shareholders as well as the stakeholders.
Post-discovery stage assets typically occur following diamond drilling success and proof of economic-grade core samples. A company with a discovery may or may not have a mineral resource but certainly will not have a mineral reserve. When mineral resources are declared for a project, junior exploration companies often move to produce a Preliminary Economic Evaluation (PEA) report. This is good practice because it provides an indication of the project’s economic potential, the alternatives for development and the risks needed to be mitigated. However, some caution should be taken when reviewing the economic metrics of a PEA since Inferred mineral resources (which are the lowest category of mineral resources) are allowed (by NI 43-101) to be included in the mining plan analysis and project economics.
A company with a mineral discovery can have a wide range of valuations depending on the nature of mineralization, deposit type and the extent of the drilling, which may justify a maiden mineral resource declaration by a qualified person (QP). Valuations for Discovery-stage assets are also greatly influenced by how effective management is at promoting. The Discovery stage for a project is most fuzzy in terms of valuation because quality and quantity of mineralization is not well defined and can be prone to volatile market speculation. Typically, the market value of the mineral asset will be a fraction of the net present value determined in the PEA unless it is deemed by the market that a significant portion of the property still remains to be explored and is prospective.
Management skills required at the post-discovery stage consist of detailed surface mapping, diamond drill placement, core logging and structural interpretation and, most importantly, raising risk capital, which requires relationships with larger and more established investment sources. The impact of the project and level of engagement with the local community increases significantly after a discovery.
Ask what the policy and programs the company have in place to build trust and goodwill with the local community. What is the history of mining in the area and general understanding of the community of mineral exploration and exploration?
Advanced Exploration stage exploration projects have sufficiently sampled a deposit to justify an independent party to declare an Indicated mineral resource, and if a positive prefeasibility (PFS) or feasibility study (FS) has also been completed may be able to declare mineral reserves. When a company has established a mineral resource or mineral reserve they have effectively created some reality or economic context to the initial discovery and have limited much of the previously unknown blue sky (speculation) as well as mitigating a significant portion of the project risk. The valuation of an Advanced Exploration asset can be in the tens or hundreds of millions and still be within a wide range but will largely be influenced by a comparison of mineral reserve tonnage, grade, location, etc, to other similar public “peer” advanced exploration deposits.
Ask about the company’s corporate social responsibility (CSR) program. What are the basic terms? Are they open to offering equity participation with the local community to recognise their contribution to growing project value and aligning interests?
Development stage projects are projects in which advanced engineering in the form of feasibility study, basic or detailed engineering has been performed or is in progress for the purpose of determining a production decision and arranging financing. Valuations for development-stage mineral assets will generally reflect a modest discounted value of the cash-flow forecast in the most current engineering report (feasibility). Since the asset is well known, the upside value is relatively capped and a function of external market conditions at the time (metal price) and downside a function of implementation and execution risk.
Management skills at the Development stage require increasing understanding of government regulations, permitting, regional and federal politics, and detailed engineering and construction matters. Geological activities now take a back seat to the “engineering machine,” which is focussed on building the mine.
Development-stage projects must have a binding agreement with the local community, which defines how local companies will be fairly considered for construction and service contracts, and the local labour force will also be given a fair opportunity for training and mine employment opportunities. Generally, this is called an Impact and Benefits Agreement (IBA).
Ask about the company’s corporate social responsibility (CSR) program. Do they have an IBA and what are the terms?
Many development projects are currently held up due to difficulty with local communities, which can lead to significant capital cost overruns and schedule delays. Unfortunately, many countries retain mining taxes at the federal and state level and do little to distribute those funds at the regional local community level. Therefore, mining companies have little choice but to allow for a fair sharing of project profits to the local community to ensure their licence to operate. CSR programs are a basic cost of doing business but typically are less than 5% of the future mines free cash-flow or an equivalent gross royalty of about 1.5%.
Mineral Asset Location: Where an asset is located and its system of laws regarding ownership of mineral rights can be critical and shouldn’t be taken lightly. From an investment perspective I suggest not wasting much time with companies with mineral assets in countries such as Bolivia, Venezuela, Ecuador, Kyrgyz Republic, China, Russia, and Mongolia. These countries are Marxist based and are pros at stealing and extorting mineral assets in a variety of ways once something of value has been defined publically. Also, some care has to be taken in countries in which ownership of land and mineral rights is based on Civil Code of law, which tend to be based on the notion that the state owns all mineral rights but may grant private investors the right to develop and commercially exploit minerals and metals. This is in contrast to Common Law countries, in which ownership and title to property, land and mineral rights are clearly held by private individual or corporation. Questions to ask relating to location and ownership are suggested as follows:
How was the property acquired? Was it by a direct sale (cash, stock, and/or royalty)? Is it by a joint venture earn-in agreement? Meaning the company has the option to make milestone payments and work expenditures to earn an increasing interest in the property with eventual majority control. The company will also have the right to stop spending and return the title of the property back to the vendor.
It is important to know what outstanding commitments still remain in order to achieve ownership and control of the mineral asset. Often companies imply that they own a mineral property, which can be true in a legal right sense but still have onerous financial commitments that are coming due and thus being in default and possibly being required to return the property to the vendor
Was the property acquired through an individual (prospector) or through another mineral company?
If through a mining company and specifically a major mining company (example Barrick Gold), is there a “back-in” clause in the agreement. Back-in rights mean that the vendor has the right to regain majority control of the asset based on some trigger such as declaring a mineral resource, which contains, say, greater than three million ounces of gold or a completion of a bankable feasibility study.
When a description of a future financing is mentioned, ask how the uses of funds have been budgeted. Get a sense of how much money is going into the ground and how much is required for property payments and corporate overhead.
In conclusion, hopefully some of the thoughts shared here will lead to other questions and answers from the booth reps at the Investor Exchange, which will help you survive PDAC 2018 but most importantly to have a better understanding of what to look for in a junior exploration company. Realize that anecdotally only 1 out of 1400 discoveries ever mature to become commercial mines, therefore investment in mineral exploration and development is not investment at all but speculation for future capital gain. Not saying exploration ventures shouldn’t be part of your portfolio but it has to be approached rationally and balancing your awareness and expectations of risk and reward.
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Wes Roberts is a Canadian Mining Engineer with Gravitas Mining Corp. and has over 35 years of experience in the minerals industry.
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