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Hello and welcome to The Con.

Crux investor and I have decided to create a series of videos to help investors analyse and understand the resources market. We will use real-world examples as much as we can to share our thoughts on how the sector works.

We chose the name ‘The Con’ for a very specific reason: when working on a mineral project, one of the key stages in the development of an operation is to take the ore and enrich it to the point that it becomes a concentrate. That concentrate is often many times richer than the original ore. It's a key-value point on the way to your finished product. For example, if you are in a Copper operation, the concentrate is just the Copper minerals, but it isn't Copper metal. In a Gold operation, the concentrate often contains Gold sulphides or sulphides with Gold in it, but it isn't the Gold bars. Thus, concentrates are a key part of the process but they're not the finished product. As we developed this series, we realized that whilst the content provided would not be the final answer, we aim to enrich your understanding of the resources market and go on the journey with you. We will give you access to the ideas and concepts that professional resource investors will go through. Someone who has spent 20-25 years in the market will have gone through everything that we will be talking about here.

We will look at resource companies under a series of headings, and analyse them in the same way that professional investors or professional market participants do. This is how they form their opinions and enrich their ideas.

They start by sifting and winnowing the projects, the teams and the companies to the ones that they want to spend more time on, and they reject those that they want to spend less time on.

For you, the retail investor, your starting point will be news releases or a recommendation from someone in the Club, or something that you've seen or heard about a company that looks interesting. That's the raw material you get given.

Hopefully, you will proceed to take it through several stages, potentially using these videos as a guide and your rider point, which is the concentrate - your enriched, higher value conclusions.

It's not the final step. You haven't gone all the way to the metal. We're not making true investment decisions, but this is absolutely a key step on the path to that finished product.

Our choice of naming the series ‘The Con’ was not without a nod to other types of cons. The resources sector is famous for its cons, as in confidence tricks. It's an industry with a huge amount of jargon. It has many technical components and it needs a huge amount of money before the real con - the concentrate - is produced.

Cons, as in confidence tricks, can proliferate; they can be a real obstacle to the retail investor. The mining sector has a certain reputation for this.

It starts with Mark Twain saying, ‘A mine is a hole with the liar standing above it’. This is a slightly tongue-in-cheek episode because we know that there are management teams that stretch the truth and there are some shysters out there. There are saints and sinners in the resources sector as in any other sector.

I do like the idea that a con is an old English word meaning to study and to learn, for gaining knowledge. What we're really working on here is using the idea that through processing the information that comes, you can reach a point that gives you an enriched product - the con.

Our aim through this series is to look at the basic building blocks of your decision-making process, and at the end you will be able to evaluate a company like the professionals: which team is credible, which team is serious, what kind of capital structure is serious, what kind of project is serious? And it will hopefully guide you to a point where you can make better decisions for your investments.

That's the basic introduction. The structure will be very similar to how I analyse resource companies myself. I spent many years as an analyst and I’ve broken the topics down into a series of headings.

Now, of course, there is overlap, but on each of the headings that I will run through next, I will do a subsequent episode where I can drill down into more detail on that subject. I will include some real-world case studies, where the topic that I'm covering in that episode came to light and affected the value of the company or the trajectory of the company in question. In addition to using classic case studies, I will bring the topic up to date by discussing current events in the market.

Introduction
New
Ep
1
What is the Con?
Available soon

The series will address each of the following topics:

  • Strategy - what is the company doing?
  • Commodity - what is the company looking to discover, develop and produce?
  • Market cycles
  • Management - who's behind it?
  • Funding - the size of the company, how much cash they've got and how much cash they'll need
  • Resource - the scale and the grade
  • Geology - what kind of geology is there?
  • Mining - how are they getting the resource out of the ground?
  • Mineral processing
  • Permitting and jurisdiction.

Professionals who work in the space have got all of these filters pre-set in their mind; anytime a new company comes across their desk they automatically or instinctively go through this checklist. The Con should become a resource for you to refer back to when you need and say ‘Oh, this is how professionals do it.’

I'm not trying to say that I've got all of the answers or I've got a monopoly on the truth. This isn't the only way to do it and there may be other factors that you'd need to take into account.

But what I'm trying to do is to cast a specialist eye over the key factors that anybody in the profession will look at. In short, what I hope is that these become a useful repository of information and that you enjoy listening to them.

Over the course of the series, I will conduct a deep dive on each of the topics in turn, but to start here is an introduction.

Introduction
New
Ep
2
What will the Con cover?
Available soon

The first area I look at is strategy; not just what a company says it will do, but what it is currently doing to get there. There's often a difference between what a company says it wants to do and what the company is actually doing, therefore, it's worthwhile taking the time to understand the true strategy of that company.

I also cross-reference that with how things normally pan out for that kind of company. In other words, there's a well-established playbook of what happens to companies in that situation.

Exploration companies are a good example. At a very simple level, their strategy is to find and discover ore deposits, but each management team will take a different approach.

Some will set out to be project generators and farm on their projects. Others will look to find a resource and then run the flag up the ‘for sale’ sign looking for people to take them out. Others are picked up by a team that really want to build a mining company.

Some teams have the ambition to bring one project into production and then bring a subsequent project into production. There are teams that say, We're going to start a small mine here on this small mining opportunity, and with the cash flow from that we're going to develop the resource. Therefore, there are a myriad of strategies that they will be employing.

There are also a number of companies that say they will be doing one thing, but actually, they've done something completely different. For example, I find it extremely useful to go back to the annual reports for the companies, looking back over the years to see what they actually have achieved. Quite often, the strategy from 5-years ago was for growth and bringing something into production, and yet that strategy is repeated on a yearly basis. Thus, the reality of what happens is very different to what their professed strategy is. Equally, each company’s strategy may not match where it really wants to get to. There's a difference between the ambition of the company and the capacity that a company has for fulfilling that vision.

The transition from explorer to developer is complex. When I refer to ‘explorer to developer’, I'm talking about the team of geologists going out to find a resource with the intention of drilling out that resource.

When I refer to a developer, I’m talking about taking that resource through all the real-world study phases to get it to the point where it's ready for construction and financing. Then there's a team that's required to finance it, build it and bring it into production. Finally, there's a team with a philosophy and a strategy to have steady-state production. I'll be doing a deeper dive into the challenges, the opportunities and what to look out for when you understand the strategy of the company.

Introduction
New
Ep
3
An Introduction to Strategy
Available soon

In the next episode, we will be looking at the commodity. At its simplest level a commodity is just, is the price going up or is the price going down?

A common mistake made by non-professional investors, and indeed by many professional investors as well, is the assumption that all commodities are mean-reverting, and that when the price is low, it's going to go higher, and when the price is high it's going to come back to the mean.

It's also very simplistic to say there's a general trend towards, for example, electrification or electric vehicles, and therefore, battery metals must all go up because the demand profile is there. The reality is far more complex than that. Each commodity has its own set of constraints. Some commodities, for example those used in electric vehicles, can be considered niche. Some are minor metals, others are major metals. What are the implications of that?

For retail investors, such as members of the Club, it's really important to understand that not all commodities are the same. Some are simple, others are complex. It's worth looking at what's contract-based and what's on the terminal market, what has traded widely and is fungible between Singapore, New York and London, and what is highly dependent on the specific chemical characteristics of the concentrate going to 1 customer. It's not just the macro demand picture or the price of the commodity that's important, one also has to look at the market size and transparency. On the episode on commodity, I'll go through some of the major and minor commodities, and also some of the niche ones.

Introduction
New
Ep
4
An introduction to Commodity
Available soon

The next topic is management. I don't want this episode to become name-calling and sandbagging of various management teams, instead it will be a rundown of what you should be looking for in a good management team. It is really important to understand if the management team has got the appropriate track record for the project that it is doing.

There are some less than good actors out there and there are some people who have a very solid reputation for probity and honest transactions. Rather than focusing on individuals, I want to look at how management teams engage with the project and the market.

It's not just about whether they can do the technical job on the ground, it's also about how the company communicates with its external stakeholders, including the local community, the local government, shareholders and product customers when it comes down the line to that. That all comes with the maturity and evolution of the company. When you have a very small company at the early stage, you don't need to have the full team built out.

Exploration geologists on a small team, are the ambassadors of the project. They are the front line. They are the ones going out into the community, and the senior executives are the ones who are speaking to local governments. It's vital that you've got the right management team who can build trust, who can establish procedures and protocols to ensure that this company has the ability to grow and succeed. What I've spoken about so far is strategy, commodity and management. These 3 all go together to some degree.

It's slightly different talking about production or exploration, but if you are going into production, a properly skilled management team would only want to look at very simple projects such as sand, gravel production, alluvial Gold or possibly alluvial diamonds, possibly tailings retreatment or processing oxide Gold.

The more typical mineral sector projects that we think about are the mid-CAPEX size of things, and again, that comes back to strategy, commodity, funding and management. You need to have an experienced group to successfully build a Sulphide Gold operation, or a Lead-Zinc project, or a high-grade Copper project. As the complexity and the size of your project grows you also need a greater maturity of your team. You need greater management depth and breadth and capability. Those are things like mineral sands, some small iron ore mines or Nickel deposits.

One has to question the strategy of teams that are looking to build complex kinds of deposits such as Coal, large Iron Ore mines or low-grade Copper-Gold projects, which are normally large, or low-grade, or complex Nickel deposits, which are high CAPEX, complex mineral processing. Hard Rock Diamonds, the Platinum projects, Rare Earth projects: all of these are only suitable for certain kinds of management structures. Obviously, this is mixing the topics, but it's absolutely crucial that the management team has the appropriate skill set and record for the kind of project that they're doing.

Introduction
New
Ep
5
An introduction to Management
Available soon

When evaluating a company, the first thing that I look at is the funding. I look up the ticker. I look at how big the company is. I look at how many shares are out, the share price and its cash position. It's fundamental to consider the size of a company, how well-established and how mature it is.

A feature of the resource market is that it's easy to create a company, it is easy to get going, but it's much harder to survive and to thrive.

The smaller companies have got greater rewards associated with them as it's much easier to get a USD$5M company to increase in value to USD$50M, than it is to get a USD$50M company up to USD$500M. You're more likely to get your 10-bagger on a small company, but equally, there's a much greater chance that a smaller company won't thrive. You're going to have more failures, but the few successes you do have will be the bigger reward. It’s a classic risk-reward analysis.

On the funding episode, we will cover:

  • How dilution happens
  • The cash flow of junior companies
  • How they get financed
  • How the management pay themselves
  • Typical capital structures
  • How brokers work with them
  • The compromises and the promises that the smaller companies need to make to institutional investors, private equity and high-net-worth individuals.
  • How deals are made
  • The bargains that have to be made in order to get to the next stage and how to avoid this
  • How some companies can self-fund

An absolutely crucial first step is to look at how is a company evolving. That's for the very junior end of the spectrum, then when one goes through to a more mature company, how is it going to fund the next stage? Where has it got to in terms of its market capital development?

For example, how can a company with a market capitalization of USD$100M, but with a CAPEX requirement of USD$500M-$1Bn for its project navigate that step? What options are available to that company? What are the risks? All of these aspects will be covered in the episode on funding.

Introduction
New
Ep
6
An Introduction to Funding
Available soon

Another thing to consider is the market cycle. Cycles should tie in with the commodity. It's not just the price of the underlying commodity, but it is also about what can get funded and how that can affect the life of a junior or mid-tier company.

Anybody who experienced the downturn from 2011 to 2017 knows that even though the price of the commodity was actually doing okay, particularly from 2016 onwards, there can actually be a real shortage of capital available from investment in the exploration or the development space.

That can have a massive impact on the valuation of your company. Therefore, the availability of capital is absolutely crucial. It can switch on and off. I'll go through some worked examples of how access to capital has provided an opportunity for some companies and how it crushed others, and how having alternative financing available to you can really help. It also will focus on the strength of cash flow and how companies that can maintain their bottom line and their cash reserves can prosper in a capital-constrained market.

In a sense, everything I've spoken about so far is a general approach to the company. These features are common to all companies at that stage of the cycle or in that particular stage of development, whether it's an explorer, a developer or a producer, but the next few topics will be more focused on the local or site-specific factors.

Introduction
New
Ep
7
An introduction to Cycles
Available soon

When I look at a company in the resources sector, I carefully consider the quality of the resource that it's working on. Critically, I look at the scale and the grade of the resource, as well as the stage of its delineation.

Understanding where a company is on the value curve is central to understanding the valuation of a company.

Exploration isn't limited to finding more tons of ore, it's also about improving the understanding of each of those tons of ore. We will refer to the finding of the ore as expanding the envelope of mineralization. Once you've defined your envelope of study or your envelope of mineralization, you've got a kind of volume of ore.

Then delineation and de-risking is associated with better defining the quality within the parameters of each of those terms, within that volume of mineralization.

Can it be extracted? Is it in the inferred category? Is it in the measured or indicator category? How close is your drill spacing? What stage of delineation has it got to? This is critically important from the preliminary surveying.

At what point can you say that you've made a discovery? Do you know that this is going to be a mine? Companies get into all kinds of difficulties in terms of the weight of their valuations as it goes through the varying stages of the necessary feasibility studies (from the inferred resource to the bankable feasibility study, to a construction decision.)

You may not yet understand the requirements of what is precisely involved in the development of a mine. There are many intricate factors: how to handle the data, the team, the cost, the time associated with the development, or why they take so long, why they're so expensive and why they're so important.

I'll be looking at some of the factors that go into these considerations.

Introduction
New
Ep
8
An introduction to Resources
Available soon

The geology of each of the projects that the company is focusing on, and that you as an investor is looking at, is really important. It's pretty much the one thing that cannot be changed in an exploration company.

It is mother nature; you get what's given to you in the sense that within your license area you can't change the geology. Understanding the geology has implications for scale, grade and operability, and it offers opportunities and challenges.

Whilst I won't cover all of the opportunities for economic mineral development and/or mineral failure within the entire geological world, I will be discussing the questions that you should be asking when analysing a project.

What do these drill results tell us and what do we know about these kinds of deposits?

We will cover some of the features that make projects work or fail, for small, medium and big projects in terms of the geology. In addition, the probability of finding more, the probability of not finding more.

An interesting paradox exists where quite often when a geologist or an exploration team gets on the ground they do regional work first and they indicate the exact position of a series of anomalies.

Each time that that anomaly gets tested, you go through a kind of ranking process. Eventually, within your license area,  you've got a series of targets with the best ones sticking out, and those are the ones that typically get drilled first.

Quite often you've got a rather strange paradox: when you go in and make your discovery, you actually drill the best of it. The early drill holes can be very exciting, then the company struggles to maintain that good news story because they've actually drilled the best targets first.

I look at the time when an exploration company opens up the ground. The first drill hole or the early drill holes that make a discovery are important, but for me, the turning point often comes later in subsequent drill holes, often the second phase or the third phase of drilling unlocks the key to the area.

The early drill hole was a play opener and after that, they get these intersections which go – ‘Ah, this is 1km away, or this is 500m or 2km away. And this is the kind of drill hole that makes me think: this is an economic deposit.

I have several examples in mind from last year and from history, which have been the turning points for a company. Once you've found it and you've delineated it, you've started working out that this is a resource, it’s crucial to remember that the NI 43-101 code and the JORC code have implications to their resource classification. Thus, in order to declare it as a resource, or in order to get it beyond the PEA stage into the pre-feasibility stage, you've got to take it beyond inferred resources up to measured and indicated, and that has economic implications attached to it.

You must have an understanding of how this can come out of the ground on a commercial basis, and that involves both mining and mineral processing. Each of those 2 topics will be covered in a separate episode.

Introduction
New
Ep
9
An introduction to Geology
Available soon

Mining is fundamentally about how to get a resource out of the ground. We'll be looking at the CAPEX and the OPEX associated with it, the complexity or simplicity of the mining operation, the safety aspects, and the timelines to development.

Remember: quite often, an exploration company has had no real experience of doing this.

An exploration company will often take the numbers from the studies that it does, from the PEA, the PFS, even from the feasibility study, and it will use those numbers in valuation cases, which are often very attractive, but actually, because they're not real-world numbers there may be omissions in there.

We look at a lot of benchmarking to ensure that the projected projects coming into development reflect the real world. Quite often, if you look at the chart of the cost of companies which are in production and the cost of future production, it's really interesting to see how all of the new mines coming in will be lower CAPEX, with lower operating costs, and it's going to transform the cost curve of the industry. It will be brilliant and this new company will be great.

In reality, what actually happens is that when the project is really brought into production, the schedule changes or changes of scope to CAPEX- which means that they actually forgot to include the key things in the CAPEX in the first place.

We'll look at that from a mining perspective and also look at it in a separate episode on the mineral processing side of things.

Introduction
New
Ep
10
An introduction to Mining
Available soon

Mineral processing has all kinds of implications for efficiencies, CAPEX and operating costs, and the end product.

This is a real favourite of mine as it's where the industry sees the most 'con'. These studies are presented to the market with a rather large amount of 'slippage', or lack of correlation with the real world. In other words, the payability of your concentrates.

It's looking at how do you get from your ore to your concentrate? And what's the payability of that, and what are the recoveries?

Quite often on a simplistic basis, when one is looking at this early stage where companies have not got into production yet, it's very simple to look at the in situ value of the metal or to take a simplistic look at the valuation that is spat out in the NPV by the consultant or the company.

Actually, when you factor in the loss of revenue from recovery and the real payable content of the metals, it can have a significantly different impact or significantly different outcome on the value of the project.

That is something we'll look into, highlighting a few case studies and the generic analysis of why a Gold project is easier to build than a Copper project, which is easier to build than a Nickel project, which is easier to build than a Platinum project, which is easier to build than a Rare Earth project.

We'll cover those differences and hopefully help you understand that when a junior company says it's going to be a Rare Earths producer, you've got to go: ‘Okay…Let's think about that.’

Introduction
New
Ep
11
An introduction to Mineral Processing
Available soon

In order to get your mine permits, you need local permitting and you need to get government approval.

A mining license is normally centrally granted and there are timelines and risks associated with that. It may seem like a very short topic for an episode but we'll be able to cram some good stuff in there on ESG, community liaison, and in particular, the relative risk-reward of different jurisdictions.

In some countries, it's very easy to get a mining license very quickly according to the mining code, but there may be an environmental aspect to it that takes much longer. It's really important to differentiate between the perceived appetite for the host country to develop a minerals industry and the reality on the ground in terms of which bodies you need to go through, in particular, the indigenous title and the environmental sign-off.

Some of these things can stretch out for years and years, and that has a profound impact on the investability of these projects.

On the jurisdiction side of things, there are complex factors that add or subtract to the investment case for a product in that area.

There are well-developed mineral-rich countries such as South Africa, Canada or Australia, where mining is relatively easy, but then it's also a very well explored area making it much harder for a junior company to come in and find something fresh than it is in a country where there's been very little exploration.

Equally, if you go to a country such as the Democratic Republic of Congo, Ecuador or Cote d'Ivoire, there may be a huge logical opportunity because there's been so little exploration done in the past, but it comes with other challenges.

It's that typical interplay between the opportunity and the challenge. This will feedback on the kind of project you're looking at. Obviously, if you have a more mature project in a well-established country, it will be preferable to a more mature project in a less well-established country because it will be more debt fundable. It's a much lower risk, but the chances of finding a good project or finding a high-grade, large project are much greater in a country that has been less explored and is less developed.

That's that interplay between instability and opportunity. Risk versus reward. During the episode on jurisdiction, I will look through some of the broader areas and cover off a few of the countries and areas that are often bandied about as the next great thing, or perhaps unfairly judged as a no-go zone. I'll be able to look at some of my favourite areas in there.

Introduction
New
Ep
12
An introduction to Permitting & Jurisdiction
Available soon

For this section, we will focus on the different strategies that resources companies take. By understanding the strategy that the company is taking, you can better understand your current or potential investments.

As a general rule, investors typically come to a company first because they're invested in a certain thematic. For example, if I'm worried about the global debt burden, I might be interested in a gold company. If I'm looking for a way to play the future, the market and the electrification of society, I might choose a copper company. If I'm particularly interested in looking at battery materials. I'll look at nickel, lithium, or cobalt. Once you've selected your thematic, you then need to choose what kind of company and what kind of investment to go for.

Stepping away from resources for a second. In the broadest sense of investment, there are two ways that your investment will go up, either through dividend yield or through capital value growth. In this episode, I'm going to focus on dividend yield within the resources sector. Okay. So if you buy your shares in the resources sector for dividend yield, you're essentially taking the view that the share price may not change very much. It will vary with the cycle. But essentially you're looking to get your returns from your company through the dividend flow immediately. You've got that gating moment. Is this company really going to provide dividend yield or is it going to offer capital growth? Remember that growth is typically associated with the resources sector because the resources sector is capital intensive.

Therefore, if your company is going to get bigger and better, it needs lots of capital, lots of money, and the lowest cost of capital typically for a mining company is money that it produces itself, which is free cash flow. So if you're in growth mode and you've got production, any of the money that you generate or a lot of the money that you generate is going to go back into the growth side of the business, therefore is unavailable for dividend payout to shareholders. So that means that most resource companies that have got this kind of growth profile are going to be allocating their capital to growth, not to dividends. So you can only really get dividends within the resources company in certain specific situations. One type of company that can pay a dividend are the majors. These are huge companies which with many divisions. I mean, look at the Rio Tinto's or the BHP's of this world. They've got iron ore divisions, coal divisions, base metals, precious metals. BHP has even got an oil and gas sector. Therefore, due to their sheer size, they can maintain a dividend and chase growth as well. The power of their balance sheet enables it. They've got the balance sheet to enable both growth and pay a dividend. So that's one area where you can get the get a dividend from resources company, and they can maintain their growth profiles to a degree, even though of course, trying to get a major like BHP to grow rapidly is much harder than to get a smaller company off a lower base to increase rapidly in size. So the reason why most retail investors are not so interested in these huge corporations is that they lack an individual narrative and the leverage to a single commodity. Huge corporations have multi billions of dollars of market capitalization, and your investment in them is largely a cyclical choice. You say, I'm going to put some money into the majors and park it there, and it doesn't give you the granularity to be able to say that this investment has got the potential to be a double or a multi-bagger because of a specific discovery, or because of the fundamentals of a specific commodity. However, the majors are very much a part of the retail

investors suite of choices. And if you believe in the resources sector, if you believe in the resources cycle as well, you should have some investments in the majors because they've got good capital discipline (or they should do), and great power. So that's one kind of company that can pay a dividend in the resources sector.

Another kind of company that can pay dividends in the resources sector is a company that's essentially in harvest mode, for whatever reason. They have an asset that's difficult to grow and a position that it makes it difficult to replicate or to find other companies in which to invest. A company such as sentiment, a gold producer with 50% of the Sukhari project in Egypt, is one such company. Another one that springs to mind is Central Asia Metals, which is also London listed. It's a copper producing company and zinc as well, but they're essentially working the dumps in Kazakhstan. And both of these companies have got a fabulous deposit. And they're in the harvest mode because effectively they're exploiting a depleting asset and they can't find new places to invest their money in new growth, which gives them the same kind of return that their current asset does. Any new deal they actually do degrades the quality of their own portfolio. And in those situations, they set up as a dividend payer and run down their asset. Central Asian metals, of course, does look at other things, and they will come to a point where they will pick up other assets. But it's very hard to find a hard rock new build project that can compare or compete with the capital efficiencies and the cost efficiency of the Konrad leach project in Kazakhstan. The company talks publicly about capital discipline, which is another way of saying that they struggled to find an asset as good as Conrad. Yes, it has bought the mine in North Macedonia, but effectively CAML pays a regular dividend on a depleting asset.

In the case of Centamin in the mid 1990s, sentiment was such that the share price was down at 1 or 2 pence and it was an exploration story. And if you remember, the Egyptian government actually took away title for about five years. And the El Ragi family, one of the major shareholders and founders of the company, had to work extremely hard to keep the company together and keep pressing for that title, which they eventually got back. Sentiment returned to the sector and the share price went from one pence to a pound and then towards £2. It therefore had all of that exploration, growth, capital gain from growth that we so love about the resources sector. But once it was up and running, the El Ragi family still had 5% of the shareholding. The reason for owning the shares changed because the company had changed as a company, and El Ragi family realized that building a new project in Egypt would be hard, and finding another project to provide the same kind of returns as Sukari would be very hard. And so actually, for the shareholders, the best thing that they could do was to pay out a dividend. And in recent years, once the share price reached £2 and then pulled back, but once it kind of settled into kind of a range trading price horizon, the most important aspect of owning sentiment in recent years has been the dividend, not the capital value growth of the share price itself.

The final group of companies that pays dividends, sometimes in spectacular fashion, are single commodity companies that have got a strong production base in a commodity that falls out of favor with the broader markets. The classic example in recent years has been the coal sector. No one wants to own coal mining companies because of the stigma. It's out of choice of not wanting to be that contributor to climate change. But the coal companies are actually paying out dividends as they're still highly profitable companies.

In the next episode, I will talk about capital value growth.

Strategy
New
Ep
13
Strategy: Dividend Yield
Available soon

The second kind of company you'll be interested in is those companies that offer capital value growth. You're looking for your share price to go up. This is the kind of investment in the resources sector that most retail investors are typically looking for. They're looking for the share price to go up a multiples of X, because you can invest a small amount and you can earn or create a huge amount. What must also be taken into account is the fact that you can actually lose your money. This is, of course, the balance between risk and reward. This comes back to the question of choosing smaller companies over larger companies.

Smaller companies are always more fragile. Their grip on this world is more tenuous, and the larger companies that are more established and more mature have got a much firmer grip on life. Equally, one has to question how will those larger companies have a transformational event? It’s hard to make an elephant gallop. If you look at what contributes to capital value growth in the resources company, there are a couple of ways of doing it.

At the junior end of the market, the most obvious way of creating value is through discovery. Actually finding a new commercial deposit creates an enormous amount of value, but it isn't easy to do, and very few projects make it. But we'll talk about this in more depth later in a different episode. If you're talking about companies that are in production already, to increase your earnings from production means that you need to find new projects, improve your cost base, or get lucky. Perhaps smart with the commodity price.

Mines are depleting assets and you have to invest in more growth. Invest in exploration and resource development. You have to invest in maintenance CapEx. You have to invest in mine expansions and new projects. The whole business is complex and difficult. And if you're going to increase your earnings over the long term, you have to be a very well managed team, extremely disciplined and stick to your core principles of not overpaying for assets and keeping a tight eye or close eye on every level of your operations. Specifically, choosing not to pay out dividends as you're focused on your growth pipeline.

When a junior company comes into production, typically they de-risk their asset, and the value of a junior company often trades at a discount to its net asset value or its net present value, until the point that you can see they've effectively de-risked their project. We often see smaller companies which are not in production yet, trading at something like 0.3 times their NPV value when it's at the PFS stage, and they gradually de-risk as the project passes key milestones. And perhaps it reaches 0.5 times its NPV value when the feasibility study is completed, or 0.6, maybe 0.7 of NPV or NAV when permits and funding strategy becomes clear.

Once the asset is in production, when the underlying metal price is doing well, these companies can increase their value to get close to 1x NPV. And that is essentially the kind of growth that can be achieved from a resource company that's coming into production. You go from 0.3 to 1. So kind of over 2 to 3 times kind of capital value creation in that de-risking process. Let's say your earnings will increase as you bring it into production. And your discount NPV or your discount to NAV will also decrease. Really this is where you get your “double” in value. You may get a two bagger if the

commodity price is moving in the right direction. But pretty soon you're going to settle down among your production peers, and you'll be valued on 6 or 7 times your cash flow, or possibly ten times your earnings. These multiples are relatively consistent over the cycle and relatively consistent across the sector.

If you're a producing company, it's quite difficult to get the multiple return that's so beloved of investors in the resources sector. Again, the returns may be slightly lower than you would like to get from a pure exploration stock, but remember, your company has reached that maturity where it's got the internal organization, it's got the internal infrastructure of a producing company. They've got the HR team in place, they've got the full structure and internal capacity to create a stable operating base, which is something that junior companies tend not to have.

Having said that, if one looks back over various cycles, many miners have a bad track record of delivering value and capital growth through the cycle. I mentioned earlier that it's important that companies are disciplined and stick to their core principles, but typically companies will overpay on acquisitions, and that's not just restricted to the mid-tier or the smaller companies. Even larger companies overpay on acquisitions by making those acquisitions at the peak of the cycle. Just with some specific cases in mind, let's look back at the acquisitions, for example, of MMX by Anglo American. This is the iron ore project in Brazil. Or when Rio Tinto bought Alcoa, these acquisitions were laden with debt and they were priced right at the top of the cycle, using a multi-year commodity price high as the base case. And over time, they proved not to be that smart, particularly the Anglo acquisition of MMX in Brazil. What a disaster that was.

But anyway, a further feature of producing companies is that when the metal price rises, quite often the margins on the companies don't follow it through. Therefore, you don't get the earnings growth that you might expect in an uptick. And the reason for that is cost inflation. Some companies don't stay disciplined and they chase the output as the prices increase.

As a metal prices increase, their margins go up and therefore they may put in some low grade material to produce more ounces, but at a higher cost and a lower value, famously in what people thought was the supercycle of 2003 to 2010, cost inflation was right there all the way through.

The oil price increased from $10 per barrel up to $140 per barrel. And that had a huge impact on cost, because when you look at the operation, for example, most operating mines, your energy bill is somewhere between 30 to 40% of the total cost. Rio Tinto back in 2010 I think it was, stated on record that they couldn't get the tires to put on their trucks because there was such a shortage of material. The labor costs in developed countries suddenly went right up, as did the cost of geologists, and therefore as the demand for the services and the equipment for the resources sector went through the roof from 2003 onwards, after China joined the World Trade Organization, and all you could hear was that, oh, great sucking noise as China sucked in every bit of commodities, spare bit of commodity across the world, the cost of producing one ounce of gold or one tonne of copper went up commensurately.

The earnings of producing companies didn't necessarily reflect the metal price rises. What does this all mean? I keep bringing this back to strategy. What kind of company do you actually want, and what kind of company is the management offering? When they are a producing company, they have to be extremely disciplined if they're going to increase their capital value by increasing their earnings, because it's not easy to do.

And there are many reasons why miners may not deliver their capital value growth. I've mentioned cost inflation as a cycle rises, but equally in the downturn, prices for and generalist investors are quite happy to step away from the sector while they believe that metal prices are in a cyclical downtrend.

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The mining industry can make a series of really bad decisions in cyclical downturn. They're somewhat forced into it, but their decisions can create long term problems. Essentially, they're trying to preserve capital, look after their balance sheet. Thus they start cutting non-essential investments in that downturn.

Firstly, they stop or reduce funding in their exploration. Secondly, they start reducing their investments in maintenance CapEx. They push their maintenance cycles out. They don't spend quite the same amount of money on ventilation or underground heading development. Every aspect of the development cycle gets stretched and reduced. And finally, they postpone the larger capital items. They push back their expansion. They push back their new build on that project in question or that feasibility study.

What they really often do is they high grade, high grading is when miners go off to the high grade portion of the deposit. This initially sounds sensible in a downturn, but it may not be the best economic approach to mining and processing of deposit over the longer term. Short term gain given by market necessity, which impacts the economic longevity of a mine. This may mean that they drop mining in lower grade zones that they had picked up during the upturn. And one reason why margins don't necessarily actually follow the cycle entirely on the way up is because they realize that with the higher prices they can get more low grade ore through the mill and make it pay.

However, during a downturn, the opposite occurs and they end up having to high-grade their resource, which reduces the overall grade of the remaining life of mine. Thus, they do long term damage to their asset. These are some of the struggles that a single asset miner or mid-tier miner will face. Only the companies who are in harvest mode, or those that have got low cost assets which are just depleting (the dividend players who can cope with it) and / or the majors who have multiplicities of operation, don't face those things. These kinds of companies have got the flexibility to manage their cash flows, tweak their dividends. The majors are such big beasts that you don't actually see a couple of the smaller projects struggling within their overall portfolio. Additionally, they'll often own these mega low-cost assets, which will pay through the cycle, such as the iron ore divisions of BHP, Vale and Rio Tinto.

So, mining and making money for your shareholders is actually rather hard to do. It comes back to their strategy for any company. Any junior company that says we want to be a miner, you need to question it. You need to ask yourselves, are they really, truly able to do this? Mining involves a special skill set. It takes an organization a long time to build up operational expertise. A company that I admire very much is Agnico Eagle. If you look at their staff turnover at the top level within the company, it's very, very low. That team has worked together for many years, decades even, and they've got an in-house engineering capability. They really think about the assets they go for. They understand what kind of assets do they can do and those that they can't, and they stick to their knitting. Equally Newcrest from Australia, for example. They are block cave specialists. They're not

trying to be the next greatest thing. Instead, they focus on their speciality. It's interesting to look at those companies and remember those companies which have garnered a reputation for excellence.

Perhaps the most famous case, of course, is Mark Bristow with Barrick. He was previously with Randgold for many years and he had an internal investment rule. Randgold wouldn’t pursue anything that didn't produce at least a 20% IRR, and it had to be over 2,000,000oz of gold. It had to work at $1,200 gold, and it had to have the capacity to produce over 200,000oz per annum. That discipline made it difficult for him to pick up new projects, but the company consistently outperformed everybody else in the sector in terms of its earnings and delivery to shareholders.

So as you consider your favorite resources company, it's important to understand that the more de-risked the proposition, the closer the valuation will trade to these standard, well indicated, well trodden paths of the multiples. I've outlined how difficult it is to run a mining company, and equally, outperformance is hard to achieve in this sector because as soon as you start producing earnings, you gain coverage from analysts and banks and they begin to follow you. It's very hard to stand out from that crowd. At that point you need to put your faith in the cycle and in the management team.

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A good management team will outperform a bad management team over time. So even though we know that companies go up and down with metal price moves and there'll be some out-performance due to the metal prices, the cycle changes, that's pretty generic. It's not unique to one company, but the management team is unique to a company. So some companies will go up because the gold price increases. And within that field, good management will make sure that that company outperforms its peers. And of course, over time that gets priced in. There's a reason why Franco Nevada is an expensive company to invest in, and that is because management has delivered returns for shareholders over decades. And the same is true for other sectors as well. So the multiples that a good management team attracts are higher than the multiples of a less good management team. It's pretty obvious. That's one thing to look at in your strategy for investing in as a company. It's a quality management team.

You've also got to understand what you're really looking for. Are you looking for production or are you looking for exploration? And there's a reason why you might want exploration in your portfolio. Yes, you need to pay for some expertly run companies, but if you want to make a lot of money on something which is a little bit more exciting, it's the exploration sector which can deliver. In short, one fund manager told me that he likes the exploration sector because it puts in the sex and the violence into his portfolio. Or another way, it’s the sex, drugs and rock and roll all wrapped up together within your investment portfolio because discovery of a mineral asset is an outlier activity. It's something that can't be predicted. It creates true capital value. It's a specific event that can change the fortunes of a company. It's a bottom up disruptor. You can find a company making asset through exploration.

So that leads us on to discoveries. And as you know, the kind of the nutty end of the exploration business is actually making discoveries. It's not going out and exploring and spending lots of time looking at mountain ranges. It's actually making commercially viable discoveries. And it's really hard to do that in a production company. It's hard to make a company-making discovery in a larger company. It's very rare. And when it happens, when a true discovery is made, it's fantastic. If you're in a really big company, for example, making one discovery won't have an impact on the overall value of the company. It might feed through in the longer term, such as an Escondida-scale asset. These are multibillion dollar, multi-decade huge copper porphyry deposits that do, over time, change the fortunes of even BHP or Rio Tinto. However, in essence, a discovery is unlikely to change the short term returns in the share price of a very big company. Even for mid-tier companies, it's quite hard to do. You know, you've got production across 3 or 4 assets, and you make one new discovery. Of course, when it does happen, it's very exciting. As an example, Fosterville and Kirkland Lake - that was a transformational discovery. When it happens, great, but it's incredibly rare.

You do have to keep an eye out for those kinds of company-making discoveries, because of course, a bigger company is larger, it's safer. It's got the management team, it's got the internal infrastructure to make it a lower risk company. But typically the returns that come from discovery are only offered by the weaker, smaller, high risk companies. So it's always worth checking out the strategy of the company to see how they're performing in their discovery record.

You don't want to be with a serial explorer who's just funding a lifestyle for a CEO who likes mountaineering. You want to be with the companies that are actually going to make those discoveries.

So it comes to the culture. In a situation where you're dealing with a development company or a smaller mining company, there's a huge psychological difference between the culture of discovery and the culture of mining, and this is often missed by retail investors. In essence, this is a highly significant moment. Mining is difficult and potentially dangerous. You're buying big equipment, your trucks, crush, plants. It's capital intensive and it actually makes money if it's done properly. The people who end up running mining companies are good managers. They are meticulous, methodical and focused on making money. A good mining team is focused on making money. The exploration division of that company is often seen as a loss leader division where these stupid, maverick bearded geologists take good money and pour it into the ground, drill holes and there's no money coming out of the ground.

The culture of exploration and resource testing, and the risks associated with geology are completely different to the cultures of a mining company, and therefore, it's very difficult for a small mining company to go through the painful process of giving birth to a new mine, having perhaps built one, and is trying to build a second or third mine. That culture of an exploration team is very rare, and it's a key distinction that's imperative to understand. It's essential to really look at your management team and see if they truly understand what they're trying to do, and how they'll be creating money. Is it through operating an asset or is it through discovery?

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Many junior companies refer to the Lassonde curve in their presentations. It's a somewhat simplistic analysis, but a useful indication that the management team are actually considering how they're creating capital value growth for shareholders. It's also an indication that they're already thinking about exit strategy. Ultimately, to make money from a resource, you must dig it out of the ground and sell the product for a greater amount than it costs you to find the resource, study it, build it and extract it. Therefore, if you can sell it for $2,000 per ounce and it costs you less than $2,000 per ounce, in theory you make a profit. However, that timeline can be extremely long and some companies will prefer to sell the resource in the ground at an earlier point.

Coming back to the Lassonde curve, it begins with discovery rather than exploration. What it doesn't show you is a huge tail off to the left on the time axis where these junior companies pad around looking and testing a whole host of anomalies or sub-optimal projects. The Lassonde curve is overly simplistic as it really only begins from the point of discovery. That killer discovery hole is very difficult to make and it's very exciting when it comes. It's pure value creation in the discovery phase.

You can imagine it like catching a wave if you've been at the back waiting for a wave and waiting and waiting for that one wave and when it comes. If you catch it, my goodness, it's exciting. It's the ride of a lifetime. And that is the front part of the Lassonde curve, which comes when companies have got the right land position and they're able to deliver stellar exploration results over a period of one or two, possibly three years. And they can create continual growth stories in the form of new releases as they intersect wide good grades of mineralization.

This is absolutely the most exciting point in the cycle. You've got all of that hope and expectation. You've got this wide open mineral resource, which is growing and growing and growing. Fantastic. But I often see retail investors pick up the story in that phase and they follow it and they cling on for many years afterwards. But you must remember to be disciplined. You've got to top cut your position because it's in that first phase that you're going to make most of your money. Don't ride it for too long. For the first one or two years, you need to keep top slicing and if you want to keep your original stake in the stock by all means do so but take as much money as you can while maintaining your original position or your toehold position in terms of value.

The reason for this is because the next stage in the Lausanne curve is the study phase of the curve when the envelope of fresh mineralisation has been defined. Growth is over. You can imagine it like inflating a balloon. You blow up your balloon and during that blowing up phase it becomes a globe. You get your globe of known mineralization and that's what happens in the discovery phase. It gets to the maximum size and you can't go any further due to the nature of the geology or indeed in the nature of the metaphor the elasticity of the balloon. That is the shape of your deposit whether it's long and skinny or round or planar that's the envelope of mineralization. It's the most exciting part that typically delivers value to the shareholders in defining that envelope but once it's defined is pretty much over.

Once you delve into the more granular analysis of the study, you start applying these Modifying Factors. You look into how economic getting into the resource will be. You look at the confidence curve from inferred to measured and indicated resources. Typically share prices stagnate or indeed fall. During this phase of the life of a mineral asset, the company spends a lot of time grappling with the modifying factors.

These modifying factors are essentially all of the details that affect whether it can be extracted out of the ground at a profit or not. And the balance of probabilities and the balance of nature means that during this period, quite a lot of the news is not exciting. It's actually likely to be bad news, not good news. And this can actually clip the wings of shareholders' hopes and expectations. I will cover the resource growth aspects of a company, that the challenge of feasibility studies and the relationship between the increase in the size of the envelope and the increase in the confidence of each element of the material contained within the envelope as seen through the lens of modifying factors in a separate episode of the Con. It's really important.

In short, however, during the study phase of the Lausanne curve, share prices can stagnate or fall. Once you come to the end of your study phase, what typically happens is that when the company gets financed, when the feasibility study is completed, when the mine permit is issued, and when a company completes its financing structure, it's at this point that you get the closure of the discount to NPV, and particularly as the company comes into production. This is a simplistic analysis, and you've got many, many other factors to consider, which will dilute the impact of this pure analysis. However, in theory it's good, but in practice you have, oh my goodness, I mean, where to start?

For example, between 2011 and 2017, perhaps 2018, it was almost impossible to find capital to build your project. Actually, the share prices didn't rise after you produced a feasibility study. And when you got the mine permit, again the share price didn't rise because now the market thought, okay, now they need to raise the money to build.

From about 2012 onwards, exploration was so out of favour that it was actually a waste of money to invest in exploration because unless the results were truly stellar, if you put out good news, the market just thought you'd need more money for further drilling and therefore it sent the share price down. It was so out of favour that almost anything you did didn't enable the Curve to work.

In essence, the cycle at that point was the driving force. And this Lassonde curve as a kind of a concept didn't work in the downdraft of that horrific downturn. Outside of that window of time, 2011 to 2017, I've seen companies who typically have multiple projects in their portfolio. Another fact to consider is that some companies have multiple projects in their portfolio. So you don't get a simple valuation curve like the Lassonde curve theory. It's a much noisier, much messier share price graph.

Issues such as management skills, funding choices, strategic decisions, jurisdiction risk. Essentially everything that's kind of covered in this podcast and the series of podcasts has a part to play in whether the Lassonde Curve plays out perfectly or not. And in essence it really does. But the concepts are still valid. You get that growth through exploration in that

discovery phase, you have that stagnation through the study phase, and you have the de-risking, the capital value growth as you unlock the intrinsic value of each ton of material.

So. Coming back to the exploration part of the graph, it's worth reiterating that exploration is very difficult and truly economic all bodies are very rare. Retail investors in particular and some institutional investors (I've seen this happen a few times), the investor will buy into a management team or buy into a thesis and it's almost like kind of cognitive dissonance or cognitive bias. That there's an emotional attachment to the story that doesn't correlate to the true nature of the geology. The unfortunate fact is that most of the assets being talked about are never coming out of the ground. It can take a great deal of time and money to make that discovery hole. So when it does come and you see that discovery hole, you surf that wave for one, two or three years, but then you've got to have the discipline to top cut, reduce your position and take out as much as you feel is appropriate of your investment. It could be all of it if you're in a bear market. If you still like the underlying fundamentals of the commodity, you might want to keep more of your position in that company to maintain exposure to that good asset in that good commodity.

But anyway, you need to have the discipline to think about that investment point rationally. Finally, I will say that discoveries are typically made by small teams in small companies which have small market capitalizations. They often have a director or a founder who's a geologist, sometimes wrapped up in one, that founder CEO role. It's a very specific skill set. These are typically self-reliant people that can go into a country, manage a team, manage the community, manage government relations, and they do it very well.

Geologists are a funny breed however, they are emotional, they're temperamental, they are mavericks. They've got a scientific base, yes, but they've also got this creative streak to them. Geologists make very good pioneers. In the Soviet geological system, the geologists were equipped and treated like a wing of the army. They were frontier scouts used to run geological expeditions to get military-grade camping equipment and they used to go out from six to seven months at a time into these remote communities.

It's very much like the scout element of the military. And not to militarize exploration teams, but that pioneering self-reliance. And in a smaller company, you really want to see it actually understand it and get there out on the ground. That works well at the smaller end of the sector. But it means that once that discovery is made, you need to see if the company can make the transition that is needed to mature.

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A move that I'm enjoying seeing in Canadian companies is the split between the president and the CEO. I've seen that a few times - where the founder, the CEO, either moved to become the president or stays the CEO and the more market-driven resource specialist comes in to take the twin role, just diluting that pioneer or maverick sentiment as the company matures. And that's something to look out for in the strategy of a company. In explorer strategy, you need to kind of drill down more into the strategy of explorers. There are several ways that people can explore for assets.

There are serial explorers which is all well and good, but you must question how they can monetise it and generate returns for shareholders. I've seen a few companies that explore well and find assets, but they've got a tendency to actually gift the assets to majors. They do trade deals, selling on their assets to majors, which won't necessarily give a significant return to shareholders. One thing to look for is does the company a strategy which is actually going to make money for their shareholders.

If you're looking to sell an asset to a major it needs to be material to the majors and therefore that immediately reduces the opportunity suite for the retail sector. It's only worth chasing assets that are going to come out of the ground and someone else is going to want to buy. The degree of complexity around that is that one never knows what someone is going to want to buy. Scale is always good and grade is always good. If you can get the two together even better.

There's been a recent takeover bidding war for Cardinal Resources in Ghana. Seven million ounces, just over one gram of gold material. It's right up in Northern Ghana on a difficult border in a relatively difficult country. And I was very surprised by the valuation attached to it. But two majors have decided that they both wanted it. And there's been a real tussle for it. That has been an expensive acquisition, great for Cardinal Resources shareholders. But you've got to look at the fact that it was seven million ounces and the majors wanted it. And that's how it gets taken out.

Strategy - Cycles, M&A, Project Generators, Commodity Cycles. Another thing you need is for the cycle to be favorable. In a period of rising gold, copper or lithium prices, you need to look for consolidation in the sector in order for your asset to be taken out. Typically the majors should be by companies on the way down when the metal prices are falling as medium sized companies are struggling to raise capitals as exploration companies are struggling to raise fresh capital and equity to do the drilling.

That's when you'd expect the majors with a cashflow to come in and buy these assets at the bottom of the cycle. Strangely, it typically works the other way around. The board takes so long to come to a decision, they're so risk averse that they need to feel comfortable that the metal prices will stay high and often mistakenly come in at the top of a cycle. I referenced Anglo-American buying MMX in Brazil in 2008, and that was an example of a company coming in at the top of the cycle. Iron ore prices had reached $150 per ton, and.one really

makes money on iron ore when it comes to direct shipping or lump ore. MMX was - when that deal came through - it was mostly on magnetite, which is pumped as a concentrate down pipelines. Anglo didn't actually buy the pipeline infrastructure or the port infrastructure as part of the deal. They desperately wanted to get into the iron ore market, and so they bought MMX, and it was a classic top of the cycle kind of indicator.

Another struggle when you're trying to sell your asset is that many mining companies actually have quite a strong not invented here philosophy. New business development teams of mining companies are incredibly risk-averse. They have seen all of the problems of bringing in a project or bringing a project into production. They understand that if you have a small metallurgical problem it can destroy your margin. They understand political risk. They understand almost every aspect of technical risk. Consequently, unless your project has a champion within the potential acquirer company, they're going to come in, do their due diligence and walk away.

It is very hard to get mining companies to buy you out. Only the best assets will make it and very few assets that we see in exploration will ever actually come out of the ground. M&A, I believe that the best strategy for a junior company to attract and acquire is, in a sense, not to put it up for sale, but just to keep committing to self-development. You need to grow your company, mature your company, go through that exploration phase, increase staffing to demonstrate the core competencies so you can take it forward. You need to ensure that you line up the government, you line up the permitting, the financing, and you demonstrate that you've got everything in place that is required to build this thing. And it's at that point that if your asset is good enough, people will say, oh, this is the real deal. It's coming out of the ground. We need it in our portfolio. That's the time when the company's likely to get sold.

Project generators. Another style of exploration strategy that is often put out there are the project generators. Now, the challenge with the project generators is that typically the timelines to production are long from an early stage to the final brick going in. And so that creates a time value challenge for investors. So even if you do a high value farm out, you essentially end up with a minority stake in an asset which has got long-term value. And the bigger the asset, the longer the timeline for development is going to be. So it is going to be a decade at least and possibly longer. I mean, look at how long it takes to build a mine.

Globally the average now is around 12 years. It used to be seven years, but permitting has got more difficult and it's been pushed out. Copper mines, typically larger, are now 15 to 25 years. It can be decades before a mine can come into production. So for a smaller company to have a carried interest, either you need the patience of Job, or you need to have very advanced, short timeline development assets as well, or a single project that you take on a 100% basis, or the projects in your portfolio need to be so good that they'll get bought out directly.

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Another thing to look at when it comes to strategy is if a company says that they're going to develop an asset and you need to work out whether they're actually credible or not. Has the management perhaps been promising the same thing for years? You can easily go back and check out the annual reports and if the same story comes up every year, you know they're just repeating themselves. It comes back to the classic cry wolf analogy. If you hear the company saying, we're going to bring this into production next year, and every year they say the same thing, it begins to lose its credibility. You need to see the company maturing in line with the strategy. Typically, that equates to share price growth in line with the market cap growth, or in line with market cap growth. Therefore, it's not just the value of the company going up because they're issuing more shares, but actually the market is respecting the value of the de-risking of the asset, and so you can issue more shares but at regularly higher prices. It's market cap growth with a number of shares in a healthy relationship with a share price.

Reporting, you can also consider it in other ways. You can look at the quality of the reporting and the quality of the staffing. How has the board changed? Have they brought in people with specific expertise for the development of these kinds of assets? Have they brought in resource geologists rather than just straight exploration geologists? How much are they relying on external consultants? Have they got the right engineers in the team? Have they got the right in-house team?

That staffing and organisational chart as the company grows from a small explorer through to a resource evaluator to the technical and financial appraisal of assets into that build phase. Underlying the statements that the company will make through its presentations and interviews, you need to see an underlying correlation with the internal organisation of the company.

Market cap. Perhaps the easiest way to see if this is happening or not is whether that market capitalisation is changing relative to the capex requirement. If you have a company with a very low market capitalisation and a large capital requirement to build the project and that relationship doesn't change over time, think to yourself, it is extremely unlikely that it's going to get developed by the company itself. For any type of investor, if you're sitting in a company and you see a scenario where the market capitalisation is tiny relative to the NPV, you may think, oh this thing is going to get taken over, we're going to make 10 times our money here. I would caution against that very carefully because for some reason your company is not in good shape and it's highly likely that it's not going to be developed by your team. Furthermore, the larger mining companies will not want to take it over because they can see a technical or an economic risk that you can't. For me, that's a real flashing signal to watch out for. Look at the market capitalisation versus the CAPEX requirement.

Strategy. Team building. To reiterate the point, the team required for exploration is really a different team required for resource development. It's a different team required for builders. The construction team is different to that of resource development. And then again, you need a different team that's required for operations. So you really need to see the evolution

of the team underlying the strategy. As I noted before, geologists are emotional. They are hard to manage. Frankly, they're impossible people. I speak from the heart. I am one and I've been dealing with others for the better part of 30 years. They are scientific, creative, often maverick. And yet the build team, led by engineers, often is methodical, risk averse and organised.

Quite often if you look at a smaller exploration company, the original team, your founder geologist, he's the CSR manager and the camp manager who's running the technical side of things. One of the first things that happens when you make a discovery is that you bring in professional managers who then appoint a logistics manager. And before long, your geological and exploration camp is being run by a logistics manager who wants to drive the process, and there's a geologist there who also wants to drive the process. I've seen it so many times, there's conflict. But perhaps that's the paddling of the swan's feet underneath the water that investors don't need to see.

Moving on to the strategy of when people say they want to develop, they say, we're going to start a small operation so that we can generate the cash flow to continue exploring. My comment on hearing that is if you hear people talking like that, generally run a mile because a small operation is just as hard to manage as a large operation. I repeat, run a mile if they talk about starting small to pay for exploration or starting a small mine to pay for the big mine. Small operations require the same amount of GNA and the same amount of office time. And mostly a small operation doesn't make enough money. The cost estimates are wrong. It sucks in every aspect of a small company's resources and time and as a result, you don't focus on the big exploration story or on getting the big development story correct. So for an exploration company, it's priority number one. Focus on making a discovery that is absolutely going to be economic and commercial. It needs to have the scale and the grade so that you can be sure that this thing is coming out of the ground. Secondly, when you do want to produce it and you go through that difficult transition period from resource evaluation to development, permitting and finance, you've got to have the maturity of the team to ensure that this will be a meaningful development.

There are, of course, exceptions, well, rare exceptions. Typically, private companies will find an alluvial diamond pack or a placer gold deposit, and they can be small operations that are highly profitable. These are normally kept private, and that's fine. Also, a number of small mining companies in the Andes with veins running 20 grams per ton over one to two meters. These are small underground operations. They're producing high margin ounces. The resource development only ever runs about a year ahead, so they'll never be able to put a big resource together that can support a public valuation. But on these meso-thermal veins that kind of go down almost to the center of the earth, you can keep mining in front of your nose and that works. It's very suitable for a private company. Occasionally they can tip out into the public sector. For example, I mean, Atico Mining and some South American companies that can make that transition into the public markets.

And the other style of company that can make a small asset work is when you've got a very, very simple strategy and a de-risked development path to a low-risk - technically speaking, operations such as a heap leach project, where you make your mistakes small to begin with, if you're going to make mistakes, but you can build out on a low cost basis with low capex, if

that is your company philosophy. A good example of this is Minero Alamos developing simple heap leach projects. So it can work in circumstances, but generally if anybody says they're going to start small, small operation to pay for exploration, or they're going to start a small operation so that you can expand into the big operation, avoid.

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19
Strategy: Developing An Asset, Reporting, Market Cap
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It's really important as a retail investor to ask first of all, does your company have a clear strategy and does it know how it's going to make money for shareholders? Is it a developer? If it is, is it making progress towards its goal in a reasonable timeframe? Has it got the internal organization and the progress to really confirm it? Is it an explorer? If so, how is it going to make money for shareholders?

The project generator model. In this scenario, management really needs to articulate clearly to shareholders how it's going to make money. At this point, it's highly important to be aware of your own confirmation bias. Try not to go into that interrogation wanting to hear an answer that suits your own previous investment ideas. Actually, look at it really carefully. Some of the things to look out for are, is the company offering dividends? If it is, question, is it really offering dividends? Is it in harvest mode only?

If not, where is it going to get the capital from? Does the C-suite truly understand how they're going to create value? I would advise, watch out for the miner versus the explorer mentality. In some ways, these things are incompatible. It's very hard to capture both the exploration side of the business and the miner side of the business within one philosophy, within one company. Many companies will say that they're good explorers and they can produce. B2 Gold, for example, always used to say that they were both brilliant at exploration and very good at mining. In fact, they tend to buy their assets more or less ready-made. That's not a criticism of B2, but it illustrates the philosophies, the mentality of exploration and development are actually quite different, or not development, but operations. These are quite separate. Another thing to remember is that very few assets will actually make it. You also need to understand the Lassonde curve and to understand at what stage you're investing.

I'd repeat that many retail investors fall in love with their stocks and you've got to be disciplined. If you're going to ride an expiration story, ride that part of the curve for one to two years and then top slice or sell out completely or retain your original position. But don't expect continued growth that you've just experienced because you're in a different part of the investment cycle now. Make sure that if you love the stock and you want to stay with it, keep a toe hold, but sell some or the majority of your position.

Exploration can be great, but companies are often very immature. Some companies will struggle with that maturation transition, follow the management and see if they're actually talking the language and walking the walk of growing up. If you are a developer, keep an eye out for that market cap versus CapEx figure. Beware of companies that have a tiny market cap relative to a large CapEx. If you're looking at producers and they've got small scale production, well, generally avoid those.

Instead, go with experienced teams only, and when it comes to production, and in very few cases, small production rarely turns into big production. So if they're talking about developing a small mine so they can go to the big mine, avoid, it can happen, but in most cases it can't. Thank you very much.

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Strategy: Conclusions
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We're going to be looking at the good things about certain commodities, the bad things, and what to look out for, how to approach them, and why they should matter.

Understanding commodity prices and forecasting commodity prices is a whole industry in itself. You have commentators, analysts, forecasters who spend their entire lives looking at commodity prices and trying to predict whether they're going to go up or whether they're going to go down. What stage we are in the cycle and what stage, et cetera, whether the cycle is peaking or going up or coming down. Every investor will have a different view on a commodity. You will have a different view on a commodity. Quite often, retail investors, fund managers, institutional, high net worth family offices, they will take a view on a commodity based on a feeling for the supply and demand fundamentals.

One feels that this commodity has got stronger demand fundamentals, it's got constraint and supply fundamentals, and therefore prices are going to go up. So the investor is actually making a bet on a commodity price move. And this is a very instinctive thing to do. And actually, I believe it's the wrong thing to do. Well, not entirely, but I'll go into that. Many investors get into a stock because they believe that they are a commodity price forecaster and they believe that the price is going to go up.

So this is an area fraught with complexity and perhaps investors should have a slightly different approach to looking at the commodities in their portfolio. And what I mean by that is, well, we'll come onto that. But when you look at a commodity, you've really got to think about at least two other things which are perhaps more important than the price direction, which are one, how it's sold (your particular commodity) and two, how it's produced.

I hope to be able to demonstrate that these two factors, or these two features, are worthy of just as much consideration as perhaps your price forecast or your price estimate for the commodity in question. Now, why do I say that it can be dangerous thinking that price is going to go up? Well, there's a whole industry out there of commodity forecasting, the commodities analysts, the commentators, the banks have them, the news wires have them. All of the major mining companies and producing companies have got their own analysts who spend their time predicting price cycles and where we are on the price curve, and as an industry, generally, it's relatively well paid. It's a good job. In less virusy times, commodities analysts travel the world, and one of the key features about them, about all of them, is that they are almost always wrong.

Trying to predict the cycle is about as relevant as trying to pick the stock market. You know, time and time again, people get it wrong.

And I know this because for many years I've been a commodities analyst, and I've got many friends who have been, and I've got a friend who also spent time as a group chief economist for one of the major gold mining companies. And we both know that the art of metal price forecasting and commodity cycle prediction is a dark art. People may feel that they're a genius when they get it right, but they mostly get it wrong. I don't think you're going to be in a good place by basing your investment on your view of the cycle.

You might have noticed that when I talk about projects, I often use spot prices. The reason for that is so that we can get a feeling where the value of the company is relative to the value of the asset at spot prices. If we predict a metal price in the future, what we're doing is compounding our estimates onto something, whereas if we just do it at spot, it's a much purer, instantaneous market view. Actually, if you want to spend the time, go and look into what people are predicting for their commodity price forecast. If you look at what the analysts from the banks are doing, and from the major companies, typically what they do is they just take the spot price today and then for next year they predict prices slightly higher and they do that for three years and then the long-term price forecasts come back to the long-term average price.

So really what the vast majority of commodity price forecasts are - is essentially just plotting out the forward curve because in a commodities market that has an exchange value today, you can buy it in the future as well. And that Future price is normally just the interest, the borrowing cost of that metal, the financing cost plus the storage cost, and that gives you the forward curve. And you can plot that out for two or three years, looking at interest rates and such like. And then it comes down to long run averages. And since most commodities are mean reverting, they come back to their average price over time. And that's how the industry does their long-term pricing. So, quite a lot of the industry of commodity forecasters, analysts, commentators are really doing no more than just looking at the spot price, applying the forward curve and the mean reverting long term. Hmm. So, not so fancy, not so special.

Where good commodities analysts really earn their keep, though, is through detailed understanding of the supply and the demand fundamentals, the make-up of the cost curve, and understanding of the barriers to entry and required price incentives for any new supply. That's where they add value. They understand the market, but they shouldn't or they should steer away from trying to predict prices. Now that's not to say that commodity prices are not important, but what we think or what I think is the wrong thing to do is to spend too much time trying to predict the future price of the metal. And I also think it's dangerous for you to make an investment on your company solely based on the fact that the metal price is going to go up or down. Now of course, yes, you choose your sector because of the cycle or of a thematic. For example, if you believe that fiat money is unsound and perhaps that Bitcoin isn't the total answer to everything in life in the universe, you'll probably want to have some investment in gold or in the precious metal sector because you believe in Sound Money. If you believe in the nuclear industry and the problems of decarbonizing the world, climate change, reduction from coal and petrochemicals, and you also believe that the solar and wind sources of energy aren't going to do enough, you'll probably want to have some investments in uranium. And so on. If you believe in the battery revolution, you'll probably want something in the nickel, lithium, cobalt, copper space. If you want a general approach to the modern electrical life or coverage for that, you'll probably want something in copper or possibly tin. So as an investor, you will be drawn to your own commodity through your own interests and your own thematic. You'll want to back something that you believe is going to have a good demand profile and a scarce supply going forward.

But I steer you away from trying to be a commodity price analyst. Almost always wrong, certainly not bothering to listen to.

And yes, the other commentators out there, they're almost always wrong as well. So let's come back to the commodities.

Now one of the key things about commodities is that they're not all equal and you have to look at how they're sold and how they're produced. These two things are really important. Now, obviously in a short podcast, I can't go through every single commodity, but as a basic rule, the commodities range from large volume markets with transparent, efficient pricing, down to low volume markets with exact chemical specification defined in a contract between one customer and one producer, sometimes just a single mine.

The large volume markets are typically traded on terminal markets such as NYMEX, now part of the larger CME group, which includes the Shanghai Gold Exchange, or the LBMA for precious or the LME for base, London's Metal Exchange or the London Bullion Markets Association. And there's a huge amount of transparency, pricing data, data on volume, spot and future prices, above ground stocks, warehouse stocks. You know, all of that kind of stuff is available in these large volume markets.

The small volume markets are private, opaque, often dominated by larger producers in a cartel-like or oligopolistic model. And these are the ones which put you at a disadvantage as an investor.

Commodity
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Commodity: My Perspective
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Cost Curves

Before looking at individual commodities, we need to understand the concept of something called a cost curve. A pure definition of a cost curve is a graph of the costs of production as a function of total quantity produced. Let me try and expand and explain that. The y-axis, the upright one, the lower portion represents the lowest cost of production, rising ever higher up the y-axis to the most expensive production. The x-axis represents the amount of supply for any given cost. The x-axis can be shown either in production units such as ounces or tonnes, or expressed as a percentage of total supply. Then the x-axis is normally divided up into quartiles, so that the graph can be read simply.

The lowest cost block of production, normally shown by producing entity, or whether that's a company or a division of a company, or a mine or a project, is plotted first along the x-axis, and the width of the column represents how much is produced at that cost. Then the next most costly block of production is plotted, again with its width representing the amount of supply at that particular cost, and so on. The graph keeps being added to, varying widths according to how much production there is at that price along the x-axis until 100% of all production is captured with the right-hand-most column being the most expensive supply currently in the market.

Each commodity has its own specific cost curve and its own specific dynamic which is really important to understand when trying to assess the investment potential of a new company or a new project. For example, in an industry which is dominated by few players with low costs of production such as iron ore, it will be extremely hard for a new entrant to survive, let alone compete with the giant low-cost production bases of Vale, Rio Tinto and BHP.

In a highly fragmented market where there are thousands of contributors to the cost curve and no one entity has pricing power, such as gold, any new project can probably slot in next to another without too much trouble, providing it's economic, of course. Creating these cost curves requires a deep understanding of the metals markets, and they are real devils to produce. That is how commodities analysts earn their stripes.

The curves are so important though, as they enable proper analysis of the supply side of the commodity to be done. How elastic or responsive to changes in metal prices is the supply? How inelastic is it? Are there strategic producers that will defend their operating base through trade tariffs or subsidies or simply just by undercutting the price? Is there byproduct supply in a commodity that will ensure supply of metal no matter what the price?

Are metal prices so far below the cost of new supply that a new price range has to be established, it has to emerge in order to incentivise a new raft, a new wave of production. We can't cover everything in a short podcast, but here are some general observations.

PGMs and Precious Metals

Now, interestingly, once they are refined, precious metals are fungible and of a standard quality, and they can be traded anywhere around the world. They can be deposited in warehouses or almost pure products sent to refineries for refining to reach an accredited

standard so that it becomes entirely fungible, whether that's gold or platinum, palladium or silver, and they can be then traded on the terminal markets in New York, London or Shanghai. So far, so good, but there is a different set of barriers to entry to the PGMs as to gold or silver. And the cost curve, determining the supply of silver has a very different structure to the cost curve determining the supply of gold.

So even within this tiny subset of similarly traded commodities, there is a completely different set of factors that need to be understood before making your investment. Complicated? I'm afraid so.

Bulks

The bulks are contract-based large markets, such as iron or thermal coal or possibly potash. These are large volume markets, but they're actually contract-based and pricing is much less transparent than for commodities that are traded on terminal markets. The product is much less fungible, and critically the operations require a vast amount of capital to bring them into production. Remember that the product that is being sold is more or less the whole volume of the ore that's being mined, so the logistics around this industry are just mind-boggling. And it is not just the significant capital that's required, significant expertise is just as important. The capital. The complexity plus the opacity of the pricing of the commodity are the key components in understanding the barriers to entry. It is just so hard for a junior to find a bulk asset that is going to get a good price from a major. Either the project is far from the major's existing infrastructure and therefore will be worth cents on the dollar to them, or it is close, but will almost certainly have been reviewed and rejected by them. When a junior tries to get you excited about one of these bulk projects, the safest bet is to stay calm and do nothing. Oh, and if a junior mentions magnetite iron ore to you, trust me, run away.

Market size

Just to put things in perspective, the iron ore market is 1.3 billion tonnes per annum. The thermal coal market is a billion tonnes per annum. The copper market, which is one of the major base metals, being one of the largest volume base metals is traded on terminal markets. It's got warehouses all around the world. It's between 20 and 21 million tonnes of refined products of annual mine supply, plus another four million tonnes of secondary supply. So you're talking around a 25 million tonne market. Zinc's around 14 million tonnes, lead 12 million tonnes. And then there's this huge drop down to nickel, which is 2.6 million tonnes of nickel metal produced on an annual basis. And then you start looking at some of the small commodities, something like tin or cobalt. I mean, tin is only 360,000 tonnes per annum of mine supply and cobalt is only 140,000 tonnes per annum. These are tiny markets.

So, let's say you want to get involved in the battery sector or in the electrification thesis. You've got a choice, the electrification theme. You've got the choice of copper, which is a 21 million tonne per annum market, or cobalt, which is a 140,000 tonne per annum market. Now, the ability for a new producer or a new bit of the mine supply to come on and enter into the market is obviously much greater in a larger, more liquid market than it is in a smaller, less transparent, illiquid market that's contract-based. So what you get is price stability and price security and more people who will be interested in actually buying your mine if you're in copper than you are in cobalt. Cobalt it is a niche product. There are very

few people who will actually want to buy you. Whereas in copper everybody's going to be looking for a copper mine. And don't forget that a vast amount of the cobalt supply curve comes as a byproduct of copper production or nickel production. So it doesn't really matter what the cobalt price is going to be doing. You're still going to get the same amount of supply. So it's the pricing of cobalt is one of the hardest things to do.

Gold and silver. In gold, there's 107 million ounces of gold produced per annum, and there's almost a billion ounces, 840 million ounces of silver produced on an annual basis. Yes, they are big markets, and of course, the gold futures market, the silver futures market is even larger, and they're trading on a daily basis. So you've got real liquidity and real depth in the market. That's a huge advantage when you're looking at it. It's something that people probably don't often look at when they're investors, but it really offers your company so many more options. And then if you want to get into the crazy end of complexity and difficulty, you can come to the smaller, the specialist metals. Now I often see these companies which are offering superb projects and come on an NPV basis and are really exciting. And then you actually think about it, well hang about, how are they gonna sell this stuff? And of course, for me personally, I never forget that silver is mostly produced as a by-product. You know, it's a byproduct of lead production. It's a byproduct of zinc production. It's a byproduct of copper production. It's a byproduct of gold production. So silver doesn't really have a cost curve. Yes, there are some silver mines out there contributing into the mine supply, but fundamentally the pricing of silver is relatively arbitrary. So I'm a great fan of gold.

Kicking on, let's look at graphite. The graphite market for example is 1.1 million tonnes per annum and here we get into the really specialist areas. Everybody interested in future metals and batteries and solar panels in modern life will know that graphite is kind of a key component. But actually if you're a graphite producer, how do you sell your product and what is your product and who do you sell it to? There's flake graphite, there's chip and lump graphite, there's amorphous graphite.

Who are your buyers? You can't just sell it to a warehouse and realize your cash. You're probably going to have to enter into lengthy contract negotiations with obscure Chinese groups or different groups from around the world who'll have their own approach to doing business, their own language barriers, your cultural differences. You might be set up to deliver one kind of chemical composition to one specific customer who then decides actually that they found somewhere closer to home or a different group and then you have to rejig your entire manufacturing process, your entire operating process in order to be able to provide the right chemical grade with the right balance of minor elements in your graphite or the right mix between chip, lump, flake, amorphous for a different customer. So suddenly it becomes incredibly difficult to actually sell your product. Lithium. Another favourite market of course are the rare earths or lithium. For lithium it's a 77,000 tonne per annum market or it was in 2019 and that's grown. It's grown threefold. The lithium market has grown threefold in less than 10 years and is predicted to grow from here. But again, you've got lithium oxide and lithium hydroxide. You've got lithium carbonate, which is mixed between other types of lithium carbonates and pharmaceutical grade. You've got battery grade, you've got alkaline metals. It's a minefield of subtypes and specific arrangements or of specific types of lithium product, which means that you've got a very small market to begin with. And each of these various sub-markets are even smaller, and you're dealing direct with customers. It's an absolute mission to find a reliable off-take arrangement, and you're dealing with a market which has got a number of very large players. You've got the Chileans and the Australians, and you can find yourself at the wrong end of a pricing agreement and on the wrong side of a supply cost curve.

Coming back to gold, if you're producing gold, it's absolutely no problem at all. You just produced your gold, and you either sell your concentrate - there are lots of outlets for that - or you do a commercial deal with your smelter or you sell it to a refiner or you produce a doré ,you sell it to a refiner and the terms and economic arrangements the commercial terms with these refineries are very standard so you know what you're getting

Finally, I'm just going to mention nickel, because it's such an interesting metal. It's a 2.6 million tonne per annum market. Historically most metal supply from the juniors has come by working sulphide ore, mining at depths where the ore is still in its sulphide form, as in it hasn't been oxidised, exposed to oxygen through air or water, and the companies will produce a sulphide concentrate, a nickel-rich concentrate, which can then be smelted to produce a metal. Now, those sulphide ores have been harder to find over time. They are increasingly scarce. And when you look at nickel, there's been a growth in the laterite production because the sulphide ores have been so hard to find over time and they've been reducing in size, and there's a lot of laterite nickel. About 70% of the global resources are actually sitting in nickel laterites.

These are tropical weathered ultramafic rocks which have leached most of the minerals out, creating a new suite of nickel minerals. They have complex metallurgy and you can produce nickel metal through SXEW (solvent extraction, electron winning) and or High Pressure Acid Leaching. The barriers to entry in nickel laterites are formidable both in terms of expertise and capital required.

So many junior companies chase after nickel. It's not as simple as that. In a separate session, we'll look at mineral processing, but essentially, nickel mineral processing is complex and difficult for laterite ores, which are more abundant than the sulfide ores. And those sulfide ores are traditionally easier to produce, but they're getting harder and harder to find. So on a market of 2.6 million tonnes, you've got to really, whether you're a new entrant or a company with a nickel project.

Yes, you've got to understand that the supply and demand fundamentals look good, but you've got to think about, well, crikey, well, how are we going to get this out of the ground and how are we going to sell it? Who's going to want to buy us? Because if you look at the majority of nickel production, it's actually a very tightly held concentrated industry. You've got Vale producing 200,000 tonnes, Norislk Nickel 166,000 tonnes, Xinshuang producing 150,000 tonnes, and Glencore on 121,000 tonnes, and let's not forget BHP on 87,000 tonnes of Nickel per annum. So all of these major companies are only going to want to take your project if it's going to offer them a better return than it does investing in expanding their existing operations or advancing some of the projects that they've almost certainly got in their development pipeline. As tempting as it may be to get involved, Nickel is not for the faint-hearted.

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22
Commodity: Cost Curves and Individual Commodities
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The big boys in this industry are the diversified mining companies. And to attract their attention with an asset, you've got to think, well, how is it going to be material to them? These are companies with market capitalizations of between 50 and 120 billion dollars.

And remember that most of these conglomerates have significant coal or oil and gas divisions in one case, which are distinctly out of favour among enlightened investors. Rio Tinto flicked out its coal assets in 2018, beating Anglo-American to the punch by about three years, which divested its coal business into Thungela Resources in June of this year. Glencore, as usual, is taking the brass neck approach and has decided to run down its coal assets, putting them into harvest mode and just taking the dividends. The biggest company of the lot, BHP, has seen its new CEO, Mike Henry, who joined in February 2020, immediately announced plans to decarbonize its production profile by targeting oil and coal as their areas for reduction. Given that BHP is about 13% oil and 21% coal by revenue or value, and that iron ore is about 40%, it leaves, doing the maths, 27% from base metals and others. Within that 27% base metals division, copper contributes to the total about 24% to the group and nickel about 3%. So even though the supply demand fundamentals for nickel may be better than for copper, and even though BHP feels that demand for nickel in batteries, for example, will grow 500% in the next decade, copper will still dominate the conversation about how to replace that 34% of value in the company that's going to be taken out. So they've got to grow. So for BHP to shrink one of their major sectors, hydrocarbons, which is, as I said, 34% of the revenue of the company or the value of the business, it's quite a thing for them to then replace that with base metals. It's much easier for them to really focus on the big projects or on the big commodities. Something like copper, which is a 21 million tonne per annum market. And they've got a much better chance of recouping the value that they're going to cut off themselves by growing a copper project to be a major stake or a major contributor or continue to be a larger contributor within the makeup of BHP than it is for something like nickel. I mean, how do you grow a 3% position to be relevant when you've got a 34% position to fill, you know, it's just so much easier in the bigger metal, the bigger market. Now the point of all of this discussion is to come back to the fact that it really matters which commodity your company is chasing. For me, copper, nickel are no-brainers we like. They are traded on liquid, terminal markets with clear pricing structure. And we know from what the major mining companies are doing strategically that there is therefore a strategic premium that will be attributed to good copper and nickel assets. They don't even need to be the next giant or supergiant deposit. Rio Tinto, for example, has now sussed out that off-the-scale deposits come with off-the-scale permitting hassles and that smaller projects can offer better returns in better timeframes.

Rio Tinto now includes metrics in its analysis for a project as minimal economic value. So they are looking at minimal target size. They're looking for projects that they can get into production and work and grow from there.

Then it's worth looking at the bigger volume markets or commodities which are traded in bigger volumes than copper, as I said, to 21 million tonnes per annum. So you look at iron ore or coal, and here the market is dominated by the majors. Whether that's the listed Western companies such as Vale, BHP, Rio, Anglo-American, or the unlisted or parastatal

companies. I'm thinking of the Chinese or, or indeed Trafigura. Either way, if you're a junior company or a single asset producing or targeting company, your pricing power is vastly reduced relative to the big guys. And the barriers to entry are enormous and therefore it's extremely dangerous to go into an investment in one of these kinds of companies thinking, oh, we've got this price cycle that's going to go up. The iron ore price may go up, the coal price may go up, but it's going to be really hard for you to monetize an asset because you don't have the pricing power.

So, either way your pricing power is vastly reduced and the barriers to entry are enormous and therefore it's extremely dangerous to go into it thinking, oh we've got this price cycle that's going to go up, oh iron ore prices are going up, coal prices, and we're going to bring it into production. It's really not going to work. In the last cycle so many wannabe iron ore companies tried to jump on that bandwagon in the noughties, and only one, as far as I'm aware, of any scale made it. That's Fortescue Metals. Underestimate the barriers to entry at your peril. Some commodities are just best left for the majors, and don't even get me started on phosphates or potash with the barriers to entry. Eeuw. In short - be very careful when you're in a commodity that is contract based and with a large capex or indeed just with contract based with very difficult specifications. Favour the ones that traded on terminal markets such as the London Metal Exchange, the LME or the London Bullion Market Association, the LBMA for precious metals. It makes such a difference as you get so many more commercial and off-tick opportunities for your company.

Once you have settled on the commodity, try to avoid taking a rose-tinted view of the price action. What you actually need to know is whether the company is really going to make money or continue to make money out of the asset. The safest way to run this analysis is to understand the cost curve of the commodity. Rather than looking at the metal price moves driven by demand, it's important for investors to have a grasp of the production constraints of the commodity that you're looking at.

Remember that if you're going to invest in a metal, you're emotionally invested in it, your basic approach, presumably, is that you're going to assume that demand is strong. We all know the narrative. We're going towards a higher tech, a richer future, which is needed to alleviate poverty. And as we go from seven billion people to nine billion people, we're going to need to use more raw materials. So whether it's for energy or for transport or for just basic modernity, the demand profile for raw materials is trending up.

That's all well and good. But in addition, we needed to understand as an investor, the other supply constraints, the typical timelines to productions and an understanding of any excess supply that's going to come in to really understand what that probable shape of the cost curve is going to be. What are the new projects going to do? What's the impact on the market of those new projects? It comes back to wanting to be in a bigger, larger market than being a smaller one. For example, a new project coming into the gold market, is very unlikely to affect the price of gold. It's not going to affect the cost curve. It's not going to change the shape very much because you've got so many different producers of gold and the volume is large. And any one new project is going to be a very small percentage of that overall supply. However, if you pick a material like barite, which is a few tens of thousands of tons per annum.

If you've got a new barite production stream that comes on, I don't know, something like Adriatic Metals that might produce barite as a price insensitive byproduct, it may well change the supply cost curve. And that's the important thing to bear in mind. Your new project, is it going to make too big a splash in the market that you're dealing with?

I come back to gold. There is a reason why there are so many gold companies. There is a reason why gold companies are the preferred choice of mining executives to get going. And it's this. They are much, much easier than almost any other kind of company to run and to develop successfully. The capital cost for gold is relatively low. Or for a gold project, it's low in the most case. I mean, of course you can find expensive gold projects with pressure oxidation and roasting or complicated mineral processing. But a medium sized gold project with a decent grade can have a low capital cost and it can make money. It's a very, very well known industry. It's very well known, so the money executives, the mining executives who are going about it, understand it. The engineers reviewing the projects understand it. The geologists, the mineral processes, the mining guys, everything is well known about it. There's an extremely large pool of people that know how to do gold projects, and not just that, but the market sees lots and lots of these gold companies coming through, and therefore they're easy to value. There are lots of comparisons. There's a big peer group. It's easy to see which is expensive and which is cheap. They're easy to fund because investors understand them. They're easy to benchmark. Your product is small, it's dense, it's easy to transport, it's easy to sell, it's traded on a terminal market and there are refineries who produce doorway and there are refineries globally, all who can sell it in concentrate. You've got so many options. It's a deep and liquid market.

Perhaps copper is the next step up in complexity, but there is a strong demand for the metal, falling grades, and lack of exploration historically. Again, it's a deep market, it's a big market. Again, it's well known, it's easy to value, it's relatively easy to fund. Yes, timelines are longer for copper projects typically than they are for gold projects. Timelines to develop, capex can be larger, but essentially with copper or gold or the major metals like this, the main challenge is finding them.

Once you've found them, it's a relatively vanilla process as to the development path. It's a well-worn path of development. I'm not saying it's easy, but a competent management team knows the steps to take.

Commodity
New
Ep
23
Commodity: Major Miners and Major and Minor Metals
Available soon

Don't try to predict your future prices for your commodity because it's a mugs game and you'll almost always be wrong. Price forecasts provided by banks and analysts are typically nothing more than the forward curve leading on to the long-term average price. Pick a commodity that interests you because the more you enjoy a thematic, the more likely you are to read around it and to know more about it.

Not all commodities are equal. Companies need to understand the implications of both selling a commodity and producing it. And you as an investor need to understand it too. When it comes to commercializing a commodity, I really urge you to think very carefully before avoiding the major metals or the more liquid markets that are traded on the terminal exchanges with transparent prices.

I urge you to be very cautious about going towards the smaller markets, the illiquid commodities and the customer-specific ones where you're thrown into contracts or up against an oligopoly or a cartel style of pricing structure. You've got many, many fewer options than those kinds of projects than you do in the more liquid terminal markets. Now that's not to say that you shouldn't do it and that there are times when it's appropriate to go there, but my goodness you've got to know your stuff when you go down to that end of the market. It's so much more specialised.

Get a feel for the typical capital and skill set requirements for any specific commodity. They are called barriers to entry for extremely good reasons. Understand the cost curve of the commodity and your company's position on that cost curve. Because if you're going to be a high cost producer, you've got to ask yourself, is this actually ever going to come out of the ground? Is this asset ever going to come out of the ground? The answer is mostly no, because it comes back to - and we'll do another section on this and on feasibility studies and the like - but really when you do the study phase and when you do the economic projections, they're almost always over-optimistic. So what happens is they're almost always going to creep up from your starting position on the cost curve higher. In a few exceptional cases, you can sometimes edge lower, and things can get better as you get into the deposit, but generally your costs are not going to come down.

There are bigger companies with bigger assets than yours that know how to mine and develop this stuff better than you and your small company can. And it's unlikely that you're going to squeeze into the lower quartile of the cost curve. Make sure you understand where you are on the cost curve, where your asset is on the cost curve and make your decisions from there. Clearly, if you're a real risk junkie, you might want to take a view on a marginal asset in a rising metal price, but that's another kind of risk altogether.

Another conclusion point is that I'm obviously a kind of a fan of the golds and the coppers of this world and I'm much more cautious on the uraniums, the iron ores, the coals, the diamonds and the rare earths which have got barriers to entry, government interests, logistical challenges, contract pricing and I'm even kind of slightly cautious about the in-betweens, the nickels, zincs, leads and silvers of this world and don't get me started on the downright difficult things like graphite or antimony or anything else in that category or

getting even weirder for example. Pozzolan anyone? Hmm didn't think so. One more thing watch out for commodities which are by product metals such as silver or cobalt or to a lesser extent lead. It's really important to remember that for something like silver or for cobalt they don't really have a cost curve. Supply keeps coming even if the price drops because they are a by-product of gold or copper or zinc production. Silver comes with gold, it comes with copper, it comes with zinc, it comes with lead. It doesn't really matter what happens with the silver or the cobalt price, because that metal is going to be coming to market anyway. Therefore, it's hard to understand the cost curve for them because there's not the same supply response to price changes that primary metals experience.

Finally, watch out for zinc. Zinc is a brute because of the payability terms offered by smelters. Whereas it's standard for smelters to charge 2% for lead or for copper or 2 grams of gold in con, it's standard to charge 8% of the zinc in the treatment processing terms. And that really hurts the economics of a project. So, watch out for zinc deposits. They can come back and bite you where it hurts.

Commodity
New
Ep
24
Commodity: Final Thoughts
Available soon

How do small companies and mid tiers fund themselves? This is a key question for companies which don't have significant cash flow from production. Thinking about an exploration or development company, typically they invest capital in order to create value within an asset and actually there's no real cash flow coming out until the production phase.

The production phase is so far down the track that it could be months, years or even decades before that happens. Therefore, when considering investing in a company without cash flow, you have to be comfortable with how that company is going to fund itself in the period from now to exit or from now to production. These smaller companies, the junior sector, are in the exciting developmental stage of their assets, often going through exploration.

Of course the reward is that during this period, you can get multiple returns on your investment. You can get the two baggers up to the five baggers or the 10 baggers. The risk is they go bust and you lose your money. You lose your investment. Indeed, if you look at the share price performance of most junior exploration companies, what you see is a skewed bell curve where the share price rises, peaks and falls with a long tail off to the right. Effectively, this represents the generation of some good exploration targets in the early days,

followed by some initially positive results, and then the grim reality that few of the initial exploration success stories actually make it into an economic deposit.

Companies have to issue more shares to self-fund, and without that rarest of things - a company making asset - what one has is ongoing dilution, chopping and changing between projects, and a long, unexciting tail to the share price.

If you take a slightly less risky approach, you can invest in a company which has already identified an asset with economic potential, where the first phase of exploration has already been completed. And I refer you back to the Lausanne curve to put yourself in context. But at this stage of development or this stage of the asset in the Lausanne curve, what the company is trying to do now is to establish a realistic net present value or NPV for a project and to hunt down or walk down the discount that is being applied to that asset at that particular time. Put another way an NPV is a theoretical financial value but there are a host of other risks that need to be included in the analysis, such as market volatility, permitting risk, and most pertinently when it comes to the junior end of the industry, funding and execution risk.

In short, the market applies a haircut to the NPV. And the investment case is predicated on the discount to NPV gradually being chipped away or eroded as key milestones are met. Feasibility study? Check.

Full suite of permits and licenses from the authorities to allow development? Check. Funding strategy that doesn't wipe out equity investors. Check.

Successful construction on time and on budget. Hardly ever happens, but “check” anyway.

And then startup and commissioning without any nasty surprises. Again, pretty rare, but “check”.

Each successful step reduces risk and should lead to a re-rating. Assets sitting in juniors at the study phase are likely to be trading at something like 0.3 to 0.4 times NAV or NPV, rising to 0.7 times NPV when funding and permissions are in place. And when a project is successfully commissioned without blowing up the capital structure, then the market finally gives the project full value. Overall, the share price performance may be less spectacular than enjoying the wild ride of a bonanza exploration discovery, but if you select your commodity, your team, the jurisdiction and the project properly, then you should still get a very healthy return on your investment. These kinds of return profiles such as de-risking from 0.3 NPV to 0.7 NPV, or shooting for a 10-bagger in a discovery, are key factors when it comes to funding.

Clearly the primary way that a junior company raises money is by issuing stock, and the institutions or brokers that cornerstone a capital raise want to be sure that the issue is properly priced so that their share price goes up, not down, after issuance. Conversely shareholders typically want to issue capital at a higher price so that the original shareholders, the founders of the company, don't get diluted too much. Which means that there's a degree of tension in the pricing as investors typically want a lower entry point and existing shareholders typically want a higher pricing price.

What often happens therefore is that the management teams start banging the drum hard before rattling the tin, just like a good busker does in a crowded street market. Watch out for this if you're a retail investor and ask yourself is this a fundamental rise in share price or is it a result of a short-term marketing push? And there are other reasons for a sudden share price rise that should make investors wary. Your antennae should be twitching if there's a sudden rush of interest as a commodity comes into vogue. You have to ask yourself is this move based on something fundamental or is this perhaps a little bit choppy?

By studying the trend of a share price over the longer term, the fundamentals of the story tend to come through and the share price will settle down to trend levels or more realistic levels. Buyer beware, don't go chasing sudden price rises. There's always time. Take a deep breath, exercise prudence when the temptation arises to rush into a hot stock, either when it recently has had a large move upwards or when you know that they're doing a big marketing push with a view to an “opportunistic” capital raise. Often one of the best things to do as an investor is to sit back and wait for things to settle down and to really see how this company is funded and backed and is going to perform.

Another general observation for a retail investor is that there's always a knowledge gap. No matter how the market is trying to be transparent, no matter how the regulators are trying to ensure that everyone gets access to the same information, there's a cascading flow of information from the CEO outwards. And the closer you are to the heart of things, the more you will know. Typically, this means that retail investors get pretty much the worst information out there. They are often privy to less information than institutions. Certainly, advisors and brokers know more about what's going on within the company.

Board members will often know more than the buyers and the key brokers, although this of course does depend on communication lines. And finally, senior management are privy to the most information. As an external investor dealing with publicly disseminated information, all of this can make your decision making quite difficult. You can build up your trust in your company. In the spokespeople from the company, you've got to start off without trust and verify from there. Doubt and double check.

It is why it is so useful having the long form interviews with Crux Investor when Matt asks difficult questions. Seeing how a senior executive deals with an unscripted question is particularly revealing and useful for investors.

A quick word on confirmation bias. It is of course important to be aware of confirmation bias. As humans we are always looking for things that we want to be true and we try to confirm the views that we already hold. But let's bring it back to what does this mean for the funding of a company. It's crucial that a company is well funded.

If your company is cheap you may think that it has a really good asset but its share price and market capitalisation is very low relative to the reporting value of the asset. There are probably good reasons for why it is cheap and just because it is cheap does not mean that it is good value. It probably means that there are risks that you haven't thought about and timelines and how the company gets funded is often a key oversight. There are some well established playbooks in the resources sector that seem to play out in slow motion.

And with time, you'll get to learn the signals, which are often there very early on. Those signals will indicate how things will turn out in one, two, three or more years. Let's have a quick look at the funding history because this is relevant. So when you look at the funding history, my aim is to highlight and spot these early warnings or indeed these attraction signals because let's not be too negative here. If they've got a good funding history, it can actually be a positive for the stock as well.

So, let's specifically on funding look at the many indicators. And perhaps the first thing to look at is what is this funding history? It's always worth checking to see who owns stock in the company and at what price did they get that position. For example, if it's been private for a long time and then it comes to a market at a much higher price than the price at which it raised money during the private rounds, you need to question, will there be a wave of selling as perhaps bulls take advantage of this sudden liquidity event?

In an extremely well-managed exercise, in an extremely well managed company, anybody who wants to sell at the higher price will have been mopped up pre IPO, but I've only seen that once or twice in my experience. Typically what happens is that it comes out at a higher price than the IPO and these shares get met by some early selling as people crystallise their gains and the share price pulls back, it settles down and eventually a new trading range is established and the share price gets back on track. It's not good practice but it happens a lot.

And this is perhaps not so relevant to retail investors because there's less opportunity for engagement in IPOs, but it's still worth considering because if you do hear about a new IPO coming to market, you may want to sit back and wait and just let things settle down before

jumping in. Another key factor that's worth considering when it comes to funding is skin in the game because many people have strong views on this. And as a general rule, most people like to see management with skin in the game. From my perspective, it's not quite as simple as that.

The management team that founded the company, that started it or found the project and run it, they've got a particular skill set and they might be just the right people to pick up the asset in a difficult jurisdiction such as Central Asia or Africa or South America or in the frozen expanses of Northern Canada. The specific kind of person who can pick up the asset and identify the opportunity might not be the right person to take the asset forward or at least not be the right person to take it beyond a certain point. At some point, you need to hire people with different skill sets to do the next phase of the job.

You might need to pay a professional to get the job done well. I think it's slightly strange that the resources sector puts so much emphasis on this guy's not taking any salary and he's got skin on the game. I don't think there are many other businesses in the world where you'd be able to attract a good professional and say, we're not going to pay you, or you have to invest heavily in this business, have no salary and also expect that this person is a professional who's going to do the job properly.

You know, there's a conflict in my mind between professional and amateur. Clearly you don't want people to come in on a huge salary who've got no downside. There has to be some ratchet and that's the way I like to see it. Fair pay with a reward on success and a track record of delivery. What's less encouraging is when you see founding directors with large positions who are not prepared to let go of control, who are not paying anybody because they don't want to see any dilution. The company's not going to grow, it's not going to move on. Or people coming in on a huge salary and actually their salary is so large that it doesn't really matter to them whether they succeed or fail. Hence getting the G&A right, the general aspects of the company, right in a small company, it's really important.

I would urge every investor to look at the reports of a company, the financial statements and look at the remuneration and ownership of stock. It can be really revealing and the professionals on a decent salary don't always need to be big owners of the company. There are many companies where I think actually that's just taking the mickey, that's really not good enough and that's a good enough sign for me not to want to get involved in that company.

But I wouldn't say that having skin in the game is an easy thing to analyse and I wouldn't base an investment decision purely on whether one guy has skin in the game or not. You've got a question, is it a fair package and particularly is this company properly set up to make a successful future for itself?

Thank you.

Funding
New
Ep
25
Funding: Confirmation Bias, History, Skin in the Game
Available soon

Historical Financing

Another thing to consider when you're looking at how the company was financed in the past and how it will be financed in the future is to understand the company's structure and to look at the number of shares out. It matters enormously how many shares there are in existence. To understand how the company will be funded in the future and how it's funded now, you really need to look at the history and understand the circumstances where there is a track record of serial issuance of shares without commensurate price rises. This is particularly challenging for a company which has been in existence for over 10 years because all of those companies would have been caught up in the boom and the bust from 2011 onwards. During that period, from 2011 to 2017, most equities saw 98% or more value destruction. Some companies can have a very large number of shares issued indeed.

If you look at the Australian style company, they've often got billions of shares in issue. If this is the case, it's worth seeing whether the company has had the maturity to regroup, revalue, refocus and rebuild an investment case. Focus perhaps on the last few years, the recent management team, perhaps two to three years back and see whether there is a recent history of value creation. Remember that issuing shares is not dilutive if the share price goes up. If you use capital properly, if you take one dollar and you use that to create two or five dollars worth of value and it's reflected in the price, that's fine. That's a really good use of funds, which demonstrates that the management team has had a sensible and appropriate access to capital and use of that capital.

What is more problematic is if the company time and again issues stock, spends the money, but value is not accrued. You've taken one dollar and spent it and you've only generated one dollar's worth of value and you're running to stand still. The only thing that happens there is management and advisors get paid in which case everybody's losing apart from the management, who are winning by taking their salary.

Unfortunately, this is the story of all those exploration companies that don't make a transformational discovery. And since transformational discovery are as rare as hen's teeth, that means most exploration companies are serial destroyers of value.

In short, the track record of how the company has been funded in the last few rounds is really significant. Ask management, what do the last funding rounds look like?

Access to senior management

Where is Matt when you need him? It is an easy thing to check for yourself. Go back to the annual reports and look at the funding history. What has the management team done over time? If you've got a new CEO, a professional who's been hired, it's worthwhile looking at the previous company where that CEO was working. Don't forget to check the remuneration page as well and watch out for egregious performance rights packages and the like.

I said in a previous episode that I wouldn't focus on companies which have got cash flow, but it is worth mentioning that cash flow renders companies so much more powerful. That is why the producers are in a different category to the non-producing juniors. When capital markets dry up and when the juniors sector can no longer access equity capital easily, producers can mine their own money, particularly if it's gold. You're just creating money from the rocks.

But beware the company that says, oh, we've got this great exploration play. We're finding it difficult to access the capital markets, but we can see that over here, there's a small mine that we can target to produce cashflow and we can operate this dump leach or vat leach project or this little mine here. It's extremely rare for it to work because a small operation takes just as much time to manage as a bigger operation and it will suck in all of the management time. A management team will spend its life running a small mine which has got no relevance to shareholders.

And the reason why people invest in a smaller exploration company is not so that they can run a small mine, but so that the team can discover a big deposit. Because that is where you are going to get ten times on your value. If you come across a company saying that they're going to start small to fund exploration to self-fund, generally I would walk away. In fact, didn't I in the previous strategy episode advise you to run away in that case? So - take your pick, run or walk away and just don't get involved.

There are some rare cases where you can get a funded explorer. You can get a company with a royalty stream or you can get a company with a subsidiary doing something else, whether it's a drilling company or some other kind of activity which is so far away from the main objective of finding a major deposit that it doesn't dilute management's attention. But, of course, you have to be aware of mission creep. What is the real business here? Are you making money from exploration or is your bandwidth invested on a small business?

This ties in with the strategy conversation from earlier episodes where essentially if your exploration team has a good target, a good geological thesis and a good approach to an asset, you can generally find backers to support a major discovery or the potential for a major discovery. This is the reason why junior companies are doing this. They are exploring for that transformational discovery, the 10-bagger.

Burn Rate.

Another aspect of funding is that one has to fully understand what the money will cover. You need to look at the burn rate and again I'm coming back to the G&A package. When a company says it's going to create value and have a wonderful future, you have to realize that exploration companies are research and development companies, they're R&D. They need to spend a significant amount of money on a study, on drilling etc. and the aim is to take one dollar and to turn it into two or five or ten dollars. To get value through an investment, it's imperative to look what they will be doing with their money. The use of funds.

The most important thing is that the management team needs to be able to clearly state what it's trying to do with its dollars. Is it going to invest in the ground? What are its goals with that investment amount? Will it get to the next catalyst or the next value milestone? If

you've got a deposit with a hundred drill holes in it, and it was raising money to do another 10 drill holes, that won't materially change the value of that asset. So is that material? As an investor, you need to question what the next catalyst is and where the next funding ground is going to come from.

And you need to look ahead two to three funding rounds. If a company is going to need a fund a feasibility study to find a resource or to complete a drill out, the key is will the money that they're raising now drive it up the value curve to get to the next catalyst? Is there enough so they've got a little bit left over as better funded companies are always better valued than companies which are running on empty? Better funded companies have a buffer from shocks and more options to juggle or shuffle the cards when the situation changes. And you never want to be raising money when you've got nothing in the kitty. You don't want to be running on empty when you go out to the market to raise fresh capital because the market will punish you.

Coming back to G&A, it's always worth looking at the G&A because if a company is raising say $5 million or it's got $5 million to spend and the G&A is $3 million, walk away. You've got to question the rationale for owning shares and listed companies basically that are raising a million bucks or less. That's barely a homeopathic dose of capital and not the shot in the arm that's needed to deliver results.

And if you're looking at a 200 million dollar company you can be pretty sure that the team is getting paid some decent salaries no matter what they say. Remember that it's a great industry in which to work. Exploration is pioneering and exploration, development and mining makes a crucial contribution to society. Most of us really enjoy the work and bring key expertise to the company or to the industry. Consider me old-fashioned but I believe that professionals should get paid well for delivering value to shareholders. Fair play to fair pay. But I guess I would say that I would say that wouldn't I? Still, you do have to avoid the mickey takers because there are some jokers out there on huge salaries whether they're delivering value to shareholders or not. You don't need that in your life so it's always worth looking at the G&A and walking away if it's too egregious. I've seen it too many times. Management teams that sanction huge pay packages, they fundamentally don't have shareholders interests at heart they're just looking out for themselves. The lifestyle company. The playbook is predictable and spoiler alert - it doesn't end well for shareholders.

I do come back though to professionals who do a good job. They may walk away with a good bonus or a payday when the company gets taken out. But if every shareholder has made money along the way, or at that point, it is fair cop to them, I reckon.

Proportionality of funding.

Finally, when we talk about a well-funded company, it's worthwhile trying to keep things proportional. Sometimes a company can raise a huge amount because there's a change in the market. We saw this a few times in 2019 and 2020. And in fact, one earlier stage development company, which was doing a resource drill-out, raised $80 million and it was almost forced to take the money from investors. It's important to keep your funding proportional to where you are in your development cycle. Too much money can lead to some short-term poor decisions where they think, wow, we've got this money, we better

move quickly. And they start pulling out all the drill rigs. They're producing vast amounts of data and they simply don't have the bandwidth within the company to handle that flow of data. So you can get wasted drilling, which is a waste of capital and that shouldn't happen. Having said that, it's always nice when you are in an exploration company to have money to hand. So perhaps I'm just a little bit green around the gills about that.

Changing the subject slightly, let's look at how things are actually funded. Looking at startups, for example. For a new company to be funded, let's say you pick a name and you pick up a deal. What you're looking for is money, an idea and some champions. You want to de-risk the idea. If it's private, you can pick up a deal. And typically it's very rare to see a completely fresh exploration story. Typically the private startups that are done, these are restructuring, repackaging or reappraising an older asset where previous shareholders got wiped out and they're bringing in new professionals. It's typically a retread. In the first instance, you get the champion, the money and the idea. And that comes from your network. Occasionally you'll get some funds backing a particularly good geologist or a particularly good manager. They'll have a network, or you will have a network, of people who've made money on the last deal. They'll be supporters, people who follow the leadership, and you might get involvement of a few high net worths. Someone who'd made money on a mining deal beforehand might employ a younger professional to do the running for them.

The money that gets into these early stage companies is very well informed, quite smart, and it's usually taken out quite quickly when the share price starts stabilizing, when the value of the company starts maturing to the point where it begins to stabilize. Often the people who put the package together get paper on the inside, they get broker warrants and they're issued with almost free stock and this actually starts to become a bit of a problem. You can see some sharp practice, some perhaps nasty tricks, some unethical behaviour. I've seen people doing what I would call inside papering where directors issue themselves stock in an unnamed holding so that when it goes public they can sell without being seen to be selling and they can take money out without actually alerting the market to the fact that they're selling. It's completely illegal, but I've seen it happening and it's regrettable. And just for the record, I don't get involved in that.

Vancouver, AIM, Australia, Toronto, no matter where you are, there are cases of malpractice. People issuing free paper to mates. There are some rip-off merchants out there and if you've got a sniff of that, avoid it. If it's too good to be true, it probably isn't true. I would urge investors again to take their time. Don't make decisions in a hurry. Let things bed down and don't rush into the latest new deal because other people are doing it. Unless they're really offering quality in terms of the team and the asset, perhaps, but it basically takes time to build up trust. It takes time to build up a proper network and to get institution involves. Try not to be hasty when making your investment decisions.

Let me shed a bit more light on the “bull market warrants financing model”. In case you're unfamiliar with this model, here's how it works. In a bull market, stock prices tend to go up. Therefore a CEO calls his broker buddies and they do a unit financing which is stock plus a warrant. Either a half warrant or a full warrant. The brokers call their mates and they cobble together that the raise at 5 or 10 million bucks, pick your currency, whatever, which is locked

up for 4 months. And that is the hold period. Given that it's a bull market, there's every chance that the stock will be trading at a high level in 4 months.

And once the hold period is over, everyone sells their freely trading stock, hopefully for a profit as it's a bull market. And they keep the warrant, whether it's a half warrant or a full warrant, in their back pocket. And they use the funds from selling the proceeds from the sale of the stock to invest in the next unit offering. In this way, anyone who's on the inside of the magic circle gets to build up an ever-increasing portfolio of warrants, pretty much for free, which in a bull market will become a valuable portfolio. This process is largely risk free in a bull market, and it is always possible that one of the companies will actually make a real discovery, in which case everyone makes out like bandits.

Rinse and repeat.

This is not a credible list of expert shareholders that will back a company team investment through a few bumps in the cycle. These are flaky, fair-weather investors that will abandon the company as soon as the market turns. Think twice before investing in companies offering units.

It's not necessarily an out and out turn off, but you do have to look at the quality of the shareholder register carefully if you see those warrants being offered.

Thank you very much.

Funding
New
Ep
26
Funding: Historical Financing, Cash Flowing Juniors & Burn Rate
Available soon

This episode will give an overview of how long only funds and private equity funds work. Hedge funds are not included in the discussion beyond saying that these are funds where they can go both long and buy the underlying equity or can go short and sell short the underlying equity. And typically hedge funds need deep liquidity to be able to borrow stock in order to sell short which rules out most of the junior mining sector, which of course sits at the more illiquid end of the stock spectrum or the trading spectrum. Therefore, I'm not going to spend any more time on hedge funds as they are not one of the main sources of funding for exploration and development company. It is important, however, for investors to understand how long-only funds and how private equity funds work, because these are two key sources of funding for exploration and development resource companies.

And from what I can see from the chat rooms and the bulletin boards, I think it'd be helpful to shed some light on some of the inner workings of these funds and how they reach investment decisions and the differences.

First of all, for simplicity's sake, I'm going to call long-term funds institutions and private equity funds private equity or PE. To make a gross generalisation, one could say that the main difference between institutions and private equity is that institutions are typically structured to hold publicly quoted equities, publicly traded stocks, and will only rarely invest in private companies.

Private equity, there's a clue in the name, is typically structured to invest in private companies. Another difference, again with a caveat of making another generalization, is that institutions prefer low profile minority positions that avoid having to be declared or even worse a position that crosses a change of control threshold, which is 20% in Canada or Australia or 30% in the UK. Those change of control thresholds means that the fund therefore has to make an offer to all other shareholders to buy their position. So institutions prize liquidity and the ability to trade in and out freely and independence very highly. They don't want to be tied down by regulation. Institutions are typically owners but without strings attached. This means that as a general rule, institutions only get involved with strategic decisions at the board level of a company when things are going extremely wrong and they feel the need to step in. Or extremely right and senior management on the board is just kind of asking an opinion which of two quite good outcomes the fund manager would prefer. Kind of as a sounding-board exercise.

Private equity on the other hand, generally takes a much more integrated approach to any investment. Strings are almost always attached and positions are almost always large enough and strategic enough for the PE group to have a proper say in company strategy.

Quite often, a PE investment literally comes with a seat at the table with one or more board positions. In summary, institutions like minority positions in public companies and private equity likes strategic stakes in private companies. Yet, despite this fundamentally different

starting point, the Great Bear Market from 2011 to 2017 mixed everything up and things are still mixed up and a little bit confused.

Let me explain. It may be stating the obvious but Public companies trade on the stock exchange and the value of the shares varies according to the level at which people are prepared to buy or sell shares at. And in a horrific bear market like the one we experienced, no one really wants to buy the stock and so valuations can collapse. And from 2011, my goodness, collapse they did. Most junior resource companies dating from pre-2011 are part of the 99% club, where share prices fell by around 99% in the downturn. Pretty ugly and they produced share price charts that you wouldn't want to ski down.

Private companies, however, were spared the excesses of the downturn as long as they didn't need to raise capital. And the reason is that private companies are typically valued on the basis of the number of shares multiplied by the price of the last issue of new shares. Which means that if a company raised money in the good times or better times, no matter how bad the new bad times become, the private company can point to the price of its albeit historic share issuance. Multiply it by the number of shares outstanding and say, look, our company is worth X. And you've got to add into that, that fund managers hate having the book value of their private holdings marked down in a bear market. So, for example, if a fund has got 10% in private companies, when fund performance is under pressure because of a bear market, when the 90%, which is in the publicly traded portion of their portfolio is under pressure, it's nice for the fund manager to have an overall performance buoyed by their privates in the portfolio, even if it is an artificial measure.

So nobody wants to see those private companies downgraded or have their book value reduced. It is in no one's interest. But coming back to the great mixing during the bear market, the key factor was that private equity became a major funding source for publicly traded stocks. While generalist institutions headed for the resources sector exit, private equity, which struggled to deploy capital during the boom proceeding the bust, had cash on hand to invest. PE funds hadn't deployed their capital. And because private companies technically held their value, in real money terms, there were many much cheaper entry points into good quality assets in the public markets. And so it was that from 2011 onwards, the PE groups became increasingly important funders of last resort for the public sector, to the point now where the words private equity have lost their resonance with regard to the word private and instead simply represent the different approach it makes its investment decisions to an institution.

Let's have a look at some of these factors which affect the decision-making process, both for Institutions and for PE, starting with Institutions.

Okay, remember that the vast majority of Institutions, they measure themselves against their peers and against the market. For Institutions, it's a relative game, not an absolute performance game.

This means that generalist investors are not intrinsically wedded to the resources sector but they will afford it attention if it's clear to them that it will help them outperform their peers. Indeed, as one fund manager famously told me years ago, “the rest of my portfolio trades in

line with the market but resources gives me the sex and violence I need”. So resources can spice up your portfolio. Overweight resources in a bull market? In a prolonged bear market, the generalist funds will want to be underweight resources, and they will only rebalance their positions when valuations have stabilized or are at cyclical lows. And this cyclical nature of the sector, plus the need to outperform peers, means that truly specialist resource funds are few and far between. And leading on from that, one has to take into account the fact that a general investor won't necessarily have the in-depth technical background to really understand the bottom-up technical aspects of the business that is so important for assessing the potential of single-asset companies or pre-production companies. The fund managers have a wide variety of sectors to deal with, so it's much easier for them to play the cycle than to get involved in the weeds of high-risk small-cap stock picking. And for this reason, generalists are typically better suited to playing the larger end of the spectrum - production companies - not the pre-production junior end of the sector.

Another key factor is liquidity. Many institutions are enormous, many billions of dollars, where liquidity and the ability to trade positions without crashing or spiking the market is absolutely vital. And remember that any investment has to be relevant to the size of the fund and you may ask yourself what is deemed relevant. In my experience, having been in a fund, 50 basis points is a good guideline for being relevant. So 0.5% of the funds under management allocated to resources or in a fund. Therefore with a $2 billion fund, for example, 50 basis points is 0.5% or $10 million. Therefore anything smaller than that is your minimum stake in the company is irrelevant and a waste of time. So in reality, fund managers want a few high conviction positions, one to 2% positions that can grow into three or possibly more percent positions.

And using the example above a 2% position in a $2 billion fund means a $40 million starter investment, potentially growing to a $100 million or $200 million position in a single stock, which this would be a reportable stake for most junior companies. But it's not such a critically important slug of equity for a mid-tier producing company or larger. And remember that I said that institutions generally don't like to have a reportable stake or cross any kind of control thresholds.

All of this means that many of the bigger institutions don't want to play in the smaller space as it's too difficult to build or sell a position or to be a below-the-radar investor. And of course, if you think about new issues when it comes to raising capital, a $10 million or $20 million investment, let alone a $40 million ticket, would be a huge chunk of most junior mining financings. And funds rarely want to do the whole financing. Therefore, when you factor in the specialization required to play in the pre-production space and the general liquidity of the junior end of the market, it is not surprising that few of the big institutions invest in the smaller end of the sector.

If you speak to funds such as Capital or BlackRock, they term anything with a market capitalisation of $250-500 million as microcap. And yet a large chunk of the retail investors' time is spent looking at the smaller space, with market caps up to $500 million, and often a lot lower than that. I repeat, there are very few specialist institutions that can play in the junior sector, and those that are active in the space are crucially important.

So let's have a quick look now at how they work and how do they choose their investments.

Well, typically funds have an internal hierarchy of decision-making, an org chart process that plays its part before any new position is included in the fund. Usually the bigger the fund, the more formal the process will be. Now many funds will have an internal investment committee with a chief investment officer, CIO, and a portfolio manager, and analysts, and junior analysts. And it can take years to get up the career ladder to become a portfolio manager, and very few people make it to be a CIO.

Of course, it depends what kind of fund you are, but exploration will often be referred to a junior analyst who then has to bring it to the attention of a broader committee, and in particular get the backing of the CIO. It has to be such a high conviction thesis to warrant taking it up to that level. And I've seen many times where companies are talking to a big name fund, they get good traction through lots of meetings, but the investment decision never makes it through their internal discussion on the allocation of assets.

And the junior analysts will then learn that actually it's a waste of time looking at these smaller projects or the smaller companies. So even though smaller funds have a less structured hierarchy, they generally also have to convince an internal investment committee that the investment in a resource's stock is a good idea. And often the smaller funds have to sell their own portfolio, what they're invested in, to their own investing partners, the groups that are investing in the smaller fund.

In a way, a smaller fund is in a similar position to an exploration company in that they're always trying to look to get more people to invest in them, to grow the AUM, to grow the assets under management. They're constantly trying to raise performance, trying to raise more money to make it bigger and to make it more relevant. Because the way that the fund managers make more money is by managing more assets. The greater the assets under management (the larger the AUM), the more money you make both in terms of annual fees and on potential performance fees.

Incidentally, a rule of thumb for fund managers is to ask themselves whether they would be comfortable having the CEO or the C-suite of the exploration company in question in the same room with the investing partner of the fund. So would the pension fund or whoever allocates capital to the fund manager, what would the reaction of those people be if they met the management team of the junior resources company in question? If the thought makes you squirm as a fund manager, more than likely that you're not going to want to invest in that particular junior company.

So a little note to the CEOs out there, if you're too rough and ready, if you're too sharp or too glib, institutions will likely back away. Fund managers have seen it all before, they can be very jaded and presentation does matter. So beards and haircuts and the rugged kind of stuff. But anyway, I digress. When it comes to getting that crucial decision to invest from a fund, timelines can vary. I have seen decisions being made over a single phone call, which is very rare. Normally they've been warmed up for a long period of time to make that decision. I've also seen the other end of the spectrum where decisions come at the result of months, possibly years of meetings. And typically funds are risk averse. What they don't want to do,

what they hate doing, is losing money. So it's more likely to take longer than it is to take less time. Some funds may want to see a long track record of delivery emerge through quarter by quarter performance. And it's a huge commitment to take on a new position. Trust is absolutely vital.

However, once the company has earned that trust, that institution is normally incredibly supportive. As a minimum, you'd expect them to maintain their interest in the stock as the company develops, unless the progress is either very good, in which case they'll want to increase their position, or if the progress is poor, the fund will probably want to just dilute passively by not participating in the next funding round. And remember that through all of this, an institution's goal is to crystallize gains. Therefore, if you do have strong performance, don't be offended or alarmed as a company to see the fund trading around that position. They will top slice.

Although I should say that the secret to a lot of success is backing your winners. So when a fund manager knows that they're onto a company that's really got a three or four year growth path ahead of them, they will probably increase their weighting until they feel as if the valuations are stretched and then they'll start top slicing. So I've also seen fund managers rebuilding their position having top sliced as long as their fundamentals remain positive. So that's - I hope - an insight into how funds work.

Moving on to private equity. As I said, private equity in the resources sector really came to the fore in the last downturn. Because when the generalist money was not available, when the specialist and institution money started slipping away from the section in 2011, private equity stood up and private equity companies or groups began to realise that their entry level into public companies was much lower than into private companies. As I've already said, the private companies were judging themselves on the basis of their own NPVs.

Publicly traded stocks due to the flood of “capital out”, has seen a massive loss of value. Companies couldn't get funded, exploration companies couldn't get funded, therefore they had assets which were trading at a fraction of their, let's call it “real value”. And it was at that point that private equity really started to participate into the publicly traded stocks. Having said that, private equity is a completely different beast to your typical equity institution.

These guys do exhaustive due diligence and they allocate a massive commitment of time to invest in the project. PE teams typically have vast technical experience. They're bristling with engineers and professional geologists and metallurgists. The technical team will usually want access to all of the data available on the project to date and then they will run their own resource model and their own technical and financial assessments. The work they do is almost as rigorous as the kind of work that companies do in mergers and acquisitions. It's also worth remembering that private equity, fund themselves on fund cycles. And so fund one will be, say, I don't know, $200 million or a billion dollars, and they will fill that up with five to 10 positions. And then that fund needs to demonstrate that they've got an exit strategy in order to start marketing their second fund. They don't have to exit all 10 positions, all five positions, but they need to demonstrate their ability to make significant returns on their capital. PE funds are looking for really significant returns. They're not in this to get 20 or 30%. It's too much work, it's too difficult, it takes up too much of their time.

They are looking for two or three or more, preferably five times return on their money. Private equity investments therefore need to be relevant to their own fund and they're not too fussed about what size percentage of any company they become. They don't really care about control thresholds, they don't care about declarable positions. In fact, unit size

for private equity when operating at the junior end of the spectrum is typically much larger than an institution would be happy running with due to those liquidity and reporting constraints. And whereas a fund may have several smaller positions, a PE group will often take fewer positions with a more grueling investment into diligence process. And remember that private equity can become a dominant position in a register which can cause imbalances, especially in downturns or bad times. In scenarios where the prices go down or management makes mistakes, the private equity team can turn from support to being the rod to the back for your management.

And retail shareholders can end up on the wrong side of a dilution kind of situation there. If no one else is going to provide the crucial build capital, then the PE fund can start to dictate terms and perhaps delist the company or tinker with the capital structure. Debt with stringent covenants is a classic.

So as an investor, you have to look closely at the dynamic between the private equity company and the management team. What are those signals there?

A quick sign that things are not going well are subsequent fundings at lower prices where the PE groups are taking progressively more dominant positions. That's a bad sign and it means things are going seriously wrong at an operational level. The private equity group doesn't want to lose its money so it's stepping in to prevent a complete snafu. And you'll see that with more board positions for example. They will support the company because it knows that no one else will. They will pick up a controlling position and at that point it can change the management and then it can restructure the asset, put itself much higher up in the capital structure and guaranteeing that they, the PE group, gets its money out. They're not in this for a charity. They're in this to make money. And at that point, an average, your common-law Joe retail investor, your average shareholder, is going be at the wrong end of the deal at that point.

In conclusion, private equity within smaller companies is not to be embraced blindly. It's not just a good thing that the project is getting built. It's not necessarily problematic and PE can be fantastic, but generally you want to see private equity either very early on, so they back a management team and an asset very early on, and they start diluting in the general progress of a company, or they come in late when a 20 to $30 million investment is only worth, say, 10% of the capital.

When they come in the middle, and they take a dominant position on the register, and then perhaps something goes wrong in the development phase, it can be much more challenging for your average equity investor.

I hope that's a useful guide to Institutions and private equity.

Thank you very much.

Funding
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Ep
27
Funding: Institutional Investing and Private Equity, How Institutional Investing Works
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So starting with industry partners. Industry partners in situations where junior companies take investments from bigger companies is what I'm going to be talking about now. And it's an interesting topic because it can be a really valuable source of capital for a junior company. But I'll just make a few observations on what

the major companies doing here? What's their philosophy? Industry typically has very different goals to private equity or indeed equity investment funds, long-only institutions. Industry isn't really looking to make money from the investment per se. What they're trying to do is to buy access to information and potentially an entry into an area. A mining company...

doesn't really care what the share price of the junior is doing, within reason of course. But if you're a $100 million market cap company and you invest a few million dollars into an exploration company and that exploration company suddenly becomes a ten bagger, then yes it is relevant to your position. And I've seen that often where...

Companies have got a kind of a minority position in an exploration play that suddenly becomes a source of capital for them so they can sell it and trade it. But essentially, a producing company, which is mid-tier or higher, has little interest in the share price of the junior company in which they're investing. Producing companies are looking for the next generation of assets to support their steady state or their growth plans. They're looking to replace resources or add resources.

Larger companies can also fund management teams and new junior companies so they can gain better access or a better understanding of a region or an asset. And this is a strategic approach and the monetary stake is much less important, much less interest, and therefore they don't typically offer any selling pressure over time.

For this reason, larger mining companies can often take a position, whether it's Sentera, or Teck, or Kinross, or BHP, or Newcrest. They can take a 10% or a 15% or a 20% position, or they can reach into, in the habit of doing this over the last 15 years, or doing an exploration agreement with a junior company. And then these bigger companies can sit back. Once they've made the initial effort in terms of time and commitment,

getting to the point where the lawyers have been happy to sign off on it. At that point, they're quite often happy just to see their initial investment passively dilute through subsequent placings. Now that those communication lines, those links with the exploration company have been established. Liquidity is pretty much irrelevant for them. Their goal is to better understand the region. They want to know if this junior company in question is going to develop an asset capable of being a part of their future portfolio.

Producing companies also have a completely different way of assessing risk to your average investor. They're not too fussed about the capital structure or about the shares or the warrants or the options and everything else that a retail investor or normal investor has to

consider so carefully. Producing companies are much more focused on the metallurgy, the geology, the continuity of the mineralization and the ground conditions for mining. They're focused on the technical side of things and whether this asset is going to be

something that ever comes out of the ground and would suit their growth plans or their production plans. Whether it's going to be capable of sustaining production for their investment horizon at a level that's going to suit them.

When an industry partner comes into a stock, obviously it can be a good sign because they think, oh, this is a good asset, let's just ensure that we don't miss out on learning as much as we can about this area. I would say that the amount of capital that's invested, the size of their investment is perhaps of less interest to the retail investor. And that by having the companies on your board or on your shell to register, it's not in itself necessarily a sign that everything's fine. You know,

you can see a company which has got a passive investment by a big mining company that's been there for years. And they might have just written it off because they've seen that the exploration potential or the management team haven't shaped up. So rather than selling it, they just sit there. I mean, it doesn't matter to them. It's just photocopying money. There are many more up-to-date factors that one should look out for in your investment.

due diligence for a company rather than just, oh look, tech or whoever is a shareholder. For example, look at the funding history. Is this next share issuance that your company that you're thinking about buying into happening at a higher or a lower price than the previous one? Look at the news flow. Don't be distracted by the fact that, oh, company, big company A is on the shareholder register. It's, it's, it's not for you. It's for them. Now

For junior companies to get funded, the availability of capital through the cycle is of course a critical factor. Many companies get financed in the bull market, but only very good assets get funded in the bear markets. And moving away perhaps from the majors, during the last downturn in the bear market, alternative financing methods proliferated. I've spoken in a previous episode about the role of private equity

played and the way that stepped up to be pretty much the one of the funding sources of last resort. But royalties were also being issued. And of course, there were offtake rights, pre-production financing, underlying sales and the asset, and that's a classic one. But when you've got a major capital investment ahead of you, when you're a junior company trading at a discount to the value of the assets,

the sale and underlying sale in the asset is a really key thing to consider. The first time I saw this was in the mid 1990s when Randgold was really struggling with Sayama. Randgold was hemorrhaging cash because of the roasting process and refractory ore at Sayama, but they had a really good exploration development asset in Mali called Marilla. They just didn't have the capital to build it. And because the state of their balance sheet,

They couldn't finance it and they knew that they needed the cash flow from Marilla to turn the fortunes of the company around. They didn't want to sell the asset, so in the end what they did was they sold half of it to Angler Gold, who paid for their 50% by covering the capex with the entire mine. And it's not going too far to say that Marilla saved Randgold resources. And not only that, but the 50% share of production from Marilla saved Mark...

Bristow's bacon and the rest is history. Merilla made so much money that it covered all the losses at Sciamma and enabled Rand Gold to start growing. And of course, since then, Mark Bristow has done fantastically well and is now the CEO of one of the largest gold miners in the world, Barrick. So a strategic decision to sell 50% of an asset to get it financed into production was the right thing to do.

Going back to royalties, often junior companies in a stress situation will sell a royalty. Now remember that some majors, major companies, producing companies and many institutional investors don't like junior companies having sold royalties unless that royalty has been capped. Uncapped royalties can be a poison pearl. And some companies, I mean I know that

from smaller companies or assets that have got onerous royalties on them. So if you're an investor in a junior company and you're looking for the company or your investment to be bought out, you've got a better chance if the company has only sold royalties that are capped rather than uncapped. Remember that one of the most attractive aspects of the resources sector is optionality, leverage to rises in commodity prices or leverage to any new discovery.

and royalties pretty much remove all of that optionality. Ever wondered why the royalty companies as a group do better than the producers as a group? Well, apart from not having to operate all that dirty machinery and deal with geologists, the royalty companies are experts at capturing the optionality upside at the expense of the operating companies.

One more thing to consider really is the market capitalization of your company that you're looking at versus the NPV of the project in question. This is one of my bug bears in the sector and I call this the market cap trap where a junior company has an asset with a very large NPV but the market capitalization is way below that. In these kinds of situations it's almost impossible to get the project financed and it's a vicious circle.

You have to be extremely cautious not to be lulled into thinking that this is an opportunity because this discount will be removed. The only way that those companies can get their equity portion financed is by going through massive dilution. And therefore the time to invest in those companies is when they've got their financing sorted. There are some ways out of the market cap trap, but you really have to know what you're doing. Generally there are things to avoid. And I'll actually just bring it back and say that

probably one of the best ways is to sell 50% of the asset in order or in exchange for the 100% of the capex to be carried. So in conclusion, when you're looking at trying to understand how a company is financed and how it will continue to be financed, it's good to have a good mix of professionals and owners on that shareholder register.

the original people who picked up the idea and have equity positions, as well as some more recent additions to the management team in the form of professionals who know what they're doing and getting reasonably paid, but not overly paid. I always urge investors to check the GNA of a company. You want to make sure that the GNA is reasonable. And what is reasonable? I would say two to $3 million, that's fine. Make sure the company has got rewards to the upside.

for good performance and they're not getting paid too much. It may be tedious, but you do need to check the small print. You need to download or open the financial statements, go into the annual accounts and actually look at the remuneration table. It really does matter. Check the small print. Has this CEO or whoever been paid handsomely for many years and the project not progressed over a number of years? Anything more than about five years and you realize that this is actually a lifestyle company rather than a development.

Another critical factor is to try and understand the health of the company, how it's been funded and how it will be funded. Check the record of share issuance. Has it been done at continually lower, bad, or continually higher prices? Good. Has the same management team presided over a period of good value for money or bad value for money? Be wary of companies where the number of shares has grown in excess of the number of the percentage gain in the share price.

What levels were the previous issuances done at? I come back to that. Has their investment dollar been spent well or has it led to an 80 cents on the dollar return or a $2 return investment on the dollar? Remember that institutions are subject to very different pressures to you or I. They get different access to company information. They can meet the CEO on a much more regular basis than you can. They face greater hurdles to getting into a stock but once funds are in they can be very loyal and liquidity is always a plus in any company. Liquidity is an asset which is worth following.

Another key point is you've really got to ask yourself is the company funded to reach its goals? Has it got enough money to pay for the G&A and to fund the next phase of work that's going to be, that's going to genuinely be a value catalyst that will de-risk or rerate the company? Watch out for poison pills in the forms of offtake agreements, which actually transfers value to other companies or onerous royalties, which may prevent your exploration company from being taken up by a major. Or royalties that give away the upside in terms of exploration success or leverage to a commodity.

I come back as a final thing that is so important. You need to have clarity from the management team as to how they will drive value on this funding cycle. You need to be comfortable that your management team, the CEO, knows how it's going to take $1 and turn it into $2, maybe $5 or $10. Thank you very much.

Funding
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Ep
28
Funding: Industry Partners, Royalties & Market Cap v NPV And Conclusions
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When it comes to jurisdiction, many people have strong opinions about which countries work and which countries don't. But as in every aspect of natural resources and the mining sector, there's a risk and reward balance that needs to be understood and then put into perspective before one makes one's final decision about jurisdiction. Clearly, the more unstable a country, the less easy it is

it is to get debt funding for example, or there may be heightened security risks, let alone equity funding. Equally, there may be opportunities in that country which are not available in a more developed country where there's greater stability and a lower cost of capital. So it's necessary to balance the opportunities and the challenges of the country in which you're operating or the location of your project. A few years ago

I very much enjoyed a panel session in a conference where the CEOs of a number of companies operating in Africa were invited to present on managing country risk. The speakers included the CEO of Banro operating in the DRC, the CEO of Sentamin operating in Egypt, the CEO of Kola Africa operating in South Africa and I think the CEO of Base Resources operating in Kenya. The presentations about the DRC, Egypt, South Africa and Kenya were

all memorable by virtue of the fact that all of the CEOs were entirely comfortable with the risks that they were facing in country. Each of them argued cogently and in completely good faith that their own countries were fine and that they wouldn't invest anywhere else. Ha! It made me realise that confirmation bias is a powerful thing and that objectivity is absolutely critical. Clearly, what each of these CEOs had experienced is that the better one gets to know a country, the more one can accommodate how to work it, where the obstacles are and how to work around them.

They were dealing with the risk because it was what they had to do, which is very different to the options open to an investor when looking at where to put their money. For the investor, with a choice of investing in any geography, it's worth stripping emotion out of the decisions and going back to check the numbers on a purely analytical level. While it may be stating the obvious, investment opportunities where companies have assets in developing economies or frontier markets are accompanied by higher risk because of the geopolitical and macroeconomic risk factors that need to be considered.

Merlin Marr-Johnson (02:17.602)

To get a handle on what that means in terms of numbers, have a look online for data on Country Risk Premier or Country Risk Ratings or Moody's Ratings or have a look at the work done by Professor Aswath Damodaran at NYU Stern. He compiles data on risk premier globally. All of this data gives you a completely objective set of numbers with which to frame your investment thesis and they are key reminders that economic risk can be quantified.

and viewed statistically through large datasets. And the information is available should you want to filter your decision-making process accordingly. I think it's really interesting, you know, I've had a look at some countries myself and I thought, oh, goodness, okay, that's how it's being measured in the markets. On a more personal level, here are some of my own

observations. I've worked in many of the countries in South America, Africa, Europe and Central Asia. I haven't spent much time in Oceania, Australia and Southeast Asia, nor in North America or Central America.

What I do find is that in every country one works in there are obstacles and there are opportunities. At a headline level it's relatively easy to choose your country based on commodity. If you're looking for gold for example you might consider the gold belts wherever they are. I don't know, Lappland in northern Finland or West Africa or the Greenstone belts of Zimbabwe, Canada or Australia. If you're looking for copper you might want to go to Zambia or Botswana, Chile, Peru or to Ecuador and obviously...

If you're looking for uranium, you might choose Namibia or Niger, Kazakhstan, Australia or Canada. And frankly, if you're looking for anything high grade, pick a commodity, any commodity, you might want to go to the DRC. However, each of these places come with particular challenges, and the closer you look, the harder everything becomes. And it's not just the high risk countries that are difficult, but actually the developed countries as well. Canada, Australia, or Nevada in the US for that matter. So, Canada and Australia.

In Canada or Australia, there's vast competition for ground and assets, and they are both extremely mature exploration environments. On top of that, you've got the first nations populations and very stringent permitting protocols to get your mind built. There's a lot of scrutiny of your work practices and you have to do everything in an extremely ordered manner to make progress. Well, having said that in the age of mobile phone cameras, there's a lot of scrutiny wherever you work, but there's definitely scrutiny in the developed countries. In addition,

Merlin Marr-Johnson (04:37.866)

The environmental requirements to get a mine permitted are such that it can take years, if not decades, to get all of the licenses issued. Stephen Roman, who runs Global Atomic Corporation, is the first to say that it takes so long to get anything done in Canada. It took Stephen 10 years to get the Sugar Zone gold mine permitted in Northern Ontario. He'll also tell you that it took Denison Mines about 30 years to get the last uranium mill permitted. His view...

is that it simply takes far too long to get things done in Canada. And not only are the timelines extended, but the competition for assets is so great that it's very hard to find something good, which is just sticking out of the ground. Or if it is sticking out of the ground, it's miles away from anywhere. Remember that Canada is a big country with harsh winters and a remote project can create real infrastructure and operating challenges that negatively impact the economics. And there's a similar situation in Australia.

While Australia is a well established mining country and people are willing to invest into Australia again, it's been massively explored. All of the easy stuff has been found. You've got timeline challenges to get your permits issued. And it's not actually that easy to bring a project into production. What of course is worth noting is that because Australia and Canada see a lot of the exploration investment dollars, there's a lot of new data being produced which favours discovery.

turning over the ground, taking samples, drilling holes. At some levels, discovery is a numbers game where the more good targets that are tested, the greater chance of making a discovery in a country. So it's no surprise to see that there are good deposits still being found in Australia and Canada because that's where the work is still going on. Nevertheless, over time, people and companies are willing to take risks in new countries. They go where the assets are. Rio Tinto, for example, went into Chile at a time when Pinochet was still rounding up people and shooting them in football stadia.

They went in with BHP on Escondida. Big companies are willing to take long-term risks when the asset is worth it, and that really is the key aspect about jurisdiction, the balance between opportunity and challenge. What this means is that everybody will look at the opportunities of what asset is in front of them, and they'll take it from there. To give a few examples of the opportunity challenge issue.

Merlin Marr-Johnson (06:38.034)

Adolf Lundin who was the Swedish magnate who established the Lundin family of companies, the father to Lucas and Ian who run the oil and mining business now. Well Adolf was a buccaneering Swedish entrepreneur who was somewhat famous for taking political risk and investment decisions in countries where he felt the asset was worth it. This was in the bad old days when one could pay bribes almost openly. You could call them commissions or introductory fees in those days.

Famously, he was trying to get a concession for an oil deal in Qatar and he had been camped at the door of the Ministry for about two to three weeks and he couldn't get a meeting Eventually he got a meeting but no deal and he said you know what? I'm an expert weather forecaster I'll bet you a million dollars that it'll rain tomorrow in Qatar. The sheikh accepted the bet Adolf Lundin lost the bet. He paid up the million dollars and guess what? Next day he got his concessions. It's that

crazy buccaneering stuff where he was prepared to take a leap on the jurisdiction perspective in a country where you can bribe officials to get the asset you want. And not that I'm condoning that kind of behaviour, mind. Goodness me, no. Anyway, moving on to some of my personal thoughts about various geographies around the world. These are just my personal observations, nothing more and nothing less, and will probably demonstrate my ignorance rather than my knowledge. But for what it's worth, here we go. Central Asia.

Western investors have a relatively healthy allergic reaction to Central Asia. Generally people say they won't work in the stands because they're just too difficult. I would say that working there is difficult but it's not impossible and there are many Soviet attitudes that one needs to overcome. There's also a cultural difference which is actually much greater than just the language barrier. But even if you translate the language you can't actually or you still can't really understand the culture. These are Soviet attitudes which are deeply entrenched.

and it takes a long time to understand it and trust is a big issue. But if you spend time in the country, you can get things done and you can get your rewards there. For example, Kazakhstan is definitely workable. Yes, there are some big forces moving around at the

governmental level, which are challenging to navigate. But if you keep your head down, stick to the protocols and the law, you can have a healthy function in corporate life in Kazakhstan, as demonstrated by Central Asian Metals with their tailings project. Kyrgyzstan is a much harder place to work.

Merlin Marr-Johnson (08:49.298)

The country has been independent for 30 years and government has been extremely unstable. Centera have had a nightmare trying to work at Kum Tor over the years despite good production levels and it culminated unfortunately in the seizure of the mine by the Kyrgyz authorities in May of this year and just last week recent images of about 40 metres of water in the bottom of the pit raise operating and perhaps more importantly safety concerns about how it's being run at the moment. Another fabulous gold deposit, Jurui, has had a checkered ownership history and is now

so completely under Russian influence that Vladimir Putin himself oversaw, via video link, the opening of the plant in March. In short, Kyrgyzstan is off limits at the moment. Uzbekistan, on the other hand, is gradually opening up. Corporation tax is down at 7.5% and there are properties being auctioned on a monthly basis. The government has advertised that they're looking to liberalise the economy and base it on a mining growth potential and opportunity. There's great geological potential but so far access to real data sets remains restricted. Let's see whether that opens up.

Tajikistan not yet, Turkmenistan forget it. In summary, Central Asia, the door is almost completely shut, but it's not completely shut. You can work in Kazakhstan and you will in the future likely be able to work in Uzbekistan. Perhaps now is the time to be looking there? Question mark. Moving west to the Caucasus, Armenia used to be workable. The Armenian diaspora meant that the country was very interested in global affairs. It was the West and leaning. And it was a nation that depended on migration of money, people and ideas. Now, of course, that's all changed with the war. Azerbaijan was...

has always been incredibly difficult. I've spent a lot of time looking at Uzbekistan and Georgia was also too hard. And so if you look at all three of those, generally the Caucasus is too difficult. The Balkans however is completely different. Kettle of Fish were firmly in Europe by this stage. Adriatic metals have had great success in former Yugoslavia. It's

Former Yugoslavia, I would say it's slow, even though Adriatic Metals is actually cutting through the red tape excellently. There is great geology and manageable mining politics in the wider region as far south as Greece. Greece, unfortunately, is not workable. They've got great geology, but they've pretty much decided against mining. It's not the only country in Europe as well. Many European countries are slow or not in favor of mining. Thus, it's hard for resource companies to actually make any real progress there, such as in Italy or in Spain. It's hard, yacka.

Merlin Marr-Johnson (11:03.894)

as the Aussies would say. Italy, mm, AltaZinc are making progress on that zinc project, which is good, but generally it's quite hard. Spain, again, a very mixed bag. Permitting is so hard, but in some places you can work, and of course there are some mines down in the South,

well, not just down in the South, but there are some mines operating in Spain. Romania, so many have tried and failed, and France is particularly crazy. For example, I can take you to a district with 4 million ounces of gold potential, and yet there's no support for it.

at the community level or at the governmental level. Try getting an exploration permit or access to drill in France. It's almost impossible. And yet there's rural flight, there's a jobs crisis. The logic of having a homegrown industry is staring them in the face and yet they are unwilling to consider it. It's one of those funny things. Perhaps it's a mentality problem. I mean the motorcar for example has evolved so much over the last 40 years. If you see what it does, which is move people from A to B, it still does it.

but in a completely different way with completely different safety and emission standards very much like mining industry in the old days they were dirty, unsafe and polluting now they can be neat and almost run remotely with very low emissions and very low impact and good local job opportunities yet there are so many European countries which are pretty slow to wake up to it but, you know, rant over there are a few notable exceptions to the European gloom the Republic of Ireland for example has some fantastic infrastructure

and a superb body of scientists and regulators that really understand the potential of a resource industry. iCRAG is a government-supported geosciences centre hosted by University College Dublin. It's amazing. The Republic of Ireland government is so supportive and the country is such a good place to operate. Mind you, the geology is difficult and yields its riches very slowly. But zinc and gold, it's there. Scotland is something of a surprise in recent years. It's open to investment now and it's surprisingly prospective.

although it hasn't got a great track record of delivering large resources. We live in hope. And the great expectation is that Scandinavia will become a haven for investors in the mining sector. At one level, slightly more cautious about that, remind people that Scandinavia is largely run by the reindeer. So it's reindeers first, people second and mines third. Sweden as a mining nation is a surprisingly difficult place to get mining projects up and running. The Swedish government is run by coalitions.

Merlin Marr-Johnson (13:24.246)

consensus and committee and therefore no decisions are made. People are unwilling to say we're going to develop human capital or a mine here because it might impact a reindeer, for example. I'm being facetious, but it seems that no one is prepared to make decisions about the long-term development of the country. And despite the fact that Sweden has lots of mines, it has very weak institutions filled with people who don't necessarily understand the mining sector. And therefore there's a lack of trust even between the regulator and the operating mines. Finland has great potential. It has an extremely onerous

permitting framework, a situation which is complicated and has long timelines, but you can get things permitted despite those long timelines. The point is that the geological rewards are evident because the deposits found in the central Lapland Gold Belt in northern Finland are sufficiently attractive to warrant the investment required in terms of time and effort to get access to those projects.

is Agnico Eagles single largest resource base, in terms of the ounces contained. And other companies are going great guns in the region. Now there are honorable mentions to Orion Resources and Mawson Resources, but Rupert Resources are really leading the exploration charge in terms of new ounces being discovered in the central Lapland Gold Belt. Superb discoveries, superb work. Agnico will I'm sure want to consolidate its position in the region, yeah.

Finland's great.

Jurisdiction
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Ep
29
Jurisdiction: Country Risk and some personal observations from Canada, Australia, Central Asia & Europe
Available soon

In the last episode, I shared some thoughts on Canada, Australia, Central Asia, the Caucasus and Europe, and exploration and development destinations in general. Today I will talk about Africa and South America, two vast continents where large commercial discoveries continue to be made. And that is the attraction. Geologists and explorers take a view that their chances of finding a company-making asset is higher in Africa or South America than, say, in the traditional mining hubs of Canada and Australia.

My first job back in the day was as an exploration geologist for Rio Tinto. And I flew out to South Africa exactly one month after Nelson Mandela was inaugurated as president of South Africa back in 1994. A quick mental arithmetic will tell you that was almost 30 years ago. And since then I have worked in various countries up and down the length and breadth of Africa. Of course, it's an enormous continent of huge diversity. So generalizations and emissions are going to have to be made. Forgive me, please.

In the late 1990s, I went to Africa. I went to West Africa on the back of a research report called The Search for Quality Ouncers, which I co-authored for HSBC. Companies were making large oxide discoveries across West Africa, and in the subsequent decade, there were seven new gold mines built in Burkina Faso. The future looked bright.

My time in West Africa recently, however, has shown that it's becoming increasingly difficult and dangerous to work there. What started as an Islamist insurgency has now spiraled into a complex and terrifying mess of banditry, kidnapping, tribal and religious warfare, criminality, smuggling, and artisanal gold mining. I'll refer to this kind of broad area of instability now as the red zone, where it's unsafe for Westerners to work without the security cordon of a private army.

Thanks to the poisonous cocktail of instability within the red zone, I am slightly down on West Africa as a whole because the security situation continues to deteriorate and it's spreading season by season, year by year. I refer you to an interview I did with Liam Morrissey for Crux which covers this in more detail. In short however, I find it hard to justify the risk of losing geologists and local workers and technical staff in security incidents. What started in Mali spread to Burkina Faso and Western Niger. And there were also flashpoints in Northeast Nigeria and Northwest Cameroon. And the situation is bad, and it's spreading in almost every direction. So you can now add in Chad and Niger, all of northern Nigeria, much of Cameroon, and trouble coming into northern Ghana and northern Ivory Coast. It's really so sad having to make a negative judgment call on the geography because the ??? is superb and the people are just such a joy to work with. And perhaps Mali is the most difficult to categorize since Eastern Mali was where the insurgency started. The country has had two coups in the last two years and yet gold production from the South and the West continues. Indeed, led by companies like junior Cora Gold with a spectacular Sankora deposit, new discoveries are still being made and good ones at that.

From a resources perspective though within that sphere of instability, the better, more advanced projects will progress within a secure perimeter, but grassroots exploration will gradually dry up. It's simply becoming too unsafe to do the scout work and frontier exploration that is needed to make fresh greenfield discoveries. Brownfield's exploration around the flanks of existing operations and deposits can and will continue for the time being at least until perhaps a corporate concentration lapse or some kind of taking the eye off the ball occurs and avoidable deaths happen. But grassroots exploration, where there's trouble in West Africa is in a long term downward trend. And clearly we all know that without the grassroots exploration, feeding that hopper of targets and new projects eventually the sausage machine of discoveries dries up. Outside of the amber and red zones, however, on the fringes of safety and beyond, the opportunities still exist. The Kenyeba Inlayer of eastern Senegal and far west in Mali and much of the Ivory Coast have superb geological potential. An inlayer, by the way, is a geological feature where older rocks that are normally covered

Guinea Conakry, Liberia and Sierra Leone are a long way away from the Red Zone and as such security issues are not as acute as in the countries mentioned above. However, Liberia and Sierra Leone are actually separated from the Red Zone by Guinea and Ivory Coast. I first visited Guinea on an analyst's trip to Seguru in 1998, just before Seguru's first And that eventually turned into a 7 million ounce deposit. On that same trip, Mark Bristow, then CEO of Rangold Resources and now the CEO of Barrick Gold, told me that Rangold Resources exclusively invested into Francophone West Africa because it preferred the Napoleonic code and the French legal system.

Guinea is a former French colony and it's worth separating the big infrastructure minerals there from the smaller stuff that juniors or independents can do. The bauxite production and the iron ore potential is strategic and political. The Americans are in town co-owning the 14 million tamper anon producing national bauxite company CBG. The Chinese are there in large numbers offering infrastructure for mining rights and the Russians are there having trained the military for decades and offering mining services and security contracts.

The latest for Rivenforce are the Turks with a diplomatic and trade push as well as some private companies, some Turkish private companies. Although the balk site and the iron ore space is crowded there is the opportunity for smaller companies to explore for gold in Guinea. Moving on, Liberia and Sierra Leone do offer geological potential but you need deep pockets to work there. Exploration is expensive in the jungle and David Redding, then the CEO of Oris Mining, me a few years back that a brutal contributing factor for New Liberty going bust on top of the 2013 Ebola epidemic and falling metal prices was the fact that there were no other gold operations in Liberia. This meant that Aureus effectively needed to have a spare processing plant in stores which killed the working capital and contributed to breaking the company.

Further afield, Nigeria, which has a strong reputation as being corrupt and dangerous, does have tremendous geological potential. One company doing great work in Nigeria is Thor Explorations, which has brought the Sigalola mine into production this year. So one might legitimately ask if this is a new dawn for Nigerian mining. Unfortunately, it feels that Nigeria is actually getting more difficult as the red zone of instability, fundamentalism, and banditry encroaches from the north.

Next. Right, Ghana, formerly known as the Gold Coast, there's a clue in the name.

Unfortunately, Ghana is difficult as well. For a start, it's been very well explored. So a lot of the low-hanging fruit has been picked. And another factor is that the majors hold dominant land positions in Ghana. So getting licensed tenure for the juniors on one of the main gold-bearing structures is actually quite difficult. And there are security challenges up in the north, and the bureaucracy can give you a hard time or a headache. For the very determined and for the very experienced, there's still opportunity in the country.

And a good example has been set by Iron Ridge Resources, who have made great strides with the Iwoia lithium discovery in southern Ghana on the coast between Takuradi and Accra. That's really value added. Thinking outside of the gold box and coming up with a future metal idea in Ghana. Good stuff. But again, you need to find your way in. It's one of those things, you can be driven by the geology, but that's not enough in itself. You need to have a local champion, someone who knows how to work in the place and how you can get things done without paying bribes.

Moving east, Sudan has been taken off the terrorist list, which is great. There's great geological potential in Sudan. And even though there's no commercial mining there yet, it's actually the second or third largest gold producer in Africa due to all of the artisanal production. Personally, from what I've observed, it's really hard to obtain a license cleanly in country. Well, it has been over the last few years. It might have changed in recent months since I last looked.

Carrying on round, Eritrea. What an extraordinarily beautiful and complicated country. It's a police state, it's very small and difficult, but the people who work there love it. Ethiopia is now off the cards due to the instability and the war, which is such a pity. What a stunning country, I absolutely love Ethiopia. It's also worth noting that the geology of Ethiopia is very much covered by the younger battle since they have only limited windows of openings through which you can see the Arabian Nubian shield underneath, which has got the gold potential.

Tanzania has had its ups and downs. Some great discoveries have been made over the decades. And then five years ago, the country was more effectively nationalized by the government. Investors have been scarred and scared, but the opportunity is opening up again. The new president promoting foreign direct investment has reached a settlement with Barrick and issued new licenses, which all bodes well for Tanzania. Right, where next? Now, there are 55 or 56 countries in Africa, so I can't go through them all.

But let's now head to Southern Africa. In Southern Africa, Namibia and Botswana, these countries are still offering some of the best investment opportunities for investors on the continent. Not only that, they're lovely places to visit too. All good. They're safe. They've got workable governments. And the permitting process is fine. However, the deposits in Namibia have a tendency to be small and poddy. There is now potential for the Kalahari copper deposits to extend into the east of the country. Gold in Namibia has traditionally been difficult, although there are a few decent-scale gold projects there. And although Namibia is viewed as a uranium country, the grade is pretty low, especially when compared to the grains, grades seen in Niger. Mind you, It's a lot safer operating in Namibia than it is operating in Niger. So in conclusion, everybody wants to find something good in Namibia because they all want to live there. You've even got great beer, Vintock, which is still brewed under the Reinutzgebot rules of 1516, which just permits three ingredients, water, barley and hops. Yum. Delicious. Especially after a long day out in the field.

Botswana, famous for diamonds, has now opened up as a new copper province. The issue of sand cover plus access to licenses, thanks to composition, means that it's now hard for later entrants to get access, but investors can certainly take advantage of the existing suite of companies with exposure to Botswana.

Continuing our journey south, South Africa is still just about a premier mining jurisdiction in Africa. The country has the skills and manufacturing ability, however, there is great instability and the country has a weak government and security issues. It's also a very mature exploration environment and thus it's difficult to find something new in South Africa. I keep coming back to the maturity of the exploration environment.

It's really hard to find something that's worth looking at in a country where it's been gone over time and time again. In a place like South Africa, there's this fantastic skill set and amazing people who know how to do stuff. There are geologists, engineers, metallurgists, construction teams, health and safety, education, accountants. It's fantastic, but the opportunity suite for investment is limited by maturity in new projects. You can't even go deeper in South Africa as it's happening elsewhere around the world because South Africa has historically already gone deep. It's got some of the deepest operations in the world, if not the deepest.

Talking about maturity, in contrast to South Africa, there's the story I mentioned earlier about auras mining's inventory requirements being the only mine in the country despite the geological potential being there. Auras had to carry a complete inventory because there were no stockists in Liberia, no spares in the country, and everything had to come from Ghana, which could take weeks. This is the difference between a country with a well-established mining industry and one which doesn't. In South Africa, if something breaks, you can call up a spare or you can get it made up.

These are the kinds of considerations to take into account. It's the first mover, disadvantage. The Canadians say that it takes a lot of energy to break trail, and I would say yes, it does, especially if you're in the West African jungle.

Finally, it's worth talking about the DRC because it polarizes opinion. Some people say it's too corrupt to be able to work there. Others say that you can't ignore the potential of its geology. Of course, the leading example at the moment is Robert Friedland with Kamaukakula and the great historic copper deposits of the past, taking from Gurumi, for example. Having spent most of my professional career working in Africa, Central Asia, and South America, there's no prize for guessing that I belong to the school of thought

of following the geological potential and the transformational asset and development will follow. This is what Adolf Lundin did. This is what Robert Friedland did. This is what BHP and Ria Tinto did in Chile. And breaking news, it seems as if BHP is doing it again in the DRC. If you have an asset that is really worth spending capital on, you can get it built. Personally, I think there are limits. War and instability are the top of those limits for me. Working in the Congo is something that one can do, but it has to be of the scale and grade that will make it worthwhile.

I recall trying to get into the Livingston Conference in northern Zambia about 10 years ago and we were stuck at an airport in northern Zambia trying to get 100 fat, fleshy, mostly white analysts and investors into the country. The passport control people were being so officious and deliberately obstructive you could feel the heckles rising on every side. The investors were hot and tired and just wanted to get through. The customs control were being bloody minded and digging their heels in.

Ross McGowan, who was operating a copper explorer in the Congo, in fact he's won a prize at the PDAC for making the discovery at Comerca Cooler when he was a contract geologist for Robert Friedland, he said to me that this wouldn't happen in the Congo, this is ridiculous. You've got a hundred people trying to get through customs and a bottleneck and in the Congo you'd just pay a hundred dollars, you would leave your passports there, everyone would go through and be happy, the customs people would get their money, the investors would go through and the passports would follow later. He said, you can absolutely work in the Congo. My experience of watching investments and projects in the Congo is that it can be incredibly expensive. A Belgian company, a Belgian country manager who I knew he ran projects for foreign companies there. He said that in the Congo, you've got to imagine that you need a fence around your company at all times and that there are people outside trying to get in to take a bit off you whether it's the tax man with spurious tax claims or people challenging a title or physically trying to take your vehicles away. On every level, you need vigilance and alertness to ensure that your company isn't being undermined by people chipping away at the edges. It may sound like a nightmare, but if you're used to it and you get that mindset into your process and the way you're way of thinking, the reward of the project, it can be significant. As long as it's big and it's high grade, it can be worth doing it. But it might not be for the faint-hearted.

South America. Moving across to South America, it's worth remembering that for all of its geological potential the continent has a really socialist bent to it, particularly in the Spanish speaking countries. Mining as an industry can be state run, but by and large it's been most successful when it's been done by private enterprise and therefore it represents capitalism. Therefore, the resources sector sits at odds with the national psyche of many South American countries.

It's no surprise, therefore, that in Chile, where the mining sector has been the most developed, is where you find the most entrepreneurial culture of the individual in relation to minerals. And this is demonstrated by the fact that Chile is full of pecaneros, the little guys. At the weekends, you see them driving out of town in their pickup vehicles. They've got a tank of water in the back because water is scarce in Chile, and they've got an air compressor. These are artisanal workers who are rich enough to have a vehicle, compress their water tanks, equipment, and they go up into the hills

They've got a little plot and they mine high-grade veins and they make money from artisanal mining. This is a part of Chilean culture, the Chilean equivalent of the British vegetable allotment. So it's no surprise that Chile is where you find the biggest contribution to the economy from the mining sector, with 29% of the world's copper production in 2019 coming from Chile and all the majors present in Chile. Having said that, Chile is now a mature exploration environment however and if one looks at the rate of discoveries of the big deposits across South America you can see that the huge company making deposits were mostly discovered before the turn of the century in the 70s, 80s and into the 90s. New techniques continue to improve so the country is still prospective and occasional big assets are being found but the low hanging fruit now lies further to the north.

Staying in the south, Argentina flatters to deceive with great geology but inconsistent politics often taking a turn towards socialism. It has been said that whenever there's a window of opportunity in Argentina, the thing to do is to take advantage of that and to get out. I tend to agree. For the most part, the local government tends to be dead set against you as a foreign company ever making money out of your investment. There are occasional wins which keep people interested in the geology of course, is fascinating, but personally I'm cautious about investing in Argentina and only do it rarely on a PA basis.

For the record, I've worked in Chile, Uruguay, Peru, Venezuela, and Brazil, but not in Argentina, Colombia, well, kind of in Colombia, Bolivia, Paraguay, or the Guianas. And I'm currently working in Ecuador and part of our portfolio in Colombia. So let's continue with Ecuador.

Ecuador, of course, has got stunning geological potential, seeing that it's a fertile continuation of the Andes, which between Peru and Chile contribute a combined 45% of annual copper supply. Essentially, if you're looking for big copper and gold deposits globally, you need to include Ecuador in your search. But don't think that operating there is straightforward. The government is staunchly pro-mining as it pursues a development agenda to improve lives. And yet, there's a very strong anti-mining element to the population that is looking to put so many restrictions on the resources sector that it would effectively end mining investment in the country. This is dynamic tension in action. All of this means that to be successful in Ecuador you need to be able to manage the above ground risks well and establish such a strong local brand and such a strong license to operate that with support from your community and the government you can advance your project. Similarly if you are an investor a key part of your decision making process should involve being completely comfortable with the integrity of the CSR work of your target company.

South of Ecuador, of course, are Bolivia and Peru.

Bolivia has never quite managed to have a stable or welcoming enough investment climate to see a modern international mining industry thrive.

Peru has just lurched towards a socialist government, but it's very much on the modern mining map, producing about two and a half million tons of copper annually and 99 tons of gold. So it's on the cusp of being the 10th largest gold producer in the world. It's worth noting that Peru is comprised of a hugely varied tapestry of communities, some of which are rabidly anti-mining, where others are open to the sector. Once again, progress or lack thereof can often come down to the strength of your local relations and your community work, although real country experts would know which areas are worth pursuing and which are not. Some parts of Peru are just too hard to try. And as for exploration investment over the next ten years or so, the new president will set the tone in the coming months. It's hard to be positive, but let's wait and see.

Right, now the biggie is Brazil. It's such an interesting country.

Whenever one spends time in Brazil, weeks or months, and you start to speak Portuguese or you start to absorb the Portuguese language around you, even without direct understanding, you cannot fail to notice that the rest of the world starts to shrink in importance and disappear. It's like being in lockdown during a pandemic. Your own house becomes your universe and everything outside becomes remote and intangible and eventually irrelevant.

The longer you stay in Brazil, the more you forget about the rest of the world. Vroom! It's just so Brazilian. And this is really a function of the fact that it's vast. You've got a whole world of geography within the one country, and due to its size, coupled with the fact that no one else really speaks Portuguese globally, apart from in Portugal, Mozambique and Angola, it's also really isolated by its own language. And it's isolated by the fact that its geography is so big. It's had to do everything itself. Therefore it's got its own mining industry, it's got its own expertise, and a bit like Central Asia, it's got this cultural gulf which is not the same as being able to speak the language. It's understanding the Brazilian way of thinking. I would say that operating in Brazil is harder than you think. I've seen company after company spend time in Brazil. They worm their way in, they start making progress, but before the long they find themselves caught in a spider's web of bureaucracy and employment law and you name it. The tax and employment laws in Brazil are a nightmare and it becomes more expensive than predicted to operate there and every employment contract comes with a social contribution. I've been there, I've done it. I've got a lot of respect for the people that can work in Brazil but my goodness it's hard.

When you're doing exploration or reviewing projects in Brazil, trying to understand what is true and what isn't true, who has worked it and who hasn't, what is actually the history in the great. All of this can be a minefield of competing data and facts. I found Brazil to be one of the hardest places to work. Obviously, once you've found your project, you're up and running and you know that this is where your main deposit is. In a sense, once you've got your systems in place, you're okay. But for an early stage company going in saying: ”oh, we've just arrived in Brazil.

We really like the potential here. We've got a great geologist, and we know exactly where everything is, and we're going to explore over here.” My reaction would be, really? Which mug have you got to pay for your school fees?

Colombia and Mexico both have some no-go zones for resource investment with very different conditions in different parts of the country. The governments at some level say that they're being pro-mining and at other levels they're not. It's quite hard to get a consistent story.

The difference is that the Mexican mining industry is better developed than the Colombian, but both have got great potential, and they've got some long life assets being run by the majors and some big assets in Colombia, and lots of mid-tier producers in Mexico, and lots of family producers in Mexico as well. In some ways, relative to the potential of the geology, both of these countries are sleeping giants.

I'm probably doing Mexico a disservice because I've never worked there, and so I'm kind of constrained by my ignorance. But in terms of Colombia, the geological potential is absolutely phenomenal, but it can be a slow and expensive country for junior exploration and development companies. And in some places, it can be really dangerous. Proceed with caution and exceedingly good local knowledge in Colombia.

In conclusion, that is my romp around the geography of the world. I would reiterate the fact that just because a country, in some people's eyes, is difficult to operate in or high risk, it doesn't mean that you shouldn't invest there. It comes down to the opportunity suite in front of you. If the asset is worth it, there will be a way around the social and the political issues in most cases.

I am much less comfortable with war and with risk to life, which puts me off, swathes of West Africa, Nigeria, most of the Eastern Congo, parts of South Africa, even parts of Colombia, Mexico or Brazil. Ultimately, one's perception of risk is absolutely related to what one knows about the country and the more time one spends in the country, the more one sees the challenges and the more one sees the ways to mitigate, live with and to accommodate those challenges.

Another key factor is whether investors have made real money in the country. Since if you've lost money in a certain geography, you are unlikely to want to repeat the experience. But if you've done well, you might want to go back for second helpings. At the end of the day, a multitude of sins or obstacles to development can be overcome by scale and grade. In other words, the geological potential of the project is key. And I'm going to cover technical aspects of projects in a later set of The Con episodes right after a couple of sessions discussing the importance of management. Thank you.

Jurisdiction
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Ep
30
Jurisdiction: Africa & South America
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Management is invariably quoted as being the most important aspect of reaching an investment decision on a Company.  The thesis is that you’ve got to really understand and respect the management of the company if you’re going to invest in it.

Clearly the Con series, this series of lectures or podcasts, highlights lots of factors that are critically important and I won't dogmatically put one thing such as Management or Commodity selection as the most important component in reaching an investment decision. But for now, let's run with the assumption that it is important to assess or rank management management teams.

And that raises an immediate question, which is how do you measure what management is up to, encompassing both hard and soft issues?  What are the metrics to track management performance,  and can an investor understand what management is really about?  A lot of it is so subjective.  It’s what you feel, it’s what you think, it’s how they come across.

I found it harder than I thought it would be to write this section and in the end I whittled down the appraisal of managment to a four part approach. The first three parts would be covered in this episode, and for reasons of time, the fourth part will be covered in next episode, episode 32.

The four criteria are

  1. Likeability
  2. Strategy and Communication
  3. Skill-set
  4. Credibility, Delivery, Results

Now, starting at the beginning with Likeability

The question is, you like the management team? This is of course the most subjective topic of course and that will influence investors a lot. In fact it is completely subjective and actually not vitally important.  You don’t need to like someone to put your money with them.  They can make money for you whether they are frankly hideous people or not, but surely some of the point of investing is that you want it to be an enjoyable process.  I mean there may be some sadomasochists out there who particularly want to get involved with an obnoxious or objectionable CEO or management team, but for me investing in a company is very much linked to whether I like the company or not.  It’s not essential, but life is short, why make it hard for yourself?  Why not make it fun?  Why don’t you just go for a team that you like?

There is also the probability that the you will like people that share your own values. Looking for your resources company to treat people well? To be a responsible corporate citizen? To look after shareholders and employees rather than gouging the company for personal gain? It's more likely to be people with an ethos you respect, and people you like that do a job that mirrors your own outlook on life. In fact, that is probably the most important word, respect. You have to respect the leaders of the company in question.

Perhaps also, there is an element of finding the management team that personifies the ideal you - a subliminal projection - the romantic image of the exploration geologist, genius at finding ore bodies maybe, or the grit and charisma of the leader who can build mines, raise capital, cajole governments and deliver shareholder returns. But let's leave the amateur psychology aside and move onto the next topic... which is...

Strategy and Communication

Does management have a strategic plan and can they explain the investment case to punters? It is important that they do both. Teachers say that a good way to test whether you really know a subject is to try and explain it to someone else. Investors should look for a CEO who can develop a strategy and then communicate that strategy very clearly, which is the heart of how that company is marketed, and the starting point of the outreach and stakeholder engagement of the company.

In short, how does the Company articulate its investment case?  What is their marketing strategy and how well do they do it?

This can be measured across a number of metrics.  The first is the quality of the collateral or the copy that they produce.  Look at the website, the presentation, the videos, are they professional, are they well done?  This needs to be good.  There are no excuses.  I’ve seen so many archaic, dated, presentations, you just open them up and you go oh my goodness, can’t you see that the way you’re presenting your ideas is already stale, it’s already 15 or 20-years behind the times.  Spare me the text-heavy death-by-powerpoint presentation that is actually a long report crammed into 20 slides.  Having said that, even though every time I see one of these 'my first powerpoint' presentations I sigh, they are actually pretty useful. It's a really quick way to weed out a management team! Taxi!

And yes, I know why the wordy report-style presentations are done. It's the most up-to-date take on the Company. It's a central repository for all the information in one handy place. It's the first port of call for investors on a website. Yes, yes, yes, I know all that. Then why, in the name of all things sacred, do so few presentations actually describe an investment case, or how they are going to create value for shareholders? harumph.

It's infuriating. Time and time again resource companies cram every conceivable detail into a presentation to ensure that investors have access to all of the relevant information. Which, surely, is not the point. That's what Financial Reports and the MD&A, the Management Discussion and Analysis are for, and surely a presentation is a vehicle for communicating a story?

Time and time again, if the presentation isn’t fresh and vibrant and if the website isn’t kept up to date, then you know that things are not going to take good care of.  Now I’m not saying that everything has to be cutting edge and the very latest thing in websites.  Websites typically only get reviewed or revised every couple of years and so things don’t always have to be totally crisp and professional, but it helps.  And, there are absolutely no excuses in this day and age to having an overly wordy presentation.  If you have an overly wordy presentation you can almost guarantee that it’s written by a bearded, pale male and stale mining executive throwing up barriers to communication including a verbal incontinence on the page.

Once again, the copy, the collateral, the way that the presentation is done, the way that the news releases are written, needs to be crisp, it needs to be in focus, and it needs to explain the idea well.  You have to be able to communicate the strategy in a couple of slides or in 10 slides and if you go wade through a presentation with page after page of unintelligible guff, it shows me that the team haven’t got a clear strategy and it hasn’t got clear leadership.

When you give a presentation you need to be shown the idea very clearly and this is absolutely critical because if the company, the senior management cannot communicate it, they don’t have it clear in their head and they cannot articulate it.  When you’re looking at management always look at the collateral.

Marketing in this day and age, post-COVID, or with-COVID rather, needs to include an excellent digital media strategy.  More and more marketing is being done digitally as opposed to in-person, there is even more reason for a company to have a joined-up strategy on communication.  Interestingly, with my corporate hat on, I can see that there are lots of ways to waste money.  Companies can spend a lot of money getting thousands of low-value views or clicks on marketing collateral, without it translating into actual buying. Digital marketing is not just about Twitter and Instagram and LinkedIn and alerts, although it does encompass that.

A crucial aspect of marketing of the investment case is that Companies do need a relentless agent on its behalf or in the team telling a network of individuals to buy stock.  Quite often I see perhaps in the more successful companies, or the ones that I’ve been looking at for the last 12-months that have been successful anyway, there’s a split between the senior management team where there is a senior person in the team whose sole job is to communicate the investment strategy to the investors, to the market, and to be a public face.  But also, they’re not just an IR person, they’re not just a marketing person, they’re actually in control of the strategy and driving the business as well.

Sometimes it’s the CEO, sometimes it’s the President, but when there’s that nice duality between two senior people who share a lot of the leadership roles, that can really, really go far.  For example, in Karora, the Canadian company mining in Australia, you’ve got Paul Huet who’s the CEO and he does relentless marketing, and you hear him speak and you can be slightly overwhelmed, but he's out there telling the story and saying what they're going to do and then telling you again that they've done it, which is so vital.  Equally, he’s got his right-hand man in Graham Sloane, the COO, who's actually running the operations in Australia.  Clearly,  the two of them work very well together, ably supported in the strategy and comms work by Oliver Turner.

Another example is Minera Alamos with Doug Ramshaw and Darren Koenig. Doug’s the President, Darren’s the CEO.  Obviously, they both contribute to the strategy, but they respect each other, and Darren seems to more or less run the operation.  From what I can tell he deals with the government and all of that side of things and Doug appears to be the market-facing individual.  Again, you need that kind of relentless agent, just telling people to buy, to buy, to buy.  You can really spot the companies where you’ve got someone picking up the phone the whole time.  It keeps them alive.  Obviously there has to be something to talk about.  News flow is a critical aspect of it, to that and it needs development, it needs to be meaningful and it needs to be following out on a path of well-defined strategy which has got scale, and which has got vision.

There’s no point just pushing and pushing and pushing when something isn’t ready to go.  Remember this is very much a news-flow dependent business.  But if you put all of that together, if you’ve got a clear collateral, you’ve got a digital media strategy and you’ve got a good spokesman then that is a key , an essential part of judging good management and I can point to many, many companies that do not do it well.  A messy website, a bad presentation and someone who can’t articulate a strategy well on a regular basis, I would say that that is an absolute avoid, because without it the Company is extremely unlikely to outperform.

You can avoid it, so you should avoid it.

Which brings me on to the next topic.

Is Management appropriately skilled for the job in hand?

Are they trained in the right skills; do they have experience in the explicit area for this company? At its crudest, there’s no point having someone who has done Iron Ore management who is trying to do Gold exploration .

The next major objective analysis of a management team is really the skills in the top team.  Are they appropriate?  What I’ve seen several times before is metallurgists and accountants trying to run exploration companies and that typically doesn’t work.  I think really the most important thing here is to understand that some people in their career are … the way you can split it, is into keepers and growers.  So, if you’re the CEO of a company you can quite often see in your team that you’ve got people who are the growers and you’ve got people who are the keepers, and they are both vitally important.  But they approach their careers and their lives in a very, very different way.

Keepers are typically meticulous, very focused on attention and on details. They’ve got extremely good attention to detail.  They are very happy in a stable position and they run their division extremely well, whether it’s metallurgy or in terms of geology or mining engineering.  Those people often have a long career on the technical side of things.  So, they can run through their 20s and their 30s and possibly their 40s and into their 50s without really changing the nature of their role because they rise into ever more senior positions that mean the nature of their role is administrative and management and that is absolutely vital within the company.

But it’s very different to the grower mentality which are people who come in with a technical skill set, they run for a few years of getting their experience built up on-site, whether it's as a geologist, a mining engineer or a metallurgist or event in accountancy or banking.  But what they’re keen to do is they’re keen to morph their original career. They’re keen to run businesses.  They’re keen to communicate. They’re keen to take on leadership roles.  They often go off and do MBAs.  Or sorry, not often, sometimes go off and do MBAs, but it’s kind of that ambition or that hunger to change.  Whereas the keeper is looking to excel in the regular side of things.

Since I wrote that section I have learnt that Teck Resources actually incorporates exactly these distinctions within their org structure. In Exploration, Teck geologists can pursue two parallel and equally valued career paths, with one path offering continued progression as a geoscientist (the keeper) and the other path offering continued progression as a manager (the grower). It's nice to have my empirical observations endorsed by operating practice in a leading global company!

Anyway, what I see, particularly in junior mining companies is that the Keepers, which is geologists who’ve been doing it for 20, 30, 40-years, the expert mining guys, the top-of-the-tree metallurgists, they get to the point where they think actually no, I can do that, I’ve got all the experience to do that and they set themselves up as CEOs of mining companies and they do have all of the skills appropriate for doing the technical side of things.  But they’re completely ill equipped for the marketing, the outward facing bit, understanding the capital markets side of things.  So when looking at the skills appropriate, it’s much rarer to find a natural resources team where the guys don’t know their stuff, on the technical side of things.  But quite often they don’t know their stuff on the marketing side of things. They are Keepers in the role where Growers are best suited.

Exploration companies being run by metallurgists and by bankers and by accountants and heaven-forbid - ex-army officers: that also doesn’t work. The closest you can get is when you have a split at the top where there’s two people who have become very comfortable working with each other and one is the CEO, and one is the person who does the marketing.  But don’t overly invest in companies where the senior people are not appropriately skilled for the job in hand.  Exploration is such an idiosyncratic business, that I would always say you need someone who’s got a lot of exploration experience in there, not a banker, stock-broker, metallurgist, accountant or army-officer.

When it comes to the bigger companies, when you’re in production and when it's more about the management of a business which is the same as any other business, in the sense of kind of the bottom line and margin, and then, of course, the accountants and the bankers and the metallurgists and the engineers and anyone with a mind to detail and a general understanding of the business, can do that.  Well as long as they are of the grower type which have got the vision and kind of the leadership skills.  So, maybe this is all too soft so far, but how do you actually control and check on management?

Management
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31
Management: Likeability, Strategy & Communication, Skill-Set
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The fourth point of assessing any management team I have put down as being credibility and that is established through the delivery of results. It's also in many ways the marrying of the marketing with the strategy, with the technical and the skill set, getting things done on time and on budget.

Establishing the credibility of a management team is perhaps the easiest thing to check and therefore it's perhaps the most useful thing to do. Because it's so important, I will repeat that everyone should check the credibility of the management team by cross-referencing promises with results. In short, look at what they say they were going to do and then see if they have done it. Remember that there are many ways that companies wriggle out of it. Companies can raise money to invest in X and then spend it on Y. They can offer excuse after excuse after excuse as to why production hasn't happened yet, or why promised reports, technical reports, feasibility studies and the like have not been completed or even worse completed but not released to the market.

A really important thing you can do as an investor is to go back over older news releases and old company reports and it's worth going back for almost as long as the current management team have been in place. Let's say a new management team has been there for five years or ten years and you go back and you look at the strategy and you look to see whether they've actually fulfilled what they said they were going to do.

The easiest way I've found of doing it is if you're going to go back on a multi-year basis is to pull out the annual reports. Go back four or five years and look at the annual discussion and the statements made by the executives and then look at the last few news releases. Look at all the headlines of news releases for at least 12 months and sometimes go back further. It's perhaps the best trail of information that a management team can leave you, the headlines of their news releases.

Quick note for any company out there that may be listening, it's so important that there's some way for investors to see all of the news releases, all of the headings in a single place. A simple single long list that can be scrolled through.  For investors go to a website and skim your eyes down the list of news releases cursing any of the annoying companies that only allow you to review headings by year by year and scan down, and go back two or three years what you'll see is the capital raised,  you'll see the bold promises and then the missed promises the great ideas and then the shift of ideas I've even seen quite often they talk about you know, they're doing drilling and drilling, drilling, exploration, capital raise. And then a month later results, oh we've missed. You know what's going on there don't you?

Anyway, I found this great quote by Mark O'Day of the Oxygen Group of Companies. He's a PhD geologist, a multiple company maker, and he talks about, as a CEO, he talks about people within his team. And he says, I learned particularly that if you get the team wrong, you have to change it right away. Don't live with a dysfunction longer than you must. You might have made the wrong choice. You can try and trim around the edges to make things okay, but in reality, in your gut, you know it's the wrong person and you've got to make that change. That's a really powerful quote and that's Marco Day talking about people within his teams. And I think you need to apply the same kind of approach in your analysis of the management team.

Perhaps there's an element of confirmation bias in all of our thinking here. Quite often as an investor you get to know a company. You invest time building up the knowledge about the company. You get to learn about the projects. You get to learn about the country, the jurisdiction, the whole thing, the strategy, where it's at, what's going to be happening in the next stage of development of the company. Eventually you get to the point where having invested lots of time you start investing the money. You are literally invested in the company. But the best thing you can do for your investment is to review it critically. Do not fall in love with it. There will always be another chance. The only real tool you have, particularly as a smaller shareholder unless you're becoming a significant stakeholder, is to buy or sell those shares. You can either invest more or you can hold, or you can walk away and take your money away. There will always be another chance, there will always be another company. And it's not worth waiting for management to change their way of doing things. The leopard won't change its spots. If you can see that the senior executive team is not delivering, or is, to put not too fine a point on it, lying to you about what they plan to do, and they're not reaching those goals, then I would say walk away. Look at the strategy. What do they say they're going to do on an annual basis? Over a two year, one or two year, possibly three or four, have they actually delivered on their strategy?

Now, you know, I work in the resources sector, it can be tough. Remember that it can actually take a year or two for things to play out. We've just seen with the coronavirus, you can lose a few months of work here or there. Or if you don't get a license that was promised to you, it can take you a year to get your permit organized or two years. It can take a time to sort out your drilling program. It can take time to pan out. But that process needs to be well communicated and it needs to be well understood by the market. People don't like being kept in the dark.

Another particular bugbear is when management teams tell the market what they think the market wants to hear. So they're trying to project a positive case for the company and they don't tell it as it is. That for me is an immediate loss of credibility. If the CEO or the president bigs up the company to turn it into something which is more investable but actually overstates where they're at, for me that's a major problem. I've often seen senior management of companies explaining to the market really what the market wants to hear or perhaps really what they, the management, want to hear themselves. In a sense, they're not trying to lie to the market in a malicious way. The person that they're most lying to, the person they're lying to most of all is themselves. The typical mistake is to say, we're going to have a feasibility study completed in four months, because that's what they want to hear. They themselves want to hear that. Or they're gonna say, we're gonna be in production in two years, because they want to hear that. And they think that's what the market wants to hear as well. Actually, if you analyse what the benchmark timelines are, what the industry typically takes to complete the work that's needed to complete a feasibility study or build a project into production, it's completely different to what the management is saying to the market. That's not because the management hasn't been through feasibility studies and haven't been through the construction phase of an asset. It's because they're trying to instil confidence into the market. They're trying to put the best side of the company forward and they're talking about being positive and they're talking about getting goals done in a reasonable timeframe and being a go-getting company. But for me, all that does is undermines credibility.

It's always much more important for a senior executive to know exactly how long things take. And then you've heard it time and time again, best thing they can do is to under promise and over deliver. And the thing that really undermines credibility and is the weakness of management, and it's the easiest thing to measure is did they do what they said they were going to do with the timeframe and the budget that they said that they were going to do it within. You as an investor can go back and you can look at all of that because it's in front of you in the financial reports and on the news releases on the pages of their website.

So I hope that's given you my thoughts on what differentiates management. There have been two quite long wordy sections, but perhaps in conclusion, I can say that just as a reminder, we're always told that management is the most important thing, but it's also very subjective. I would say stay objective and look for key elements:

Look for a senior team member doing coherent, intelligent marketing and doing it well. The person needs to be honest and compelling, relentless and persistent and clear about the strategy. And you need to be honest with yourself, dear investor, when assessing this.

Investors need to be comfortable that companies have got a very good technical team making sure that milestones are met. Credibility is absolutely key.It's the only thing that investors can really monitor subjectively when they are looking at management.

Final point is that investors should cross-check. They should do their own homework. Do not fall in love with the company you're invested in. If it's the same story being repeated and it's the same team saying the same story, walk away. There needs to be change. Either the strategy needs to change or the team needs to change. If neither of those things happen and they're not delivering what they said they're going to do, you as an investor needs to change. You need to walk away.

Finally, I should say that when I was putting these two sessions together on management, I ended up, and I realised that I've just been discussing executive management. These are the people that run the day-to-day of the company, and in most cases the CEO or the MD is the architect and the practitioner of the company culture and the strategy, and they're the dominant figure that features in any analysis. That's all well and good as far as it goes, but what I have not covered is a commentary on the board of directors, and I belatedly realise that this is an omission.

So once the run of Con episodes is finished and I've got through the subjects that I want to get through, I'm going to add a separate episode discussing the importance of boards when looking at a company. There's plenty more to be done before then though, I will come back to board directors I promise. Thank you.

Management
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Ep
32
Management: Delivery, Credibility & Confirmation Bias
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Today I’m going to be talking about geology, which is a subject very close to my heart. This is going to be fun!

Well, fun as it may be, it has also been hard for me to put together because I’m essentially trying to condense one of my favourite subjects into manageable, digestible chunks of information. Preparation for this part of The Con has proved to be a useful (painful?) exercise in synthesis and precis.

I have channelled my inner Winston Churchill "If I had more time I would have written you a shorter letter" and tried to make it as concise as possible, but the geology section will nevertheless run for several episodes.  Short, but still not that short.

I went back to episode 9 and listened to the three minute introduction to geology, and decided to expand significantly on the content that I initially planned to include. Feedback from listeners to The Con series so far has made me realise that there is appetite for me to deal with complex subjects thoroughly. And that is exactly what I’m going to do here in this geology section of The Con, I’m going to address Geology thoroughly but with necessary omissions and simplifications.

Firstly, The Con is not an academic course, and these few episodes on Geology are not an undergraduate degree in Earth Sciences (even if they do contain a few more practical points... but let’s not go there). Ore deposit geology is complex and as a field it draws on many of the concepts and principles of geology that are taught at undergraduate level. One of the reasons I loved it at university was because to be good at it you needed to be good at a whole suite of specific geological disciplines. And that’s still the case. Successful exploration and deposit evaluation requires a wide and deep range of understanding. And, yes, I still love it.

This ‘long-introduction’ episode, therefore, will be dedicated to introducing general geological concepts that are useful for understanding economic geology. You may be glad to hear, however, that I will not be attempting to squeeze a full degree into the podcast. There will be no tests at the end.

Three subsequent episodes will deal with the following topics:

The Con 34 will address the question of “What is Ore?” Background crustal abundances of elements (and minerals). Concentration factors required to create ore. Different types of orebody. Capital Expenditure requirements, barriers to entry, and which kinds of companies are suited to which kinds of deposits.

The Con 35 brings it all together in a discussion of Mineral Systems - the holistic approach to exploration and mineral deposit evaluation. A discussion of the six key components that need to be in place in a Mineral System for deposits to be formed, plus a quick nod to the concept of Mineral Endowment and Metallogenic Potential.

Finally, The Con 36 will be an exercise in Jargon busting. Having worked your way through Cons 33 to 35, this episode will be a summary geological section covering language, terms, geological features and deposits, that are frequently used in news releases and technical presentations. It will also provide a whistle-stop tour of some of the junior market go-to deposits.

For now, however, as Dylan Thomas once said... “to begin at the beginning”.

You’re familiar with the main concepts, right? A mineral is a solid chemical compound of a given composition and crystal structure that occurs naturally, and rocks are simply an assemblage of minerals. There are three broad families of rock types, Sedimentary, Igneous, and Metamorphic.

Sedimentary rocks are accumulations or depositions at surface, with erosion, gravity, wind, water, frost, and evaporation important agents in their formation. These accumulations are typically preserved over geological time by being buried and protected from erosion. During burial sediments can undergo a number of different processes such as compaction, diagenesis, and cementation all of which get lumped together in a process called lithification. Sometimes young rocks are barely compacted or cemented at all. So sedimentary rocks are both an accumulation of sediments and then that sediment pile being turned into actual rock (with vary degrees of lithification).

A key feature of mineral deposits that we will explore in a later session is the source of mineralising fluids. Note that water trapped in the sedimentation process is called connate water, and that this water plays an important part in geochemical processes when it is heated up, squeezed out of the rock, moves around, and reacts with other rocks. More on this in the Mineral Systems episode.

Igneous rocks (from the latin word for fire, ‘ignis’) are formed from the cooling of magma or lava. Nice and simple. As well as classifying igneous rocks on their chemical or mineralogical composition, they are also classified by crystal size. The faster the molten rock cools, the smaller the crystal size and the inverse is true as well. The slower it cools, the larger the crystal size.  Magma that makes it, or extrudes, to the surface as lava usually presents itself in volcanos, and cools quickly. These are called extrusive or volcanic rocks and are typically relatively fine-grained. Magma that accumulates in a magma chamber within the earth’s crust simply intrudes into existing rock and forms plutons, and cools slowly. These are called intrusive or plutonic rocks and are typically relatively coarse-grained. I told you it was easy.

Sticking with magmas for a bit, because it’s relevant to mineral deposits... A feature of a cooling magma chamber is something called crystal fractionation. In the early 1900s Canadian petrologist, Norman Levi Bowen, established that as a melt cools, crystals start forming in a predictable pattern.

The first crystals to solidfy and form are mafic minerals such as olivine and pyroxene that are rich in magnesium and iron. Mafic - the ma from magnesium, the fe from ferric. Anyway, once the first minerals crystallise, it leaves the rest of the melt relatively depleted in iron and magnesium, and relatively enriched in the other elements such as aluminium, sodium, calcium, potassium, and silica. Gradually as the temperature falls and more crystals form and sink as solids, the upper portions of the magma chamber can be further and further enriched in elements stable at lower temperatures. And these elements enriched in magma chambers can include base metals and rare earth elements.

(only draw the ‘a’ picture, and it wouldn’t be paleodepth, it would just be depth... thanks!)

Sometimes, if new forces are applied to the magma chamber (a fresh pulse from below, or volatile degassing in the magma, perhaps), lithostatic pressures (the weight of the rock mass above) can be overcome and the upper portion of the magma chamber, rich in metals and lighter elements, possibly carrying some feldspar and quartz crystals, can rise up higher in the crust as part of a fresh intrusion. Remember that a porphyry is a fine-grained intrusive rock (in other words it has cooled quite quickly) that also contains well defined, larger crystals of feldspar that formed more slowly in a hotter place. Hello copper porphyries, yes, I’m looking at you.

But that’s enough detail for now. Next up are metamorphic rocks.

The process of metamorphism does not melt rocks, but instead transforms pre-existing rocks into denser, more compact rocks. New minerals are created either by rearrangement of mineral components or by reactions with fluids that enter the rocks. Pressure or temperature can even change previously metamorphosed rocks into new types of metamorphic rocks. It is fair to say that metamorphic rocks experience a range of intense conditions, and a very common verb in geological text is “to suffer”. As in, metamorphic rocks often suffer, deformation / shearing / smearing / folding. Despite these hot and pressured conditions, metamorphic rocks do not get hot enough to melt, or they would become igneous rocks. The etymology of metamorphic is simple: ‘meta’ means change and ‘morph’ means shape.

Conditions capable of stiumulating metamorphism are most often found either deep in Earth’s crust or at plate boundaries where tectonic plates collide. As much of our continental crust is old, and has been buried, so there are plenty of metamorphic rocks in the day-to-day life of an exploration geologist.  And indeed in the life of a resources investor.

Granite greenstone belts anyone, and all those gold deposits? Have you ever wondered what makes a greenstone belt? Well, they are extensive layers of interleaven mafic volcanic rock and sedimentary rock (a volcano-sedimentary sequence or complex), that have been subject to metamorphism. And it just so happens that the classification of metamorphic rocks is largely based on the presence of identifier minerals in the mix... an observable mineral assemblage, which is predictable in time and space and becomes known as a mineral facies.

Mafic rocks (rich in iron and magnesium) when metamorphosed to a certain grade can reform into a suite of green minerals that includes chlorite, actinolite, and epidote.  Do you see where this is going? Yep, you got it, greenstones. And these volcano-sedimentary packages are variously intruded by granitic plutons, plugs and stocks, which are perhaps themselves some of the drivers of metamorphism alongside burial and compaction. Hence “Granite Greenstone Belts”

This is, of course, a necessary simplification as the Greenstone mineral facies can be formed as the rocks are rising in temperature and pressure (prograde metamorphism) or when falling in temperature and pressure (retrograde metamorphism). Very old rocks can suffer several prograde and retrograde episodes, which makes it complicated trying to work out when the most economically important mineralisation event occurred, and metals can be remobilised and later fluid pulses can overprint primary mineralisation with secondary mineralisation, and multiple phases of alteration... Und so weiter... it can make your head spin.  Unpicking the history of rocks is akin to a detective trying to establish what happened on the night of the crime using forensic science. No PC Plods please, bring us your finest geoscientist.

A final word on metamorphic rocks is that in the process of compaction and rearrangment into denser forms, metamorphism can generate fluids. This metamorphic dewatering can mix with connate brines released during sedimentary compaction, and possibly even with devolatalising magmatic fluids... so the systems and sources of fluids can get pretty complex, hot, and acidic. Complexity worthy of a degree course and a further lifetime of study by experts (not me, I’m far too much of a generalist). And of course these fluids can all carry metals, which again will be addressed in the Mineral Systems episode of The Con.

Are you still with me? Sedimentary, check. Igneous, check. Metamorphic, check.

Right. Now, let’s put these key rock types into context, and explore some other concepts such as pressure, temperature and density.

We live on a roughly spheroidal planet that formed 4.6 billion years ago, and I’d like you to cast your mind back to happy memories of Year 6 geography lessons with Mrs Bigginsthwaite. Unless you are really really old you were probably shown a diagram a bit like this... Here, let me draw it for you

It’s the classic plate tectonic diagram showing an oceanic spreading ridge (constructive plate margin) in the centre. Here the hot magma upwells and comes into contact with seawater. The magma cools to form oceanic crust which, thanks to the chemistry of the seawater, is slightly different chemically from the solid rock of the lithosphere underneath.  Oceanic crust is usually about 7 km thick, but can be thinner when the plates are spreading more slowly, and thicker - such as in Iceland where oceanic crust thickness is up to 20 km thick - where the spreading is happening faster.

The molten magma forms a distinctive suite of rocks in the ocean, that includes sheeted dykes and - pillow lavas, where each gloop of lava forms a quenched, fine-grained skin on contact with water and the rest of the hot bubble cools more slowly, with the coarsest crystals in the middle.

Looking deeper into the earth, a couple of really cool things can be pointed out here... Firstly, the lithosphere and the aesthenosphere are the same rocks in terms of composition, it is just that under huge pressure and at high temperatures, the aesthenosphere is just not as solid as the lithosphere. How is your Greek? Litho means “rock”, “Aesthenes” means weak. The aesthenosphere flows (over geological time) like a slightly plastic, very viscous rock. It is ductile. In contrast the lithosphere is essentially brittle, and it can crack and form fractures. Together these two spheres form the upper mantle, a section of the earth largely rich in magnesium and iron silicates.

This concept is especially important for mineral deposit formation. Rocks that are chemically identical can behave very differently when subject to different temperatures, and different pressures over time. Ductile or plastic rocks can flow and deform, due to the temperature or pressure conditions. When those same rocks are at lower pressures and temperatures, they can be brittle or inelastic and then break and fracture. Remember most deposits like fractures as these fractures and faults act as permeability pathways and concentrate fluid flow. Also, most deposits like heat engines driving circulating fluids and hydrothermal processes. So both environments (cool and brittle, and hot and ductile) have their role to play in mineralizing processes.

To make things even more complex, a rock that is buried quickly will experience pressure instanteously, but it might take tens or possibly hundreds of millions of years to reach thermal equilibrium with its new location.... By which stage it might have been brought up to the surface again and be experiencing lower pressures already, but just reaching it’s peak temperature. Crazy, right?

I hope that you will be seeing by now that the pressures involved, and the temperatures, and the time scales are immense.  Away from the spreading centre, the lithosphere is about 100 km thick, plust the 7 or so km of oceanic crust on top. Unimaginable thicknesses, forces, and pressures! You’ve all dived down to the bottom of a deep swimming pool, right? What’s that? Maybe 5 meters? And you can feel the pressure...from all sides.

Coming back to the main picture, oceanic crust is largely made up of magnesium-rich and iron-rich minerals, mirroring the composition of the mantle, - mafic or ultramafic. It has a density of 3 g/cm3. In comparison the density of continental crustal rocks is about 2.7 g/cm3. Pure water at room temperature and pressure has a density of 1 g/cm3, and under the same conditions, gold has a density of about 19.3 g/cm3, copper 8.9 g/cm3, and aluminium 2.7 g/cm3, the same density as continental crust.

Density contrasts are helpful in the exploration phase as geophysicists can identify denser formations such as the presence of ultramafic bodies or indeed large accumulations of dense sulphide (metalliferous) minerals - which will show up on a gravity survey. Miners also need to have very accurate density measurements of any given resource and surrounding material to understand how many tonnes of rock and waste might need to be moved.

The iron-rich minerals formed at an oceanic spreading centre also faithfully record the magnetic signature of the earth at the time of emplacement. Given that the earth’s polarity undergoes mysterious magnetic reversals irregularly (between 10,000 and 50,000,000 years, with the last one almost a million years ago), magnetic surveys of the oceans reveal the growth of oceanic crust over the eons in great detail. Incidentally, all iron-rich minerals that are common in mafic and ultramafic units retain remnant magnetism, which means that magnetic surveys used by exploration geophysicists can help map geological units at depth without drilling expensive holes.

But I am getting distracted. Back to the picture.

To the left of the spreading centre that are mantle plumes, hot spots, a subduction zone and a volcanic island arc. Underwater volcanic activity will be mixed with sedimentation and in the subduction zone, sediments and seawater will be trapped in an accretionary wedge, and subducted, and eventually melted when it gets deep enough. Further to the left in the picture you can see a volcanic arc, and sediments accumulating in the subduction zone are part of the fore-arc basin, and sediments accumulating behind the volcanic arc are part of the back-arc basin. If it helps to visualise modern examples, The Aleutian Islands off the coast of Alaska and the Lesser Antilles south of Puerto Rico are good examples volcanic island arcs forming above the subduction zone between two oceanic plates.

To the right of the spreading centre, the oceanic crust and the attached lithosphere is being subducted beneath a continental plate where the crust is typically 40 km thick, on top of the 100 km thick lithosphere. The subduction of an oceanic plate beneath a continental plate has even more sediment loaded into the basin as there are more bits of broken rocks (clasts) coming from Terra Firma (terrigenous)... so plenty of terrigenous-clastic sediment that is loaded into the trench, piling on weight and sediment into the basin, which then gets incorporated into the accretionary wedge. These sediments, plus the water, and the oceanic crust eventually melt, and like a lava lamp rise in vast plutons and magma chambers into the mountains adjacent to the subduction zone. The archetypal example of this setting are the Andes mountains of South America. In addition to llamas and pan-pipes, you get volcanos, earthquakes, and occasionally mineralised porphyries.

A vast array of sedimentary process will also be taking place along this coastal mountain chain. We can zoom in on the main depositional environments

In high energy environments with steep slopes, and fast flowing water sediments can be chaotic with large boulders or cobbles incorporated in the mix. I’m thinking erosional sloughing off of high mountains, flash floods, and collapses off the steep continental shelf into the deep ocean.

In low energy environments such as wind-blown plains, meandering rivers, inland seas and lakes, and deep oceans, sediments accumulate slowly with well-ordered, predictable grain sizes. In river, desert and tidal environments regular winnowing by wave or wind action can sort sand or mineral grains incredibly effectively, so that everything within a certain energy environment has the same physical characteristics (governed by properties such as density, surface area, weight, hardness, or friability) But just up the beach, say, are larger stones that only get moved by storm surges. This is how mineral sands and placer deposits are enriched to the point that they might be economically viable.

On the far right of the picture is a rift zone where crustal thinning occurs, geothermal gradients increase, and a combination of subsidence, volcanism and heating occurs. Sometimes the rifting process stalls such as the formation of the North Sea between mainland Britain and Continental Europe [I’m speaking of recent geological history of course, not of recent politics .... ahem... enough of that].

An example of an active geological rift is the East African Rift.  In hotter climates evaporation of water during the day may cause chemical precipitation of vast thicknesses of evaporites to accumulate (especially when accompanied with ongoing subsidence). Whether marine or lacustrine, evaporites need a restricted water balance, and can form economically important resources. Chlorides, sulphates, borates, and carbonates, give us vital salts, fertilizers, detergents, and supplements. Evaporites also play important roles in trapping fluid flow and potentially as being a repository for nuclear waste.

The final point I would like to make about this simple picture of the crust but which spawns so much complexity is about uranium. I was blown away by this when I heard about it in my very first lecture at university on the age and provenance of the Earth.

Our planet is warm and pleasant - even though at times it can feel too cold, too hot, or too cloudy yes, Canadians, Australians, and Brits, I’m thinking of you. The pleasant conditions we enjoy on its surface are in large part due to the radioactive processes taking place at its centre. The radioactive decay mostly of isotopes of uranium, thorium and potassium  causes our planet to behave like an immense hot-water bottle: slowing down the cooling rate and consequently making it habitable. About half of the heat necessary for our survival is released by the radioactive disintegrations which take place in the rocks that form our Earth crust.

Geology
New
Ep
33
Geology: Introduction and Essential Concepts
Available soon

Hello and welcome to episode 34 of The Con. My name is Merlin Marr-Johnson and in the previous episode I introduced a number of general geological concepts that are useful for understanding economic geology. The plan for today is to address the question of “What is Ore?”

Once this philosophical concept has been addressed I will have a look at the background crustal abundances of a variety of elements (and minerals) and then I’ll go on to remind you how rare and special it is for economic orebodies to form. Economic orebodies are rare and special because concentration factors are required to lift a mass of rock from levels of background crustal abundancies to anomalously high concentrations that can be defined and extracted at a profit. It takes a kind of geological magic to create “ore”, and I’ll illustrate a range of different ore styles and how they are developed.

Most deposits are hard to find, and when you come to think of it, measuring anything is actually hard to do as well. I’ll jump down the rabbit hole of sampling protocols and sample representativity, and with a bit of luck I’ll manage to navigate back out again into daylight.

The development of every ore deposit offers differing types of practical challenge. Some are more complex than others, requiring more advanced skillsets and, crucially, stronger balance sheets for success to be achieved. We know from experience, often bitter, that different types of orebodies have different Capital Expenditure requirements, and different barriers to entry. The last part of today’s episode will be a review of which kinds of companies are suited to which kinds of deposits, complete with gross generalisations and sweeping statements.

That is what I hope to cover today. End of the preamble. Let’s get stuck into the main topic.

Ore

Ore, O,  R,   E,  is what the resources sector is all about. Define ore then dig it up at a profit, that’s the basic plan in a market economy. Ore is the stuff that gets mined, right? Perhaps; but getting there is not always simple, and there are hidden depths to that phrase ‘define ore’.

Starting from the principle that we know why we want use a certain commodity, exploration geologists often start with moose pasture and concepts; greenfields exploration and plenty of blue sky. With sufficient hard work, funding, and luck the team will find enough rock containing enough of the value material in question for it to qualify as an inferred resource. Eventually that resource might be derisked enough for it to be defined as ore. Regular listeners to The Con will have heard me use the term Modifying Factors that are applied to resources, to de-risk them further.  The Canadian stock exchange is explicit about the word “ore”. Under the TSX definition, “ore” implies technical feasibility and economic viability that should only be attributed to mineral reserves.

In other words, ore is only ore when a whole host of Modifying Factors have been satisfied so that the extraction of a valuable product from within that bit of rock can be done at a profit in a market economy. These Modifying Factors cover, at their most basic, geological factors such as grade, tonnage, and distribution; mining factors such as geometry, rock hardness, fracture patterns and or stability, and strip ratios or mining depths; metallurgical factors such as liberation and separation characteristics, reagent requirements, grind size, and mineralogical complexity; plus economic, political, environmental and social factors just for starters.

Fluctuating fuel prices, or tax rates, or commodity prices or reagent prices can make previously uneconomic resources economic. A resource can be redefined as a mineral reserve, or ore, under favourable conditions. But it cuts both ways. A change in the modifying factors can render ore uneconomic. And we are seeing this happen in 2022. In some cases material that last year was defined as Ore has now been downgraded to resource status as projects have been made uneconomic by rising capital and operating costs. Back to the drawing board for recently-but-no-longer bankable projects such as the Hemerden tungsten mine in Devon.

Hmmm. As you can see, defining Ore as ore is complicated. And yet, although the strict definition of Ore is wrapped up in the project specific detail, over time empirical observations can be made about different kinds of economic resources. And it is this aspect of ore bodies that I want to talk about next.

Different types of Ore

By and large, we have an idea of what tons and grades work for different kinds of deposits. Exploration companies set themselves loose discovery targets to guide fieldwork. Successful operations tend to meet certain threshold criteria and we can build up a picture of what works in real life situations. These criteria of course vary from company to company, from country to country, and from commodity to commodity, but they are used as guidelines. For example, Randgold Resources (before its merger with Barrick) used to target at least 2 million ounces at a grade of 2 grams per tonne. Rio Tinto now has its own framework of what kind of deposits meets Minimum Economic Value thresholds. When I spoke to a senior BHP geologist recently he said their target copper deposit is one that can produce 600,000 tonnes of copper per annum and at a minimum grade of 0.5% Cu. Not so easy to find! And so on. I spoke with a fund manager recently who had the view that copper porphyry resource grades needed to increase by a percentage point in grade from 0.4% in Arizona to 0.5% in Chile and Peru, and 0.6% in Argentina and Ecuador. Clearly metallurgy, strip ratio, tax rates and many other factors will affect project-specific economics, but empirical ideas of what constitutes an orebody exist.

Antony Evans wrote an excellent textbook called “Ore Geology and Industrial Minerals: An Introduction”. I’ve got a copy of the 3rd edition dating from the early 1990s, and it is a good book to own as a reference for anyone interested in the topic, even if it is a bit dated in places. In the introductory chapter, figure 1.17, there is a representation of the continuity of different orebody types and approximate grades.

see diagram / pdf / photo

Have a look at this diagram. The vertical axis shows concentrations ranging from 1 part per million (1ppm), 1g/t up to 100% pure mineral. The horizontal axis shows geological continuity ranging from high to low. Just as a reminder, 10,000 ppm is the same as 1%. 1,000 ppm is 0.1%. 100 ppm is 0.01%, etc. Remember, also, that there are a million grams in a metric tonne, so 1 ppm is also the same as 1g/t.

It is a diagrammatic representation of the continuity of different orebody types and approximate grades, dating from a paper written in 1982.  At the top of the diagram, the lowest grade deposits are diamond pipes, and then alluvial Gold, then it is a short hop to 30 ppm, or 30 g/t. In that very small range now sit most gold and platinum group metal deposits, with different levels of geological continuity from stratiform to vein-type. Any time there is a significant structural overlay on your basic orebody type, ore discontinuity will rise. The less geological continuity you’ve got, the harder it is to define your ore pods, the more the grade has to play in your favour.

Once the concentration, or grade, reaches 100 parts per million some deposits start to be measured in percentage terms. Lithium and uranium deposits are sometimes reported in ppm, so they don’t look so “low grade”. Molybdenum and cobalt, since they typically occur associated with copper or nickel, are usually reported in percentage terms.

The range for this low grade suite of minerals as shown here on the Y axis is 0.1% to 1%, or 1000 to 10,000 ppm. It’s a schematic diagram and we’re entering into the range of large porphyry deposits. Depending on a host of modifying factors, economic grades and commodity types, the deposits are going to be anything between 0.1% and 1%. The global grade of Copper being mined at the minute is around 0.45% Cu, which is just above the ‘average cut-off’ grade of copper deposits when the book was published about 30 years ago.

Rising in grade, with above 1% up to 10% of the rock mass comprised of value minerals, and you’re looking at nickel and tin sulphides.  Mississippi Valley-type VMS style deposits, stratiform hosted and volcanic-hosted Copper, Zinc, Lead, +/- Gold Silver deposits. These deposit types are usually smaller and more discontinuous than the big porphyry deposits and because they are more erratically in place, you’ve got to have higher grades to make them work. There are a host of metallurgical reasons and other modify factors as well but essentially, you’re talking about a grade that is roughly 10 times higher than the porphyry grades.

Taking another step higher in grade, one comes to the sedimentary Manganese and the Phosphorites at around 30%. At 40% - 50%, there are Bauxites and the majority of the Iron ore formations. Up at 60% content, there is some Podiform Chromite. Finally, with the value mineral comprising the vast majority of the rock itself there are Gypsum, Stratiform Chromite, Coal, and Salt. These are commodities that are potentially in situ materials that if you’ve got the right purity, you can sell them as you mine them - the fabled Direct Shipping ore.

The reason for showing this diagram is to remind you that ore comes in very very many different grades and types. The value mineral in a diamond deposit is almost unmeasurably scarce, and conversely in a salt deposit almost the entire rock is the value mineral. The challenges associated with defining and extracting these different deposit types vary enormously. For example, one of the challenges of low grade deposits is that a vast percentage by mass or volume of the ore is non-value mineral which needs to be mined, processed, and stored safely and the tiny percentage by mass or volume of the value-mineral needs to pay for the entire process. At the other extreme, huge amounts of rock need to be transported so logistics, handling, and distance to market become a key factor, and very small percentages of non-value minerals, deleterious elements or other impurities can affect the economics of the project.

Concentration Factors

Right. Having established that there is huge variability in actual ore types, now let’s look at concentration factors that are needed to be achieved to reach these broad grade thresholds.  How many times does the background level of mineralisation that’s the average endowment of the earth’s crust need to be concentrated to make an economically viable ore deposit? As a starting point, here are the crustal abundances of some key metals.

Look at Copper, a key mineral, for example. To reiterate, it has an average crustal abundance of 0.0068% or 68 parts per million. This means that to reach the average porphyry grades of around 0.3% to 0.5% Copper, nature has to cause an enrichment of 44 to 74 times the average crustal abundance. And the higher grade the deposit, the greater the enrichment or concentration factor required. 5% copper ore? You’re looking at concentraction factors of 740 times. And the same goes for all of those metals. Gold needs to be concentrated 250 x above crustal background to reach a grade of just 1 gram per tonne, 500 x to reach a grade of 2 g/t , 2500 x for 10 gram rock, and so on.

How does this happen? What causes ore grade material to occur? Well, I will cover the main processes of enrichment and concentration that can happen in geology in a separate talk about mineral systems. The key point I wanted to highlight here is that exploration and development companies are searching for the rare occurrences where natural processes have elevated, enriched, and concentrated the background mineralisation many many times over, and created unique locations where rock can be extracted as ore, for economic profit. Next time you berate exploration geologists for taking too long to find a deposit, or you rail at a deposit being small or low grade, it may be worth remembering the enormity of what nature has to do to make that deposit large and / or high grade.

Pierre Gy’s Theory of Sampling

At this juncture I would like to take a little time out to consider the concepts behind ascertaining grade. I mean, when we take a sample of something, how do we know what grade it is?  What if the point that is sampled does not have an ‘average’ amount of ore in it? I mean, we don’t sample 1 tonne of rock to establish how many grams of gold are contained within that tonne. No, we sample a couple of kilograms of rock and then scale up the proportion of gold found. But how does that work, huh? Well, the theoretical and practical science behind sampling owes a huge amount to a remarkable French metallurgist called Pierre Gy.

It all began in 1947 when Gy was working at a small lead (Pb) mine in the Republic of Congo and he was asked to estimate the grade of a 200,000 t, apparently low-grade, stockpile.  He soon recognised that fragments on the stockpile varied in size and weight, ranging from boulders of several tonnes to fine dust weighing almost nothing, and that he did not know what to do. Two key questions arose, which were: “How should one select a representative sample? and How much material should be selected for this purpose?” It was the starting point of the journey to an awesome set of Theory of Sampling monographs and papers that were published regularly from 1960 to 1998. Gy’s work incorporated statistical and stochastical theory, Bernoulli Trials, Poisson Sampling (which are all worth looking up if you have the inclination) and applied these ideas to problems such as sample heterogeneity, and variability, sampling errors and analytical errors. Snubbed by academia, misunderstood by his employers he carried out research by himself, earned not one but two PhDs in statistics along the way, and he ultimately established a formula to define a quantitative measure of heterogeneity, which “lies at the root of all sampling errors”. His work encompasses how to sample dynamic data sets (process plant flow, conveyor belts etc) as well as static data sets (laboratory analysis and ore deposits). Total genius!

To illustrate some of the challenges, imagine, if you will, ore with the value mineral disseminated finely and homogenously through a rock mass of a defined size, let’s call it the Lot. Let’s pretend the Lot contains gold. At pretty much every scale of sampling an even population within the Lot you would find the same proportion of gold to host rock. Even with a grade as low as, say, 1 g/t which is 1 part per million, in a perfectly homogenous sample the gold would be evenly distributed, so that if you sample it with a teaspoon, a ladle or a bucket, you would still find the same proportion of gold to host rock. But what happens if the distribution of the gold within your Lot is not even?

To make this point, let’s head into the kitchen and the glorious British tradition of Christmas pudding.

Mrs. Cratchit entered: flushed, but smiling proudly: with the pudding, like a speckled cannon-ball, so hard and firm, blazing in half of half-a-quartern of ignited brandy, and bedight with Christmas holly stuck into the top.

A Dickens scene. Well, the tradition also involves hiding a silver coin in the pudding. The aspiring exploration geologist can serve out 11 platefuls of pudding and analyse them each separately to come to the conclusion that this particular deposit had zero silver grade. And then a final serving, portion #12, which contains a coin….would show a different result. A naive geologist who was sitting by himself on Christmas Day, watching James Bond re-runs with this particular plate might think that the grade of this deposit is represented by the grade of this portion, so a grade of 1 silver coin per plate. Hurrah, we’ve made a high grade discovery! Let’s put out a sensational news release and claim success!

Not so fast. A wiser geologist would realise that she needs to take more samples to be sure, and would eventually reach the conclusion that the actual grade of this deposit is 1 silver coin per pudding. Hmm, maybe these puddings might not be worth mining after all.

Or imagine a huge muffin baked with only one blueberry for every million parts of cake. If you stuck a straw through that muffin to extract a core of tasty stuff, and then assessed the contents of the straw, you’d stand a good chance of thinking that you had intersected plain muffin rather than blueberry muffin, no? But if you ate the whole muffin you would realise that it is, in fact, a blueberry muffin.

The size of the sample required to ascertain the grade of any particular commodity will always be case specific. Care needs to be taken to ensure that individually, and collectively, samples adequately reflect the distribution of the value mineral under investigation. Bog this up, and you create a huge mess.

Stepping out of the larder and back into the field, gold might occur in nuggets, or preferentially in narrow quartz-veins that make up a tiny proportion of the overall rock mass. If you sample with a teaspoon, you may well miss the gold nugget or gold-bearing vein. Indeed, you might miss certain features even if you sample at the bucket-scale. There are a couple of ways round this conundrum, one is to take more samples in the hope that statistically speaking enough of the samples will contain the key features. The other method is to increase the volume of each sample taken. At the top end of this process of increasing sample size, “Bulk samples” are large samples of several tonnes or possibly hundreds or thousands of tonnes specifically planned and taken to tackle issues of heterogeneity.

Note that so far all we have been talking about is in-situ heterogeneity. Like a first-time mother fixated on the challenge of giving birth, once you’ve cracked that first problem there is no time for complacency. The next set of challenges come thick and fast. Once the rock has been broken or milled there is consitution heterogeneity caused by varying physical properties of the constituent parts, often density. For example, Gold (density 19.6 g/cm3) is 6-7x more dense than ‘average rock’ (density about 2.8 g/cm3) and gold will work its way to the lowest crevice very quickly.

Another food analogy. Have you ever opened a box of breakfast cereal and thought, yippee, this cereal has got loads delicious dried strawberries in it? And then realised that it was just the first bowlful and that every bowl after that was just the same old flakes as before? Did you infer the grade of the cereal from bowl one, or the larger sample size of all of the bowls around the breakfast table for as long as the cereal lasted? There you go. All this time you didn’t realise as you chomped your crispy flakes that you were dealing with a classic constitution heterogeneity problem! Incidentally, if there are family arguments over parity of dried strawberry distribution in bowls Pierre Gy can offer some practical steps in how to reduce the sample size without creating a systematic bias… Simply pour the entire packet of cereal onto the kitchen table, mix and then form it into a conical shape prior to flattening it out into a cake. Then divide the cake into quarters; remove the two quarters which sit opposite one another, combine the other two quarters which now constitute the reduced sample. And repeat the same process until you arrive at a breakfast portion sized sample. The dried strawberries will now be fairly distributed in every bowl. But you might have created a mess and solved one family argument only to create the grounds for another…

In short, there are in-situ problems and subsequent handling problems.

Taking a peek into the dark trunk that is the Theory of Sampling can be a bit scary. Very quickly the language becomes so bewilderingly complex, that it starts to sound comical to the layman. Sampling Errors can be Correct, Incorrect, Fundamental, or Total for starters, and there’s a veritable alphabet-soup of acronyms, even before the maths begins. But it is important, my goodness it’s important. Gy’s Theory of Sampling (TOS) is there, underpinning the entire industry.  It’s there in the way we take samples, in the number and the size of individual samples. If you look up the Australian JORC Code 2012, there is a huge section on ‘Sampling Techniques and Data’. In fact, Appendix 1 to the Code is all about sampling size, sampling techniques, and sampling protocols. The Theory of Sampling is there in everything that relies on using sample data. The JORC Code goes on to add that Sampling Techniques, I quote, “apply and should be considered when estimating and reporting Exploration Results, Mineral Resources and Ore Reserves”. In otherwords, the Theory of Sampling applies to pretty much everything we do as resource geologists.

Infill drilling and metallurgical sampling are effectively exercises in increase the volume and number of samples taken to reduce errors of estimation of average grade and to better understand any internal heterogeneity of the overall sample Lot. And remember that every meter of drilling, whether it is Reverse Circulation or Diamond Drillcore generates several kilos of sample. In the case of RC drilling, the sample comes up as dust and chips, and Diamond core often comes up in lumps or rock that may split preferentially along veins or in fault zones that are often fluid conduits and enriched in the value mineral. The samples all need to be reduced in size - in a representative manner - until they are small enough to be sent off to the assay lab, often a pulp as low as 85 grams in weight. Fire assay charges are typically 30 g or 50 g in weight, so an 85 g pulp can be reassayed and have some spare pulp left over. And each of those sub-samples need to be an accurate reflection of the original sample’s make-up.  Gy’s TOS is there in every step of the analytical process and the interaction of exploration companies with assay laboratories.

Yes, I know, on the scale of my usual disgressions this has been an elephant, but I feel it is important for you to know that science to calculate the grade of a sample is both well-established and sophisticated. This stuff matters, even if it rarely receives proper airtime. The grades of individual samples contribute to our understanding of the average grade for a mineral deposit, and it feeds into the process of Resource Estimation and the determination of Mineable Tonnes, and we are back full circle at the definition of Ore. Cool huh!?

At least now we can pause for breath. Hmmmmmm - and breathe.

Right. So far today I have talked about the Concept of Ore, differing grades of orebodies, the concentration factors required to acheive those ore grades, and the theoretical and practical challenges of sampling.

I did want to carry on to do two more topics but I realise now that my time is up, so I’m going to create a new Con which is going to come shortly after this one. And it will contain Basic Ore Types and Emprical Observations on project complexity. For now, however, goodbye.

CON 34 b

Hello and welcome to Episode 34b of The Con. This episode will cover Basic Ore Types and Empirical Observations on Project Complexity.

Ore Types

Mineral deposits can be categorised into three basic groups depending on how they are formed.

The first major group of ore-deposits are those created by the concentration, or enrichment of the value mineral through surficial processes such as weathering or sediment transport. Rock containing low concentrations of say, gold or diamonds, can be weathered (frost, rain, wind action), eroded, transported, and concentrated by river currents or wave action in the sea to form placer deposits. The less resistant rock is broken down into clay minerals over time, and washed or blown away at various stages during the processes. Ultimately the dense, resistant mineral (gold or diamonds) can either accumulate in-situ, or be transported by a high energy flow like a river, only to be preferentially trapped and concentrated in pockets (after waterfalls) or when the water loses energy such as when it flows out of the mountains onto the plains, or when it hits the sea.

Beach sands can form when resistant titanium minerals such as zircon, rutile and ilmenite are concentrated by the winnowing action of waves over thousands and thousands and thousands of years.

Bauxite, aluminum ore, is formed when surface waters preferentially remove other elements during weathering, leaving a rock that is, eventually, rich enough in aluminium to be mined economically.

The second major group of ore types are Magmatic Sulphides, that purely involve molten rock, or magma.  Magmatic Sulphides form through a process called sulphide unmixing. Normal magma is made of silicate minerals (rich in silica, aluminium, and a host of other rock-forming elements), but what can happen is that a separate melt of sulphide can form. Under certain conditions the sulphide separates out, so you end up with two melts, the silcate melt and a dense sulphide melt. And certain elements that really like to bond with sulphur move in the sulphide melt preferentially and get concentrated in that process. Cast your mind back to the different groupings on the Periodic Table - even if you can’t remember which elements go where - you can probably still picture in your minds’ eye that there were different groups. Well, each of those groupings is a set of elements with similar reactivities and chemical characteristics…. such as, yep, you guessed it, which elements like to bond with sulphur during geochemical processes. And if you have spent some time in the resources sector you will know that the big magmatic sulphide complexes such as Norilsk, Voisey’s Bay, Duluth, Stillwater, or the Bushveld Igneous Complex are famous for producing nickel, copper, cobalt, platinum, palladium, rhodium and other platinum group metals. [Note the use of the word ‘group’ there - PGMs or Platinum Group Metals - a nod back to Mendeleev and the Periodic Table]. This link between the geological setting and the production suite is because nickel, copper, cobalt and the PGMs preferentially partition into sulphide melts out of silicate melts in magmatic processes. When the sulphide binds with the metals and crystallizes it can form an ore that will have a metallic lustre, a steely or golden coppery colour.

Finally, the biggest and most diverse type of ore deposits are those formed by hydrothermal processes. These deposits are formed by the movement of water in the earth’s crust, through permeability pathways such as cracks, faults, or preferential fluid flow through certain strata. The water is usually hot - hydro, water…thermal, heat… - sometimes up to magmatic temperatures of around 600oC although ore-forming processes can occur at temperatures all the way down to relatively low temperatures. It goes like this - in certain conditions metals can dissolve in the water, move through the fluid conduits, and be deposited when the water can no longer hold the metal in solution. As I tell my children, if you’re not part of the solution, you’re the precipitate.  Anyway, a whole host of factors determine how the metal is dissolved; and precipitation occurs when there is a triggering change in one or more of Pressure, Temperature, or Chemistry of the fluid. If the trigger is very efficient or repeated multiple times in the same spot, then these hydrothermal processes can form ores.  More on this in the next episode, The Con #35.

The final section on Ore in this episode of The Con is based on Empirical rather than Scientific evidence. I will divide up deposit types into their suitability for development by different groups or business entities. What follows are gross generalisations and sweeping statements that may cause loathing and opprobrium to be heaped upon me, but I stand by the observations. I think the classification is rooted in common sense.

Complexity in mineral deposits and their economic development can come in many guises, such as low grade, difficult geometry, depth of burial, grade heterogeneity, mineralogical complexity, challenging process requirements, refractory minerals, high altitude, political instability, security concerns, transport and logistics bottlenecks and challenges, unstable ground, water management issues and flooding risk, temperature extremes, handling issues, ore variability, waste management, deleterious elements… the list goes on. Ultimately complexity is reflected in the management skills and the capital required to develop the asset. More complex, and generally speaking Bigger projects, demand higher capital expenditure requirements and higher management demands. Less complex, and generally speaking smaller projects demand less capital and managment skill. But remember that all projects are difficult and that it is easy to stuff up even theoretically simple projects. The resources sector has an unenviable track record of failure - most projects are late and over-budget (especially when compared to the initial capital estimates from the first ‘Feasibility Study’).

The easiest, lowest capital projects are suitable for consortiums, family businesses, start-ups and juniors. These are typically small or medium sized, metallurgically simple operations where nature has winnowed, oxidised, sorted, and weathered the rock to leave a minimal processing requirement. Included in this category are sand, gravel or dimension stone operations; alluvial projects - gold, PGMs, diamonds; tailings-retreatment projects, and oxide gold operations. Low capex, with simple metallurgy these operations can be strong cash flow generators. Crucially, when mistakes are made - as they inevitably will be - they are usually not too expensive to fix. Downsides to these kinds of operations are scale (they’re often small), growth challenges (tailings dumps are finite, oxide gold only persists to limited depth, etc), and resource definition challenges (placer deposits are notoriously fickle beasts to drill out and quantify).

Mid-capex projects are suitable for more experienced or ambitious groups. These deposits are moderately complex, with challenges that can be related to geology, metallurgy, mining technique, scale or logistics or a mix of all the above. Included in the category are sulphide gold deposits, silver-lead-zinc deposits, high grade copper, heap leach copper oxide, high grade nickel, small Direct Shipping Iron ore projects, or mineral sands projects. Teams need prior experience and balance sheet strength to tackle any of these projects successfully.

High capex projects are only suitable for major groups. These deposits are highly complex, usually very large scale, and can often involve commodities that are not traded on terminal markets. The risks associated with a junior company tackling these kinds of projects are unattractively high. Deposits in this category include coal, large DSO iron ore projects, low-grade copper-gold deposits such as porphyries or IOCGs, low grade nickel especially nickel laterite, hard rock diamond mines, beneficiated iron ore such as magnetite, platinum group metals, the rare earths suite, phosphates and fertilizers, and large-scale uranium.

A rule of thumb is that engineers should not run projects with capital estimates 1 & 1/2 times larger than the previous project they ran. The same could be said for Companies. Complexity and Cost are real barriers to entry.

Goodness, it has been a long episode and we’ve covered a lot of ground. In the next session I will talk about the six key components that need to be in place in a Mineral System for deposits to be formed. Until then, thank you for listening, and goodbye.

Geology
New
Ep
34
Geology: What is Ore? Crustal Abundancies, sampling theory, and project complexity
Available soon

Hello and welcome to The Con episode 35. Today I'm going to talk about who is doing exploration and the different approaches of juniors and majors, as well as providing an introduction to understanding concentration factors through mineral systems. But it is just the introduction. Consider much of this episode as a warmup to a more technical deep dive into the constituent parts of a mineral system, which will come up in The Con 36.

But before I dive into the theory behind academic and applied exploration, I first want to touch on the dollars behind applied exploration. What is the current status of the exploration industry? We all know by now that exploration is a difficult and expensive business. Difficult and expensive as it is, however, the industry keeps going. It continues. Resource companies keep raising investment capital and they keep spending it on exploration.

They keep going in the hunt for the next mineral deposit and for the chance to create wealth. I return to The Wealth of Nations by Adam Smith, who defined wealth creation as requiring the successful combination of ideas, people, capital and land. There is data, of course, which reveals the ideas people have in the form of exploration, strategies and on the land on which the capital is deployed in the form of mineral concessions.

Some of the best data available is collated and interpreted by an Australian consultant called Richard Schoder. He tracks global exploration trends within his company, MinEx Consulting. MinEx is a great source of information, and I recommend that you check out Richard's presentations and publications, which he updates regularly. His most recent presentation estimates that four billion Australian dollars were invested by Australian companies into exploration last year in 2022.

A vast majority of that money will have been spent in Australia itself. Richard also keeps track of discovered rates, exploration spend by metal and the process of value creation through exploration over the years. I will take these Australian MinEx consulting numbers as being a proxy for the industry as a whole in 2022 and where applicable for the decade prior. According to MinEx consulting over the past 10 years, junior companies in Australia made 75%, three quarters, of all the reported discoveries and generated $2.10 of value calculated from project NPVs for every expiration dollar spent. This, on paper at least, is a good return. You spend $1 and you return $2.1. Not bad. In reality, there are many failures and a few winners, so the returns are quite lumpy. And also a theoretical net present value as defined in a technical report is very different from actual return on invested capital from profitable production. But that's an entirely separate area of discussion.

So moving on, we've had a look at the junior companies. In contrast, the larger companies only accounted for a quarter of the reported discoveries and their returns were lower, only generating 58 cents on the dollar.

It's not quite as black and white as junior exploration good, major exploration bad though. Remember that the majors are only focused on the biggest deposits and so they will write off or keep private within their portfolio or just ignore anything that doesn't reach a critical internal company threshold. And it's harder to find the really big deposits, the deposits that move the dial, move the needle for the major companies. And this means that the investment return on exploration at first sight is lower, but the threshold criteria are so different that it's not quite an apples versus arrow apples comparison.

Incidentally, there are critics of the exploration work carried out by large companies, by the majors, with a few regular complaints always being aired. Detractors say that the top-down and corporate safety and process culture in the majors means that no real field work can be carried out anymore. Head into any pub or bar in a mining town and you can find grizzled geologist-as-hero figures laughing at how the corporate geologists from the majors haven't even been able to head into the field because the roll bar specification in the vehicles aren't up to spec or similar. Generic head office rules, often designed for active mine sites where there are lots of big, heavy, potentially deadly bits of machinery moving about, prevent actual exploration activity from taking place. And executives who eventually leave the majors to start independent life in the junior sector often complain about the excessive safety briefings that accompany policy even when having a meeting in HQ offices downtown, for example, in the majors that is. The... the... the buccaneering, self-reliant, rugged, individual junior mining executive happily lampoons the complacent, siloed, cosseted, sheltered big company executive by asking if they have had the corporate chip removed from the base of the skull. But I digress.

There are criticisms of politics and empire building within the bigger companies, which inhibit good quality exploration. Top-down decisions to leave commodities at a stroke or countries on a whim can also leave good quality exploration teams work programmes suddenly stranded or hanging.

And of course, there is always the criticism that the lack of accountability on exploration within a well-funded major means that not enough useful money actually gets spent on the ground in the right way.

The counter argument is that juniors are always running out of money and can be poorly disciplined. Any money raised, a lot goes on GNA and very little goes in the ground. Budgetary constraints and sometimes unclear organisational structure means that reporting can be haphazard. QAQC occasionally slipshod and processes and procedures not as rigorous as are needed to have full confidence or to give full confidence in the data. Sometimes basic work needs to be done again when the project is much further advanced, adding cost and time delays at an always inopportune moment. Majors, on the other hand, have the budget to carry out the large geochemical and geophysical surveys that help capture regional data sets. When the work is done, the bigger companies make sure it is usually thorough, well-funded and extensive.

Pros and cons with both juniors and majors.

Regardless of who does the better exploration, the underlying fact is that exploration geologists working in companies of all different shapes and sizes need ways to improve their success rates. In fact, what we're seeing at the moment is that there's a tendency for the big companies who have the money, but the inability to actually do exploration on the ground because of safety restrictions are funding the junior companies who are nimble and are able to actually get out and do the work but don't have the money. So there's a kind of a symbiosis which is in progress at the moment between the major companies between the major companies and the junior companies. And in all of this the concept of mineral systems is useful.

Previously in the con I have spoken about natural concentration processes that are required to take background levels of metal content up to the enriched levels of an economic deposit. The discussion of mineral systems begins to lift the lid on the recognition and classification of those natural concentration processes and how they are used as an exploration tool in the resources industry. Mineral systems are a way of explaining how all deposits are formed. They are the means to explain how background crustal abundances of certain elements are concentrated in various processes, resulting in a highly localized enrichment of value mineral - an autoposite.

The mineral systems approach has its roots in the oil industry. The old boys have long known that there are some key components in any commercial hydrocarbon deposit. One, a source rock rich in hydrocarbons. Two, a fluid pathway along which the molecules can travel. Three, a reservoir rock suitable for hosting an accumulation of oil or gas or both. And four, a trap rock or trapping mechanism such as a fold or a salt dipyre to keep the oil and gas in place or indeed an anticline or a fold structure.

Obviously, there is a time component to this and a temperature and pressure component as well. The oil kitchen. Hot enough to mature the buried organic matter into crude, not so hot as to overcook the molecules and overcrack the chains. Before oil or gas wells are drilled, I'll do that again, edit. Before oil or gas wells are drilled, a vast amount of work is done to establish

Cut, cut, cut.

Before oil or gas wells are drilled, a vast amount of work is done to establish the probability of oil or gas being in the place that the geoscientists think it will be. Much of that work is estimating the presence and quality of the source, the pathway, the reservoir, the trap and the working of the oil kitchen. All of the right ingredients in the system are needed if there is to be a commercial discovery. And the same applies for hard rock deposits.

In 1994 scientists Wyborn, Heinrich and Jacks published a paper bringing mineral systems to the attention of hard rock geologists. They wrote, and I quote: “that the processes involved in creating mineral deposits are mappable on a district to regional scale and constitute a mineral system in which the ore deposit is the central feature.” They proposed that, and again I quote:

“A mineral system can therefore be defined as all geological factors that control the generation and preservation of mineral deposits.”

They stressed that the processes that are involved in mobilizing all components from a source, transporting them and accumulating them in more concentrated form and then preserving them throughout the subsequent geological history can be understood and therefore predicted. Even though the deposit itself may be small in size relative to the geography of an area, the total system of fluid rock interactions that led to all formation can extend over a distance of tens to hundreds of kilometers around the deposit. This mineral system usually provides a far larger exploration target than the actual ore deposit itself.

Now, the concept of providing a framework for exploration models proved to be appealing. It's much easier to get a budget from a board of directors or from new investors when exploration managers or CEOs can explain in a succinct manner why they need the money.

Fast forward 29 years, and there are now many ways that mineral systems are presented, but the fundamental principles are similar. Throw all the right ingredients together in the right order, in the right conditions, and you will get a predictable outcome. More than that, you will get an inevitable outcome. And furthermore, this is an inevitable outcome with the value object in the form of a deposit surrounded by a much wider and larger halo of clues pointing, if they can be adequately interpreted, to the center of the system.

Mineral deposits this away.

We all know that water pipes can burst in a cold snap, right? The mineral system analysis of the problem would be able to predict that if you have a standing water pipe at atmospheric pressure which is then exposed to temperatures well below zero degrees Celsius the water will turn to ice, expand and the pipe will rupture if the pressure exerted by the expanding ice exceeds the failure limits of the pipe. The laws of science are clear.

In this instance, mineral system analysis would also be able to point you in the direction of where the action is at its most intense by following the large network of pipes to the place where the outdoor tap, for example, is exposed to the elements. This is the vectoring element of the process. It may sound silly for that particular metaphor, but the concept is the key.

Another example. We all know that if you mix flour, butter and sugar in appropriate quantities and then bake it, you will inevitably end up with cake. Follow the recipe to the letter and the cake will be predictable. Shake it up a bit and go cross country by changing some of the parameters. This is my cooking style. Oh I think it'll be good with a few of those thrown in and a bit of this as well. And the results will vary. With my cooking there are some experimental successes. At other times it's less cordon bleu and more cordon bleurrgh.

But the mineral system, the mineral systems approach is a bit more complicated than these illustrations, given that there are often millions or even billions of years of geological history to handle. But the idea is the same. If all of the ingredients and conditions are met, then there has to be a mineral deposit formed. Important geological factors defining the characteristics of any mineralizing system include certain key features just like the way that the oil boys described. And those key features are:

  1. A mineralizing fluid with the energy and chemistry to carry metals.
  2. A source rock with an endowment of metals and other ore components.
  3. Mechanisms to drive the fluid and pathways to enable the transport of metals from source. A trapping mechanism that causes the value mineral to be preferentially concentrated in a particular spot, the deposit site. Whether the process is gradual or sudden, an economic deposit is formed through that localised enrichment, which is the final stage of a mineral system.

In the Con 36, I will provide extra detail on those key features of a mineral system. Consider it a bonus episode for the proto-geeks among you. Until then, however, thank you for listening to this talk about exploration and mineral systems, and goodbye.

NOTES

Magnetic Separation

This is where you get separation of all minerals by fractional crystallisation and related processes during magmatic differentiation. What this means is that in your magma mix, you might have an elevation of PGNs of Nickel, and what happens is the first minerals that precipitate out as this thing cools down or changes pressure or temperature may not be rich in Nickel, for example, of PGNs, but as more and more crystals crystallise, precipitate out, the remaining melt is richer and richer and richer in Nickel until finally when the Coper and the Nickel do precipitate out, they form a significant portion at that stage of the fractionated crystal part.

You can get Copper-Nickel orebodies in Sudbury, Canada, in the USSR. You can get Titanium deposits such as in Allard Lake in Quebec in Canada. These can be very extensive. Think of the Bushveld or the Norilsk-Talnakh orebodies of central northern Russia. Those are valuable and key producers of Nickel, Copper, and PGNs.

Hydrothermal Orebody

These are the depositions from hot aqueous solutions that may have had a magmatic or a metamorphic or a surface or another source. Think of metals being carried in solution and then precipitating out. It’s sometimes useful to think of an Oil process. You need to have a source, a mechanism that drives the Oil out from the source rock into a potential reservoir. You need that potential reservoir, and then you need a trap to contain the Oil in your reservoir. That is when you get the accumulation. In some ways it’s very similar when you’ve got a hydrothermal geological process, a hot aqueous solution, you need to have a source, the material needs to be leached or brought into solution in 1 area, perhaps in the magma, which is being fractionated and is being continually enriched as non-mineral bearing crystals crystallise out, or you can have the magma as a heat engine which is driving fluids through a big rock mass. Essentially you need some kind of source of the metals, you need a heat engine, and it could be tectonics, it could be pure collisional processes, it could be burial, it could be force, it could be intrusion related heat thing but you need to get the metal together, get it into the solution, and move it through a rock mass up to a point where it’s going to want to preferentially precipitate out and it’s going to want to stay there and get concentrated over time. Pulse after pulse after pulse of fluid coming through, it’s going to want to drop out the metal at that spot there. That is how you get your concentration of 80 times for Copper, or 250 times for Gold because you found a geological setting that is favourable for precipitation.

These are porphyry Copper deposits of the Andes, of PNG, of Bingham, of Arizona. These are Golden vein deposits in the Greenstone. It can be to ore, or hydrothermal, it can be lateral secretion, diffusion of ore-forming material from the country rocks, but it’s essentially carried by hot minerals. They can be driven by metamorphic processes. It’s hot fluids finding the catalysts for precipitation. Precipitation is controlled by many factors but in principle, you need to look at a change in pressure, a change in temperature, and a change in the chemistry. If you’ve got a solution that is rich in metals, that solution may be able to carry the metals at a certain pressure, at a certain temperature, at a certain chemistry, but if you changed those 3 things, or changed 1 of those 3 things, or 2 of those things, or all 3, the solution may not be able to hold the metal in solution form and therefore it will precipitate out.

Many of these hydrothermal fluids are weakly acidic so you get this wall rock interaction. As the hydrothermal fluid comes through the rock, it interacts with the wall rocks which changes the chemistry. For example, this is where you get Skarn deposits. You have an intrusion and an acidic, magmatic fluid circulating in place next to a Limestone deposit or Carbonate deposit, which is typically alkaline. The 2 meets, it drops the acidity of the fluid, the solution, the metals are no longer stable in the solution and therefore they precipitate out and as the heat from the intrusion keeps chucking out or driving acidic hydrothermal fluids from the intrusion, and it keeps getting buffered on the Carbonates, therefore you keep getting this precipitation in your Skarn deposit. That is where you get your concentration factor.

The interaction of your fluid will depend on the grain size of the rock that it’s coming into contact with in terms of the physical state of the rock that it comes into contact with. Is it highly sheared or unsheared? Is it deformed or under formed? Does it have good permeability through fracturing or is it sealed together? Is it plastic or is it brittle? Are there cracks? Is it opening up? I’ve just mentioned the buffering of solutions. This enrichment process depends on so many factors.

When you are exploring for mineral deposits, you have to really hope that you’ve got a big mineralising system. You want something that feels pumped and juicy, but it can be the case that it’s almost too flushed. The mineral fluids have come through, there’s a lot of silica, it’s a big hydrothermal alteration system but actually, there’s been no concentration system that’s kept the metals, the value material, tightly concentrated. It’s been flushed through. What you’re really looking for is the large hydrothermal system and the cubic kilometres of altered rock, but you absolutely equally need a localising factor and a focus point.

Quite often that is dilation of a space opening. This is where the understanding of your structure is so critical. You need to have your structural models well understood. You need to know this is where the force is and therefore if you point two fingers together, that point there, you’ve got compression and that’s unlikely to encourage fluid flow and yet forces in geology are never entirely orthogonal or straight on, there’s always at some angle, therefore if you’ve got something that’s not quite straight, there’s always a space opening, there’s always some dilation.

You need to understand your stress and your strain, compensation in rocks and in particular your pressure shadows, and where the fluid might flow. You may have seen quite a lot of presentations with people talking about the primary structures or first-order structures, and secondary structures, and the intersection between the second-order structures and the third-order structures that you get the space creation and that’s for the preferential localisation of fluid flows. That needs to be understood. It can happen on a regional scale over tens of kilometres, and it can happen on the deposit scale over tens of metres, or if you’re in a complex geological area, it can happen down on the metre scale and even down to the centimetric.

I’ve got a little exercise for you now. With your elbows by your side, put your hands together in a flat-handed prayer position, but don't point your fingers straight up, lower your finger tips to about 45o, or half way between your nose and horizontal / parallel to the floor.  Open your palms a little bit, like reading a book without letting your neighbours see (keep your hands nice and flat).  What you should be able to see is that even though your 2 hands represent two steepling tilting planes that are facing in towards each other (where they meet along little fingers), your little fingers have a line of intersection (where the two hands meet) that is just a line and not a plane, and it is in a different orientation  - it should in fact be dipping towards your belly button. That is the intersection line between 2 planes. Frequently there are structures where fluid flow comes up one or both of the planes , but it will preferentially congregate on that line where the 2 planes meet. There is a concentration of fluid flow along the intersection of the 2 planes. You have 2 planar features and where they intersect is a linear feature. Quite often in a mineral deposit, particularly for Gold deposits, there is preferential mineralisation down a plunging chute and that is what we’re talking about. It’s on a more complex version of the intersection between these 2 planes. You can put your hands down now.

The whole thing is further complicated when that has a life, the Gold that’s deposited there and the rocks solidify, and then they get buried again and the whole thing gets deformed and folded and sometimes sheared. It gets heated up again and you might get Gold moving around, being brought Ito the solution again and re-precipitated. It can be fearfully complicated. Remember that you’re looking for things that are going to assist nature to concentrate mineralisation in 1 spot. You’re looking for space creation, favourable chemistry, the right kind of fracturing, or the right kind of capping. For example, in some Uranium deposits, it might be that you have got some impermeable layer, some clay over the top that enables your roll front Uranium to pool underneath and just concentrate and concentrate. It’s getting to know the specifics of the kind of geology that you’re looking for.

I was going through the table of the simple classification of theories of mineral deposits, but I got completely sucked into the hydrothermal fluid flow. There are many other ways to make your mineral deposits. You can have mineral deposits formed at surface through mechanical accumulation. You can have a concentration of heavy or durable minerals into placer deposits such Rutile-Zircon Ilmenite sands. You can have Gold placers, Diamond placers; that’s the mechanical accumulation. You can have weathering features as Kaolin, which is the ingredient that goes into clays, which is weathered from Granite. Or you can have the leaching of silicates to get Bauxites.

At surface, you can have sedimentary precipitates, precipitation of particular elements in particular sedimentary environments, with or without the intervention of biological organisms at various points in the earth’s history. For example, between 1,800M and 3,000M-years ago, 2.5Bn-years ago, you had the Banded Iron formations of the Precambrian Shield. You had Quartz and Iron layers and layers and layers in a reducing environment, a climate without oxygen, and you get the big, Banded Iron formation deposits being laid down such as in the Hammersley Basin in Brazil, and also in South Africa. You can also have Manganese deposits like Groote Eylandt, just east of Darwin in Australia where the Manganese was being precipitated out into a Manganese-rich sea. You’ve got Zechstein Evaporites across Europe.

Then you can have residual processes where you have the leaching of rocks at the surface, so the soluble elements get leached away leaving concentrations of insoluble elements such as Nickel Laterites, the Bauxites of Jamaica, etc. Then there’s this secondary or supergene enrichment which is re-precipitation and/or rainwater circulation that leaches elements from the upper parts of mineral deposits and then re-precipitates them at a lower level in the deposit so you can get an enriched cap. Sometimes you can just have it as an erosional feature, sometimes you can have it where it actually lifts, enriches, at the upper levels as well. You might get an enriched oxide layer. The most famous one typically is the Chalcocite Blanket, which is a supergene enrichment of the Copper in the rock where the Copper in the upper area gets leached, re-precipitated down as Chalcocite, a very Copper-rich mineral, as a black blanket over the top of your buried porphyry. Then ideally, you’ll have a degree of erosion that takes off the leached upper portion so that it doesn’t take away the Chalcocite Blanket.

It’s very hard to find an economic deposit; most people find very few in their lifetime. A few people find more than 1. Most projects that you see on an exploration basis are not going to make it. You can take yourself to the right area by understanding metallogenic provinces. You can roughly work out where these minerals are going to be found but because we’ve got centuries, thousands of years, millennia of work in these mineral deposits, we roughly know where they’re going to be found and we roughly know what age groups you’re going to find them in.

For example, your Archean Greenstone belts, you’re going to find in the Archean, which is 3,800M-years ago to 2,500M-years ago. 3.8Bn to 2.5Bn-years ago. If you’re looking for Gold or Silver, that kind of stuff, you want to be in the Archean - you don’t have to be, but it certainly doesn’t harm to be in the Archean Greenstone belt. Similarly, the Iron ore deposits have almost all got their roots in the Archean Banded Iron formations. Just making a few observations of things that have stuck with me over my interactions with various geologies and mineral deposits over time.

There’s no rhyme or reason to this, no structure, just a few observations. If you’re looking for Gold, or when geologists are exploring for Gold, in a sense Gold is where it is. If you’re panning for it or exploring in hard rock, it’s important not to over-interpret too early. Just stick to the assay results, finding it where it is. If you’re panning for it, which is worth doing if you’ve got an interest in that kind of stuff, it doesn’t travel far. It’s so much denser than anything else; it’s got a density of 19.6g/cm cube so it’s almost twice as dense as Lead, it’s 7 times denser than most rock. If you’re looking for it, it just falls and so you don’t need to go very far. It hasn’t travelled far. That is also a useful exploration tool. If you’re panning as an exploration tool, it typically hasn’t travelled far and if you’re looking for it in rock, just because in the early days it’s always been associated with a particular mineral adularia like a Pyrite, or an Arsenopyrite. It doesn’t mean that it will continue to do so. I’ve seen it many times where the Gold actually in certain areas just does its own thing so stick to the assays for Gold.

The second thing, understanding structural controls in an orebody can take a lot of time. It’s hard to know where the Gold is going. If you’re an observer of results coming from an exploration team, don’t expect too much too early. Quite often it can take you 40 drill holes to understand exactly what the controlling structures on Gold are and even then, you won’t have it thoroughly nailed down.

Sometimes it’s easier but Gold and structure can be hard to understand. You need to have a really good geologist and a lot of drilling before you can start cracking the code of the orebody. You don’t want to be too rigorous. The code might work for a year or 2, you might be able to get a feel for the deposit, and then the further you go, the deeper or perhaps on strike, it might not behave in the same way. You always have to keep an open mind.

This is where you get separation of all minerals by fractional crystallisation and related processes during magmatic differentiation. What this means is that in your magma mix, you might have an elevation of PGNs of Nickel, and what happens is the first minerals that precipitate out as this thing cools down or changes pressure or temperature may not be rich in Nickel, for example, of PGNs, but as more and more crystals crystallise, precipitate out, the remaining melt is richer and richer and richer in Nickel until finally when the Coper and the Nickel do precipitate out, they form a significant portion at that stage of the fractionated crystal part.

You can get Copper-Nickel orebodies in Sudbury, Canada, in the USSR. You can get Titanium deposits such as in Allard Lake in Quebec in Canada. These can be very extensive. Think of the Bushveld or the Norilsk-Talnakh orebodies of central northern Russia. Those are valuable and key producers of Nickel, Copper, and PGNs.

Hydrothermal Orebody

These are the depositions from hot aqueous solutions that may have had a magmatic or a metamorphic or a surface or another source. Think of metals being carried in solution and then precipitating out. It’s sometimes useful to think of an Oil process. You need to have a source, a mechanism that drives the Oil out from the source rock into a potential reservoir. You need that potential reservoir, and then you need a trap to contain the Oil in your reservoir. That is when you get the accumulation. In some ways it’s very similar when you’ve got a hydrothermal geological process, a hot aqueous solution, you need to have a source, the material needs to be leached or brought into solution in 1 area, perhaps in the magma, which is being fractionated and is being continually enriched as non-mineral bearing crystals crystallise out, or you can have the magma as a heat engine which is driving fluids through a big rock mass. Essentially you need some kind of source of the metals, you need a heat engine, and it could be tectonics, it could be pure collisional processes, it could be burial, it could be force, it could be intrusion related heat thing but you need to get the metal together, get it into the solution, and move it through a rock mass up to a point where it’s going to want to preferentially precipitate out and it’s going to want to stay there and get concentrated over time. Pulse after pulse after pulse of fluid coming through, it’s going to want to drop out the metal at that spot there. That is how you get your concentration of 80 times for Copper, or 250 times for Gold because you found a geological setting that is favourable for precipitation.

These are porphyry Copper deposits of the Andes, of PNG, of Bingham, of Arizona. These are Golden vein deposits in the Greenstone. It can be to ore, or hydrothermal, it can be lateral secretion, diffusion of ore-forming material from the country rocks, but it’s essentially carried by hot minerals. They can be driven by metamorphic processes. It’s hot fluids finding the catalysts for precipitation. Precipitation is controlled by many factors but in principle, you need to look at a change in pressure, a change in temperature, and a change in the chemistry. If you’ve got a solution that is rich in metals, that solution may be able to carry the metals at a certain pressure, at a certain temperature, at a certain chemistry, but if you changed those 3 things, or changed 1 of those 3 things, or 2 of those things, or all 3, the solution may not be able to hold the metal in solution form and therefore it will precipitate out.

Many of these hydrothermal fluids are weakly acidic so you get this wall rock interaction. As the hydrothermal fluid comes through the rock, it interacts with the wall rocks which changes the chemistry. For example, this is where you get Skarn deposits. You have an intrusion and an acidic, magmatic fluid circulating in place next to a Limestone deposit or Carbonate deposit, which is typically alkaline. The 2 meets, it drops the acidity of the fluid, the solution, the metals are no longer stable in the solution and therefore they precipitate out and as the heat from the intrusion keeps chucking out or driving acidic hydrothermal fluids from the intrusion, and it keeps getting buffered on the Carbonates, therefore you keep getting this precipitation in your Skarn deposit. That is where you get your concentration factor.

The interaction of your fluid will depend on the grain size of the rock that it’s coming into contact with in terms of the physical state of the rock that it comes into contact with. Is it highly sheared or unsheared? Is it deformed or under formed? Does it have good permeability through fracturing or is it sealed together? Is it plastic or is it brittle? Are there cracks? Is it opening up? I’ve just mentioned the buffering of solutions. This enrichment process depends on so many factors.

When you are exploring for mineral deposits, you have to really hope that you’ve got a big mineralising system. You want something that feels pumped and juicy, but it can be the case that it’s almost too flushed. The mineral fluids have come through, there’s a lot of silica, it’s a big hydrothermal alteration system but actually, there’s been no concentration system that’s kept the metals, the value material, tightly concentrated. It’s been flushed through. What you’re really looking for is the large hydrothermal system and the cubic kilometres of altered rock, but you absolutely equally need a localising factor and a focus point.

Quite often that is dilation of a space opening. This is where the understanding of your structure is so critical. You need to have your structural models well understood. You need to know this is where the force is and therefore if you point two fingers together, that point there, you’ve got compression and that’s unlikely to encourage fluid flow and yet forces in geology are never entirely orthogonal or straight on, there’s always at some angle, therefore if you’ve got something that’s not quite straight, there’s always a space opening, there’s always some dilation.

You need to understand your stress and your strain, compensation in rocks and in particular your pressure shadows, and where the fluid might flow. You may have seen quite a lot of presentations with people talking about the primary structures or first-order structures, and secondary structures, and the intersection between the second-order structures and the third-order structures that you get the space creation and that’s for the preferential localisation of fluid flows. That needs to be understood. It can happen on a regional scale over tens of kilometres, and it can happen on the deposit scale over tens of metres, or if you’re in a complex geological area, it can happen down on the metre scale and even down to the centimetric.

I’ve got a little exercise for you now. With your elbows by your side, put your hands together in a flat-handed prayer position, but don't point your fingers straight up, lower your finger tips to about 45o, or half way between your nose and horizontal / parallel to the floor.  Open your palms a little bit, like reading a book without letting your neighbours see (keep your hands nice and flat).  What you should be able to see is that even though your 2 hands represent two steepling tilting planes that are facing in towards each other (where they meet along little fingers), your little fingers have a line of intersection (where the two hands meet) that is just a line and not a plane, and it is in a different orientation  - it should in fact be dipping towards your belly button. That is the intersection line between 2 planes. Frequently there are structures where fluid flow comes up one or both of the planes , but it will preferentially congregate on that line where the 2 planes meet. There is a concentration of fluid flow along the intersection of the 2 planes. You have 2 planar features and where they intersect is a linear feature. Quite often in a mineral deposit, particularly for Gold deposits, there is preferential mineralisation down a plunging chute and that is what we’re talking about. It’s on a more complex version of the intersection between these 2 planes. You can put your hands down now.

The whole thing is further complicated when that has a life, the Gold that’s deposited there and the rocks solidify, and then they get buried again and the whole thing gets deformed and folded and sometimes sheared. It gets heated up again and you might get Gold moving around, being brought Ito the solution again and re-precipitated. It can be fearfully complicated. Remember that you’re looking for things that are going to assist nature to concentrate mineralisation in 1 spot. You’re looking for space creation, favourable chemistry, the right kind of fracturing, or the right kind of capping. For example, in some Uranium deposits, it might be that you have got some impermeable layer, some clay over the top that enables your roll front Uranium to pool underneath and just concentrate and concentrate. It’s getting to know the specifics of the kind of geology that you’re looking for.

I was going through the table of the simple classification of theories of mineral deposits, but I got completely sucked into the hydrothermal fluid flow. There are many other ways to make your mineral deposits. You can have mineral deposits formed at surface through mechanical accumulation. You can have a concentration of heavy or durable minerals into placer deposits such Rutile-Zircon Ilmenite sands. You can have Gold placers, Diamond placers; that’s the mechanical accumulation. You can have weathering features as Kaolin, which is the ingredient that goes into clays, which is weathered from Granite. Or you can have the leaching of silicates to get Bauxites.

At surface, you can have sedimentary precipitates, precipitation of particular elements in particular sedimentary environments, with or without the intervention of biological organisms at various points in the earth’s history. For example, between 1,800M and 3,000M-years ago, 2.5Bn-years ago, you had the Banded Iron formations of the Precambrian Shield. You had Quartz and Iron layers and layers and layers in a reducing environment, a climate without oxygen, and you get the big, Banded Iron formation deposits being laid down such as in the Hammersley Basin in Brazil, and also in South Africa. You can also have Manganese deposits like Groote Eylandt, just east of Darwin in Australia where the Manganese was being precipitated out into a Manganese-rich sea. You’ve got Zechstein Evaporites across Europe.

Then you can have residual processes where you have the leaching of rocks at the surface, so the soluble elements get leached away leaving concentrations of insoluble elements such as Nickel Laterites, the Bauxites of Jamaica, etc. Then there’s this secondary or supergene enrichment which is re-precipitation and/or rainwater circulation that leaches elements from the upper parts of mineral deposits and then re-precipitates them at a lower level in the deposit so you can get an enriched cap. Sometimes you can just have it as an erosional feature, sometimes you can have it where it actually lifts, enriches, at the upper levels as well. You might get an enriched oxide layer. The most famous one typically is the Chalcocite Blanket, which is a supergene enrichment of the Copper in the rock where the Copper in the upper area gets leached, re-precipitated down as Chalcocite, a very Copper-rich mineral, as a black blanket over the top of your buried porphyry. Then ideally, you’ll have a degree of erosion that takes off the leached upper portion so that it doesn’t take away the Chalcocite Blanket.

It’s very hard to find an economic deposit; most people find very few in their lifetime. A few people find more than 1. Most projects that you see on an exploration basis are not going to make it. You can take yourself to the right area by understanding metallogenic provinces. You can roughly work out where these minerals are going to be found but because we’ve got centuries, thousands of years, millennia of work in these mineral deposits, we roughly know where they’re going to be found and we roughly know what age groups you’re going to find them in.

For example, your Archean Greenstone belts, you’re going to find in the Archean, which is 3,800M-years ago to 2,500M-years ago. 3.8Bn to 2.5Bn-years ago. If you’re looking for Gold or Silver, that kind of stuff, you want to be in the Archean - you don’t have to be, but it certainly doesn’t harm to be in the Archean Greenstone belt. Similarly, the Iron ore deposits have almost all got their roots in the Archean Banded Iron formations. Just making a few observations of things that have stuck with me over my interactions with various geologies and mineral deposits over time.

There’s no rhyme or reason to this, no structure, just a few observations. If you’re looking for Gold, or when geologists are exploring for Gold, in a sense Gold is where it is. If you’re panning for it or exploring in hard rock, it’s important not to over-interpret too early. Just stick to the assay results, finding it where it is. If you’re panning for it, which is worth doing if you’ve got an interest in that kind of stuff, it doesn’t travel far. It’s so much denser than anything else; it’s got a density of 19.6g/cm cube so it’s almost twice as dense as Lead, it’s 7 times denser than most rock. If you’re looking for it, it just falls and so you don’t need to go very far. It hasn’t travelled far. That is also a useful exploration tool. If you’re panning as an exploration tool, it typically hasn’t travelled far and if you’re looking for it in rock, just because in the early days it’s always been associated with a particular mineral adularia like a Pyrite, or an Arsenopyrite. It doesn’t mean that it will continue to do so. I’ve seen it many times where the Gold actually in certain areas just does its own thing so stick to the assays for Gold.

The second thing, understanding structural controls in an orebody can take a lot of time. It’s hard to know where the Gold is going. If you’re an observer of results coming from an exploration team, don’t expect too much too early. Quite often it can take you 40 drill holes to understand exactly what the controlling structures on Gold are and even then, you won’t have it thoroughly nailed down.

Sometimes it’s easier but Gold and structure can be hard to understand. You need to have a really good geologist and a lot of drilling before you can start cracking the code of the orebody. You don’t want to be too rigorous. The code might work for a year or 2, you might be able to get a feel for the deposit, and then the further you go, the deeper or perhaps on strike, it might not behave in the same way. You always have to keep an open mind.

Magnetic Separation

today I will start by introducing the concept of Ore within the context of mineral resources. And if and when complexities arise from a discussion of such a simple three-letter word as “ore”, I will branch out and follow a down a few side alleys that

Pierre Gy began his career in French Equatorial Africa (Congo) working on the small M’Fouati lead mine as the Mineral Process Engineer in 1946, where he was in charge of the processing plant and associ-ated laboratories. In 1947 the Paris-based head office asked Pierre to estimate the grade of a 200,000 t, apparently low-grade stockpile that had been dormant since 1940. He soon recognised i) that fragments on the stockpile varied from several tonnes to fine dust, ii) he knew nothing about sam-pling, iii) there was no meaningful literature available and iv) that he would have to improvise. This request planted the seed of life-long interest in his mind.On his return to Paris in 1949, his work in a mineral-processing laboratory also constantly brought issues of “sampling” to his attention, in particular the question of “the minimum sample weight necessary to achieve a certain degree of reliability”.1 In his search through the available literature, such as there was, Gy found that Brun-ton2 claimed that the minimum sample weight was proportional to the cube of the top particle size, while Richards3 sug-gested that the square of the particle size was important. Brunton2 based his ideas on the “constant proportionality factor”, mean-ing that for samples with different fragment top sizes, the same number of fragments was required, but Gy1 was concerned that variations in grade or density had not been properly incorporated.It was the magnitude of financial transac-tions in the coal trade based on assays for ash and sulphur in “coal samples” that pro-moted much of the early research into sam-pling. Gy tells about UK- and USA-based researchers that “realised that sampling actually generated errors that could have a financial impact”, and so began the interest in investigating coal properties in regard to particle top size, sample mass and sample variance.

Geology
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Geology: Magnetic Separation & Hydrothermal Orebodies
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Narrow Veins

Narrow deposits, narrow geological features need to be extremely high-grade to avoid the problem of vertical tonnes per metre. Quite often I see people coming out with “exciting results” and they’re talking about high grades over narrow thicknesses but my goodness, those are pigs to get into a resource category that’s going to excite the market. The reason is that it’s really hard to add your tonnes and so they might go down and down and down but if they 1m, 2m, or 3m, you need to have superb grades to be able to get the market to be excited.

Occasionally, you can get away with having 1m at 20g/t. You’re never going to be able to put a big resource together on it and it’s much better to almost keep it private and just have it as a small family operation that produces a few thousand ounces per annum and is a money-printing machine. It’s not really the kind of thing that’s going to work in the public market. As a reader of news releases, be careful of that.

Another thing to be careful of is that geologists will always drill their best anomalies first. A good deposit is an economic deposit, and those economic deposits are really rare. If you go to the best anomaly, you drill your best drill hole and you get a good result, yay. But what that does mean is that after that it’s going to be very hard to replicate the quality of the drill hole that you got in your first drill holes. In order for your deposits to average out as an economic proposition, that means that you need to have a really spectacular hole in the mix, and you need to have a few of them coming down the lines. What I really like to see is not just good grades, but good continuity as well and a good spacing out of those drill holes to show that this thing carries and carries and carries because it’s so hard to get a mass of rock with that concentration factor, again I come back to Gold, 250x concentration factor over a big tonnage, blooming hard to achieve to get that mixture of something that is trapping Gold to precipitate into the rock mouth at that particular point time over time over time. I like to see a few 10m at 25g/t or a couple of 200m at 1.5g/t to 2g/t. These are ‘shoot the lights out’ results but to carry an economic deposit, it’s kind of what you need.

Gold is hard to find and very difficult to get decent tonnes. Continuity will always be a challenge. If you can recognise a strong geological system with reliable intercepts, then it’s worth sticking with. A good deposit is worth sticking with. They don’t come around very often and remember that it’s so hard to find that an exploration company will try to make a silk purse out of a sow’s ear but if you as the reader can really see and find a strong system with reliable intercepts, stick with it. Yes, it will need quite a lot of drilling but it’s important that the team is able to show continuity over decent drill spacing. Watch out for highly sheared or deformed orebodies; they’re just so hard to drill out.

Copper porphyry

Here tonnes are much less problematic than grades. In Gold deposits, it’s very hard to get the tonnes up. In a Copper porphyry, it’s quite easy to get your tonnes up very quickly. These are bulk geological processes and therefore drilling out tonnes is relatively easy. You can probably drill out 200Mt - 300Mt with 12,000m - 15,000m of drilling. However, finding a decent grade is very rare because you need 80x enrichment of your Copper grade to make it economic above background yes, let’s say you’re in a fertile part of the Andes or Arizona, you’re on probably significantly enriched above global background concentrate. You’re a quarter or half of the way there. Then in your porphyry in your intrusion you have precipitation happening, gradually enriching your single stock, your porphyry story. It’s getting richer in volatiles and metals at the top. Then finally when the pressure situation is right, the next phase of the intrusion goes up and you get this sub-chamber that’s enriched. At that point, you want to have crackle breccias and dissemination of fluid flow, and heat engines and hydrothermal processes, and Copper mineralisation to be disseminated around the alteration halo above your secondary chamber.

It’s hard to find the right enrichment there. You either need to have it super enriched in the pre-fractionation, in the melt, or you need to have supergene processes or multiple pulses and the Copper precipitating out in the same places time and time again. It’s a very specific set of criteria. It’s hard to find good grade porphyries. Porphyries to a penny, tonnes to a penny, a decent grade is much harder. If you find a good one, stick with it, it’s valuable.

VMS deposits

These typically occur in clusters. Most of them are small. 80% of known VMS deposits globally are less than 10Mt however most of them come in clusters and the average size of those clusters defined as around 17Mt - 20Mt. Obviously, if you’re in a mineral district where the exploration is being encouraged by good results then the cluster size is around 30Mt. I would say the challenge with VMS deposits is the metallurgy. It’s relatively easy to find them if you’ve got the right geophysics, the right geology. You start unlocking the key to the distribution of those deposit types in your district. Where the metallurgy is challenging and the reason being is that these were formed right at the interface between the earth and the ocean, so they’re sub-marine deposits. It’s the mingling of seawaters with these hot fluids, you have pulses of volcanism and extrusion onto the seabed. That would be just sub-surface intrusions, you’ve got your heat engine in an ongoing rifting environment, so you have quenching of your minerals as it mixes with the seawater. You’re going to have long-lived crystallisation events. You can have instantaneous crystallisation events. Sometimes you can have very fine-grained structures. You can have almost gel-like precipitation of minerals that haven’t even had a chance to form crystal shapes yet. It’s just an amorphous, instantaneous precipitation event which of course means separation of your value product is extremely hard and you can have deleterious elements locked into the, not even the lattice. That is the challenge for VMS deposits, and we’ll go into that more in the next discussion, which is one metallurgy.

Iron ore and Coal deposits

Logistics, logistics, logistics. The grade of Iron ore is important. Tonnes are no problem at all. I can take you to billions of tonnes of low-grade Iron ore that’s never going to come out of the ground. Your initial target is to find lump Iron ore, which is very hard to find, but once you do it then you’re really just talking about logistics. Once you have found it and you’re talking about logistics, as for a magma type deposit, anything with fines which you have to grind fine because it’s let’s say a 31% or 33% Iron deposit, which means you’ve got a lot of Silica in there in the form of Quartz. You’re going to have to grind it fine to separate the Quartz from the Magnetite grains. Just forget it. Walk away. It’s too much heartache, too much hard work. As soon as you’re grinding, you’re suddenly dealing with pipelines, slurries, Blaine indices, is this going to flow, to howdy you separate your magnetic separation, high density grinding rolls, great but then you’re into slurries and pilot plants. That’s the job for the big boys.

Rare Earths deposits

Bastnasite, really you’re effectively looking for Bastnasite. That’s the key mineral for Rare Earth deposits in Carbolatide. There’s so much hoo-hah about Rare Earths. I’m not a believer, principally because if you look at who owns the processing technology of the semi-finished product, it’s the Chinese. Primarily most REE companies will need to have a CHinese component in the supply chain. There then comes as issue of where the margins are made. If a company can build an entire processing chain then they have a large a ready market in the US and Europe looking to secure the critical minerals with western partners.

Nickel Sulphide

There’s plenty of Nickel Laterite out there but the costs of development are pretty challenging, very much preserved with the big guys, multi-billion-dollar builds. If you’re a Nickel explorer, it’s much easier to go for the Sulphide deposit but it’s very hard to find the grade because that enrichment process where you get the concentration of Nickel is 70 times higher than background is very hard to do. You can find it where you’ve got it 7 times or 10 times but to enrich it 70 times appears to be very hard. You’re going to struggle to find the tonnes at the right grade, Nickel is very hard to beat. We’ve got the Bushveld and the Duluth complexes, and the Sudbury and Norilsk-Talnakh, which are these superb deposits.

Geology
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36
Geology: Narrow Veins & Resource Deposits
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This episode is focussed on resources, which are the cornerstone for mineral exploration and development companies, and we will explain how mineral resources fit into technical reports.

The success of an exploration company, a development company or a mining company is dependent on its mineral resources, how they are classified and how they are categorised and measured. There's a huge overlap between the resource base, whether it is inferred, measured and indicated or probable reserve, and technical reports such as Scoping Studies, Preliminary Economic Analyses (PEAs), Pre-feasibility Studies (PFS) or Definitive Feasibility Studies (DFS).

As I was putting the notes together for this session, I realised that the study side of things, the technical reports, pretty much need a whole session by themselves. Today, we will be talking about technical reports, but more in passing than in-depth, and we will do another episode on technical reports.

Resource Statements

The resource statements that companies put out are the cornerstones for all of those technical reports. Before we get into the detail of the resource, it's interesting to note that the resource definitions and categories were defined and established by the Joint Ore Resource Committee of Australia (JORC), an industry body which created these categories of taking it from an inferred resource through to an indicated resource, measured, and then moving into the proven and probable reserves. These guidelines more or less inform all of the other codes globally.

There's a UK code, but particularly, and listeners will be familiar with the NI 43-101 Canadian code. Almost all of the technical work and the codification is based on the Australian version. The Canadian NI 43-101 goes further than the JORC in that it becomes a legally binding document that is put out by the stock exchange. The JORC, or resources statements are only regulated by an industry body, thus, they are a set of technical guidelines for use by companies to try and ensure that they don't make mistakes, they don't invest and lose money by not having done the groundwork properly.

Australian exploration companies reporting in the public arena aren't actually obligated to publish the whole technical report as it's governed by the industry body. Whereas the stock exchange stipulates: if you want to publish the summary only, you can just publish the summary, and this gives the companies the opportunity to keep commercially sensitive information about their asset, commercial terms on mineral processing, etc, confidential. A negative aspect of this is that sometimes deleterious information is kept from the public and can be hidden by only producing a summary of the conclusions of these reports rather than publishing the whole report. In contrast, in Canada, due to the NI 43-101 stock exchange regulation, it is mandatory to publish the full technical report. As a result, many analysts I know prefer to work with Canadian companies because they have access to full technical disclosure as well as the quarterly reporting on the financials. The Canadian Stock Exchange requires quarterly financial reporting, whereas the London AIM requires 6-monthly reporting. Additionally, the Canadian Stock Exchange requires full technical reports to be loaded up.

Natural Resources

The cornerstone of these reports is your natural resources. As mentioned, the technical reports are much broader, and I will do a dedicated session on the technical reports. Just to give you a clue on that, I was looking through some of the typical headings required in a 43-101 technical report, and there are 27 aspects of this. There are 27 titles in the technical report, from the summary, introduction, reliance on other experts, etc, many of these things would be in a resource statement, but in the technical report, of the 27, there are just under 10 titles, therefore, about 1/3 of it is related to the geology. The geological setting and mineralisation is the first heading, then deposit type, exploration, drilling, sample preparation analysis and security, quality assurance and quality control, data verification, mineral processing and metallurgical testing, and then you come into mineral resource estimates. That's 8 chapter headings, 9 if you go into reserve estimates, hence the resource makes up between a third and a half of any technical report that is published. Logically, the further one goes down the study lines, the more detail that one is required to focus on, but it always starts with a resource. Your starting point is understanding the geology. Geology is absolutely pivotal on what happens next in the resource development.

Every exploration project and every new project in an established mining company, or even in an established mining camp, sometimes you can have an operation which is solely focused on 1 area of the geology, or it’s just focused on the high-grade, and a pair of fresh eyes is needed to look at the geology of the region as a whole. Typically, the executive teams are trying to work out what they have and what are they dealing with? One of the first things that you want to do is to put an envelope around your mineralisation. You want to know how far it extends, how deep it goes, how far along strike it goes, and you want to know if there are other exploration targets along the trend.

A phrase you will often hear is ‘A String of Pearls’, which relates to a repetition of interesting mineralisation. The way that a company goes about trying to define the mineralised envelope, tries to define its resources, is highly dependent on management judgment. This is really the heart of an exploration company's strategy: do you try to define a smaller area better, or do you try to show the whole trend or the potential of the region?

With an exploration company, the first thing that you do is to generate your exploration targets and your best anomalies where you think will meet your strategic goals. It comes back down to the earlier topics that I've spoken about in The Con, which is about - what are you trying to do as an exploration company? Are you trying to find 500,000oz of high-grade material, or are you trying to define a massive ore body that may be low grade such as a porphyry copper deposit? The manner in which you approach your exploration targets and your resource is completely dependent on how you establish your company from your strategic objectives. If you have an existing mining operation on a narrow continuous mesothermal vein, for example, in California or Peru, where you have a couple of metres of 10-20g/t Gold, you might not be targeting resource that far out ahead. You might just be happy with 1-2-years resource ahead of you because you've got this trust that the resource will continue year after year, and there's no point investing capital in trying to define 10-years of resource life because you can just go on a year-by-year basis.

A more common situation is when you come into a new project area and you're trying to work out if this mineralised body has what it takes to be an economic proposition. Your aim is to develop this resource and take it as quickly as possible to the point where you can start wrapping around technical reports, i.e., you can start putting some economic assumptions around this. All of these resources need to be signed off by an appropriately qualified and experienced person, often QPs, qualified persons who are prepared to face their peers and defend the assumptions when it comes to signing off the resource base have also got the humility - this is in the code - the humility to seek expertise where they do not have appropriate expertise.

I've worked in the Soviet system, which is really interesting because it's so very prescriptive. One almost puts nature into a series of little boxes, and if it ticks a certain box, then it's described as a certain kind of deposit at a certain level of confidence. It ranges from their equivalent of inferred, to indicated just by ticking boxes, whereas in the western system, it is very much dependent upon a qualified person, a QP, signing off on the resource to say: yes, I think this meets appropriate standards.

One of the first things you're trying to do is to understand what you've got, in terms of the geology, and then put some economic parameters around it to work out what processing route to take. There's a feedback between what one’s expectations are of an eventual mining method and indeed, a process route that will feed back into how one goes about the exploration, but fundamentally, you do rely on the resource itself.

Resources
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Ep
37
Resources: Statements & Natural Resources
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The first step is to complete an inferred mineral resource, this is where you're trying to get an estimate of the quantity and the quality (i.e. the grade of a body of rock), which is based on relatively limited geological evidence. For an inferred mineral resource, you need to have the evidence to imply but not verified geological and grade continuity. These are definitions that you can look up in the CIM, including all the JORC standards. Essentially, we're trying to demonstrate that by taking a sample at point A, which shows mineralisation at a certain grade, and I've taken a sample at Point C, a few 100m away of few, and that is mineralised at a certain grade, thus, by implication, between the two, at point B, that is also mineralised.

The distance between point A and point C that you can infer with confidence that point B is an average of those two grades will vary enormously depending on the type of geology. For example, if you're looking at a coal scene, the spacing between the points that you study can be 100ms apart. Once you've demonstrated that this has good lateral continuity, they can even be kms apart. Thus, if you find 3m of this material here and 3m of this material over there, the gap between them can be huge and you can predict that in between them it will be the same grade. Perhaps kms is an exaggeration, but certainly 100ms apart.

However, depending on the geology, you might be on a highly variable gold structure which is nuggety, thus if you put your sample point in at point a, you get one Gold grade, you put your sample point in at point C and you get a different grade. In this situation it is almost impossible to predict what you will find in between the two at point B, because you might hit a nugget with very high grade, or you might just hit some barren coarse with very low grade. The sample spacing will vary enormously between your geological types, and this is where the expertise from a QP is relevant, it's also where the expertise of your management team is relevant. You need to have people who understand the relative variability over distance of different mineralising types. You also need to try and ascertain what you're looking for, as quite often, there's a difference between the capital market imperative, which is to put out as much good news as possible, and the geological imperative which is to understand the envelope of mineralisation that you're trying to define.

Remember that one of the first objectives from a technical basis is to put an envelope around your mineralised body and over time, improve the quality and understanding of each ton within that envelope, however, the capital markets might only want to see growth. When we talked about the cycles, we've seen that the greatest way to add value to a share price is to put out more and more high value, or good-grade results. Thus, an exploration company which is trying to define an envelope of mineralization and actually improve the understanding and the confidence that one has for every ton inside that envelope, and reduce the risk associated with each of those tons, is in conflict. It is easier to expand the drilling, to step out further away to increase that envelope and grow your potential resource base by continuously stepping out, but there comes a point when teams will choose an area to advance, they can't continue exploring and trying to grow the boundaries but instead, to focus on a smaller area and try and get that higher up the confidence curve. They need to de-risk this further, take these few exploration targets to the point of actually drilling a resource out, then they go from inferred, then reduce the sample space to improve confidence that they can predict the gaps between sample points to say, this actually will be great, or this will be this kind of mineral. The aim here is to get more information about each ton of rock at each intersection until you reduce the gaps between the minerals. Therefore, you increase the density of your sampling.

Management teams will always have this challenge between understanding the scale of the system and the cost of a full drill out. For example, if your resource is easy to drill out and you have a relatively low-cost operating base, i.e., you're not flying in and out in helicopters in an ultra-difficult icy or swampy area, you might as well keep drilling until you have a really decent resource base on which to work. Typically, you want to have at least 8 years of mine life, so management teams will throw out these thresholds and hurdles. They may say: ‘Wouldn't it be nice if we were able to produce enough Gold, to mine at a certain rate for x number of years with a target of 100,000oz/year.’ This target will typically be for more than 7-years and not much more than 10-years. The reason for that is when it comes to economic analysis, you need between 7 and 10-years of discounted cashflow to pay back all the capital and generate money for shareholders. The reason why you are not that interested in going beyond 10-12-years is because in a discounted cashflow, the future cashflows are reduced to much smaller contributions so actually, it doesn't really change your NPV by drilling out years 10-20.

Management will often aim for around 10-years of mine life, if they want to produce at 100,000oz/per annum, they will say, that's a 1Moz target. They say: let's start with a 1Moz target. They produce geological maps, they do the analysis and the preliminary work, including mapping, soil sampling, sometimes geophysics, sometimes trenching and pitting or underground mapping, reviewing old data, putting everything into 3 dimensions and coming up with a series of targets, which they will then focus on. Interestingly, management teams will always drill their best targets. Why wouldn't you? What happens if you hit your best target? That's really interesting because that means that almost everything else that comes after that will not be as good as your first intersection, which can then take some time for the market to adjust to. Secondly, if a management team doesn't hit with their first drill hole on the best target then a recalibration needs to happen.

Quite often, let's say one starts off with a generic, and I will keep talking about Gold because it's useful to get one's head around it, if one is looking for a generic 1Moz target, what happens is that facts start to emerge that actually, it isn't all that easy to drill out a gold resource. It requires lots of drilling. When an exploration company says that they've got a high value or high priority target to drill, the market will expect great results very quickly, in the first few holes because the management team has promoted the potential of the area because they want to install confidence to the market, they want to get money out so they can forward to drill it, thus, they've said we've got great potential here. They drill it and it isn't always easy. You don't always hit a deposit with your first hole, and in fact, many of the great deposits, if you actually speak to the geological team in there, the discovery hole can be quite a long way into the drilling process.

I've worked on a project where we hit it on the fourth hole, which was fantastic. But equally you can speak to the geological team at Centamin, who said they hit it on the 138 holes. The discovery of Olympic Dam is famous because they drilled 100s of holes in the area and that pretty much killed the project, and the geologist in charge was instructed to wrap up the program, and he took it upon himself to drill 1 last hole, and of course, that was the discovery hole, but they'd been drilling for years.

Making a discovery certainly isn't easy and it can require lots of drilling. What's even crazier is that the market doesn't really understand that that once some good mineralization has been hit, that isn't the end of the story either. In a Gold system, it can take up to 40-50 holes before one’s even sure that one is drilling in the right direction.

Building a resource is all about trying to understand the structure, understanding what controls the distribution of mineralisation. It can start small and change with different geology. Some inferred resources hang together really easily, and you can get them quite quickly, others are much harder to put together. Interestingly, for example, if you do manage to find a well-mineralised porphyry deposit, as it's a bulk style of geology and is mineralised in 3 directions, you can actually drill across it in different directions and straight down. If the whole thing is mineralised, you can actually build up your tons very quickly. In theory, it is possible to drill out a 200-300Mt porphyry with as few as 10-12m of drilling. The tricky thing with a porphyry, of course, is finding enough decent grade, but if you've got decent grade, the tons can build very quickly.

When you are trying to put together a mineral resource, starting with an inferred resource, you're trying to wrap an envelope around your known body of mineralisation. The first thing you do is to begin with the best-known anomalies and then step out. If you have continuity, you'll step out again and you might go down-dip to build up your knowledge of what you’ve got.

Coming back to the hypothetical target of finding 1Moz, you can develop this at 100,000oz per annum, or whatever the geometry and the mineralogy permits. Quite often, the facts change around you: you might find an oxide body at the top with different physical properties, different metallurgical properties. It's less hard. You don't need to blast it. There could be free digging and then you come into a transition zone with more complexity, or you come into a higher grade and zone at depth. What happens here is that the management team has to respond and adapt to the reality of the situation. It may transpire that the ore body starts shaping up and that it might work better being mined at 50,000oz per annum. They may think actually, we will probably only find 500,000oz-600,000oz during this first phase and you can start planning a Scoping Study around these parameters as your initial inferred mineral resource starts coming together.

It all comes back down to the scale of the system, the cost of drilling it out and the management team’s appetite for either advancing a known body towards production through the study phase or whether management team actually just wants to drill out. Remember that the bigger the company, the bigger the resource is required for it to be meaningful or relevant. Hence, if you are an exploration company with the strategy of finding resources that cannot be ignored by mid-tier and major companies, you'll want to find a large body, so you'll be very focused on growth, but at some point, you will have to focus on quality because the mining companies simply want a de-risked proposition in front of them. They vehemently dislike the implication that the spacing between the sample points is too great and there are doubts or concerns about the quality of the resource.

There are so many aspects when considering the quality of the resource: the minerals that hosts the value metal - are those minerals reactive? For example, do they contain carbon which can affect the cyanide leech. Is there carbonate in there which can buffer acids? It's not just about the metal content. We start getting into the whole nature of the mineral itself and the fracture systems within rocks. Is this friable? Is the Gold encapsulated within silica or within the matrix of sulfide? I'll do another session on mineral processing as well. But when one is looking to try and take something through the inferred into the indicated category, you need to have an understanding of other elements that apply to it any ton of rock.

For example in the inferred category, you are just trying to imply an estimate of geology and grade continuity. Inferred resources are a really valid goal for exploration company, but they don't take you very far down the technical analysis of a resource base. As soon as you want to start putting on a PFS or feasibility study, you will have to look at the modifying factors of each ton of rock. You've got to understand the nature and the characteristics of every block within your resource model that is included in the mine-planning and economic evaluation. Your data has to be adequately detailed and based on reliable exploration. It has to be sampled and tested and to be of greater confidence about grade and continuity, about structural integrity, metallurgical response. And again, this all has to be signed off by your competent person.

When you are trying to go from an indicated resource to a measured mineral resource, again, you need more information about every ton or block within your resource model. You need to understand not just the quantity and the grade, but you also need to understand the density, shape, all of the physical characteristics, and they have to be sufficiently understood so that you can apply these modifying factors in order to get a detailed mine plan and final evaluation of economic viability.

Each stage of the resource definition gets more and more onerous, more expensive and less and less fresh news comes out, therefore, it gets more and more boring from a market perspective.

Finally, the level of data required to define a mineral reserve; you go from a probable reserve to a proven reserve, you start putting in allowances for dilution and this has all of the technical factors required to make an investment decision on whether this will come out of the ground or not. When looking at reserves, you have to know whether each block in the results model will become saleable product, and to reach that level of understanding you will need lots of infill drilling, hydrological studies, you need to understand the permeability, you need to do more geo-tech drilling for pit stability, and you may need to carry out bulk metallurgical samples. All through this process, you will have had feedback, hopefully from an early stage, from a metallurgist talking about what actually do you need to get out of there? What products do you need to turn this into a viable resource?

Sometimes when you're looking at a resource, you don't need to actually define it on how much material is in the rock, but on how much material you can get out of the rock. Let's say you have a grade of a Copper mineral and if you're trying to use an acid leech on your Copper rock, what you might find is that because you've got elements in that mineral form of the Copper and the mineral form of the rock in which the Copper is hosted, you may not get similar recoveries across your orbit deposit, even though the actual Copper content may be constant. In an area where your leaching acid is being consumed by carbonate material you might have less free acid in contact for short amounts of time with your Copper minerals, thus, you might recover less Copper in those zones.

In such cases, rather than doing a grade map across your deposit, it may be relevant to conduct a recovery map or recoverable metal map. This is metallurgical mapping across the resource. All of these things need to be considered when you first start your evaluation project, which is why it's important you've got a sensible exploration team who is appropriately experienced and knows what it's looking for. The management team also has to be sufficiently adaptable to change its approach when the facts about the emerging geology vary.

I keep coming back to this this requirement to have judgment when it comes to the risk and reward of growth versus understanding and improvement of your confidence in the per ton within a resource base. One is always trying to work out: do I just want to define the first 1Moz, or am I going to test along the trend to show that this resource has multiple centres and opportunity for many other deposits to come on board? Most companies typically like to show growth potential by keeping 1 exploration rig or some exploration activity ongoing to test along the trend, to test new targets. That can be quite a significant program, or it might be quite a small program, but at the same time, they are trying to develop their core project and take it up the value curve by going through the stages of initial exploration through to inferred resource, towards an indicated mineral resource.

Remember: you cannot include any inferred mineral resources in a PFS. Most companies typically want to get the resource up to a sufficient scale where they think it will have relevance in the market, before trying to study that version of the resource, and at that point, the investment will be made to try to take it from an inferred resource up to an indicated resource. The key element here is getting more information per ton of rock, using every drill hole, sucking out all of the information from each drill hole and increasing the density of those drill holes or the underground workings. It's all about reducing the risk and increasing confidence that this project has continuity between sample points, not just of grade but of physical properties, metallurgical properties and chemical properties, so you can say, yes, this ton of rock will behave in the way that we expect it to.

As resources are geologically driven, they are primarily led by geologists, and when it comes to a mining company that wants to develop it, they are principally driven by engineers, whether they're process engineers, mining engineers or finance people, but they often have a different understanding or approach to the geologist. Where things can fall between the gaps is often on the physical properties and the metallurgy. For example, with metallurgical mapping, an iron ore project in Northern Australia which went through the inferred mineral resource, through indicated to measurement, and it was just at the mineral reserve point of definition, it had been drilled out for years and years and they realised: this is behaving differently metallurgically, and they hadn't done appropriate representative sampling of their product and so they have to go right back and remap the whole thing based on metallurgical criteria rather than just pure grade criteria.

Representative sampling is another important aspect of resource definition. If you have very variable grade in a deposit, and I'm thinking of Gold in particular, I've said that between the sample points you need to have the confidence that the distance between your 2 sample points is sufficiently close to estimate what the grade will be at the halfway point between the 2 of them. With highly variable material, it becomes almost impossible to reduce your spacing sufficiently to be able to predict whether you have a Gold nugget or not. A way to get around that is to increase your sample size and, you end up trying to do bulk sampling, ensuring that you're sampling at each point is representative.

Let's say you want to work out the grade of a Gold deposit: you need to take in each sample enough to capture a few of the nuggets so that the barren part equates out with a nugget so that you get an average grade across the whole deposit. Representative sampling in mineral deposits is a science in itself and there are hugely complex approaches to sampling theorem, grade estimation and it's used in Gold deposits, diamond deposits, in every kind of deposit. The aim here is to have the confidence to predict that at a given point away from your sample point, you can say what the grade will be.

That is the fundamental principal of all metal’s calculations, and the inferred category is just an implication. The indicated category is a good enough level of confidence so that you can actually start mine planning and economic evaluations and include it into a Feasibility Study. When you finally get into your mineral reserves, this is the point where you understand your sample density, the geology, the metallurgical, physical and chemical characteristics of your rock sufficiently well so that you can do detailed planning and base an investment decision on that.

Conclusions

By way of a conclusion, resources are not the same as technical reports, but resources do comprise about a third to a half of any technical report, whether it’s a Scoping Study, a PEA, PFS or Feasibility Study, and increasingly, there's this integration; you can't go that far away from a technical report before you start getting into a resource, and you can't advance your resource understanding without putting economic criteria and real-life data in there.

A geologist’s and exploration team’s first goal is to define resources. This is their primary role. Another key point is that boards need to judge the risk/reward of growth versus the quality of any given target area. This is absolutely key and so much depends on their judgment. It depends on the capital markets and the deposit type.

Resources can take a lot of time and money to evaluate, but good growth and grade are almost always worth chasing so that you can understand the size, the optimum extraction rate and also the potential of the area.

Finally, remember that inferred resources are an excellent starting point, but they do need further de-risking and they are just a kind of implied confidence between sample points. If you want to take your asset on up the value chain, which is so important in the sector, to a PFS or Feasibility Study you need to do at least indicated resources and probably mineral resources. So, you're talking about measured and indicated. It's a critical de-risking and confidence building step.

Resources
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Resources: Inferred Mineral Resource
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I think it’s really important to remember the point of mineral exploration companies, the purpose of mining companies, the key objective is always to mine ore commercially, or rather that’s the end goal. You’re trying to make a profit on the resource in the ground. You’re trying to take it out and add a profit, and in order to do that you have to be able to delineate it and then build an infrastructure around it so that you can actually create a mine or an extraction solution, and then you need to get it out of the ground. In order to do that, you have to gradually de-risk it.

One of the things we’ve spoken about in a previous episode of The Con was resources, how you define resources and how you de-risk the understanding of what you’ve got in the ground through drilling and sampling and a whole range of other work. What you’re essentially trying to do is improve your confidence and your knowledge about a specific block of materials that you can get an answer at the end, which is grade and tonnes.

Now, as you walk up that confidence curve in the resources space from an exploration target to inferred resources, to indicated and measured, and then eventually you get to proven and probable reserves, what you’re essentially doing, a key part of that is understanding the modifying factors that wrap around your volume of rock in the ground. You apply the modifying factors that influence how it’s going to come out of the ground. Of course, those include mining, processing, extraction technologies, the logistics, the transport, environmental aspect, rehabilitation, and the human elements of who is living where relative to the resource, the marketing, the commercial, the legal. There is a whole plethora of factors that influence whether a specific tonne of rock under the ground can be taken out of the ground at a profit.

JORC Resource Report

The resources categories feather in and they work with the technical studies. What you’re trying to do is to de-risk and understand the best way to get your resource out of the ground. Once again, one of the best places to get an understanding of the differences in the ranking of your technical studies is the JORC resource code. It’s actually clearer than some of the other classifications. If you go to the JORC resources code from 2012 and its various updates, which can be found on the JORC website, it has a section, section 37 more or less, 37 - 40, talking about technical studies. It’s quite short. It introduces a Scoping Study, a Preliminary Feasibility Study, and a Feasibility Study. In Australia, they call them Scoping Studies, which is the first study that a company will do. In Canada, they’re typically referred to as a Preliminary Economic Analysis or PEA.

Under the JORC code, a Scoping Study is defined as being ‘an order of magnitude technical and economic study of the potential viability of mineral resources.’ It’s just looking at the potential viability of something. It’s looking at roughly how are we going to get this out of the ground, and how is this going to work. I’m going back to the text now, ‘it includes appropriate assessments of realistically assumed modifying factors.’ Those modifying factors that I spoke about earlier. ‘Realistically assumed modifying factors together with any other relevant operational factors that are necessary to demonstrate at the time of reporting that progress to a Pre-Feasibility Study could be reasonably justified.’ In other words, it’s a realistic application of all of those things; the mining, the processing, the logistics, the environment, the human - whether it’s underneath a town, for example, the marketing, the commercial. Apply all of those and it spits out an answer on the resource that you’ve got. Is it going to make a lot of money because if it isn’t, you’re going to have to either do more geology or walk away?

The code has got another little paragraph afterwards, notes saying that, ‘Scoping Studies are commonly the first economic evaluation of a project undertaken and may be based on a combination of directly gathered project data, together with assumptions borrowed from seminal deposits or operations.’ It goes on to say, ‘They are commonly used internally by companies for comparative and planning purposes.’ It’s got a few warnings to say that this isn’t an advanced study, this is not ore reserved, this isn’t an absolute confirmation that this is economic. It’s just a first glance. And there is absolutely no indication that this is an ore reserve, which is anything that can come out of the ground with any level of guarantee.

Pre-Feasibility Studies

The code then goes on to talk about Preliminary Feasibility Studies, or Pre-Feasibility Studies, or PFS. Now, this is a comprehensive study of a range of options. It’s a range of options, so it looks in detail at a number of different scenarios of how something can be taken out of the ground. It’s a great comparison. Imagine you’ve got an orebody, which has mineralisation starting at 70m below ground, but it’s good mineralisation at that point, do you strip back a lot and create a big open-pit, but you’ve got to carry $20M - $30M worth of stripping beforehand or do you put a portal down and go underground? It’s the analysis of what is the best mining method. Is it open-pit or underground? Is it a hybrid? If you’re going to be building an underground mine, why don’t you just cut out the middleman, forget the open-pit, and just go straight for the underground? Oh, but maybe there’s some low-grade material at surface that we could process through a heap leach. Okay, well on that point, you might need to have a separate processing thing at the front but is the capital really worth it? All of these kinds of discussions should be sorted out at the PFS level. It’s a study of a range of options for the technical and economic viability of a mineral project that has advanced to a stage where a preferred mining method in the case of underground mining, or the pit configuration in the case of open-pit, is established and an effective method of mineral processing is determined.

That’s a little bit ambiguous actually because having worked in companies, there’s always that discussion of what is the best way to get this project out of the ground. When you study these things, you’re applying the modifying factors and all of that has to be layered on top of your geology, and you have to really stop talking about generalities and start getting down to specifics and work out what is going to create the best NPV and what is the most viable. You might have something with a better NPV but actually, it’s not practical. This is where the experience of the board and the consultants will come in.

Technical Studies
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Technical Studies: JORC Resource Reports, PEA & PFS
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Feasibility Study or Definitive Feasibility Study (DFS)

Once you’ve established what is going to be the best method for your deposit, what’s going to create the best NPV, then what you really want to know is how is this going to work and what are the actual costs going to be? At that point, you’re going to want to go to a Feasibility Study. A Feasibility Study is a comprehensive technical and economic study of the selected development option for a mineral project with all the modifying factors. The key point about a Feasibility Study is that the results of the study are robust enough to serve as the basis for a final decision. When people say they’re going to do a Feasibility Study and then they’re going to move into Bankable, or they’re going to do a Feasibility Study and then move into a Definitive Feasibility Study, what they mean is that they’re not doing a Feasibility Study. It’s some kind of pre-work because if you do a Feasibility Study properly, it is enough to make that final decision. Of course, it’s a high level of confidence in the Pre-Feasibility Study and it’s completed with ‘Sufficient rigour to serve as the basis for an investment decision, or to support project finance.’ That’s in the code.

There you have it. I hope that was helpful. Just as a recap, when you look at a PEA or a Scoping Study, the concept is what could it be? You’ve got some geological data; you should have a resource. You might still be drilling at one side. It’s just trying to work out what we’re dealing with here. Is this something that’s going to sustain 70,000oz of Gold production a year, or 200,000oz of Gold production a year. Is it going to be 10,000t of Copper per year, or 50,000t of Copper per year? Is it open-pit, underground? What processing will there be? All of these things get put into a PEA Scoping Study and quite often, it’s at an early stage of understanding the deposit, it comes out with a number which is hopefully positive, you go on and study it and then at a later stage - oh, the mining method changes, or actually this best done not as a big project, but actually reduce the Capex and take a high-margin approach on this for 15-years rather than trying to blow our brains out and get our recoveries back in 7-years.

The objective is to get an early-stage conceptual assessment of the potential economic viability of a mineral resource. Typically, these things are +/-50% accurate. You use estimates, consultants, factors; so you say, ‘Oh, this plant over here cost $70M and we’re looking at an output rate that’s going to be half of that,’ and so you factor down the Capex and arrive at a cost which is halfway between a guess and a worked example. It’s an educated guess. The consultants are experts at working out what these factors are. Of course, you use benchmarks, you know that a similar deposit costs $XM to build, and therefore it’s likely that yours is going to be $XM to build as well.

The input in terms of resources is your inferred resource. You go on this when you’re more advanced than an exploration target, but you haven’t gone to measured and indicated resources yet. You’re very much in the inferred space. What it does tell you at the end is the reserve. It doesn’t give you this is absolutely what can come out at the end of your project. It does give you a mineable tonnage which is an internally reportable figure. You can say you’ve got 50Mt of resource, when we wrap around the economics, 30Mt of this falls into the open-pit, for example. But that’s not a reserve. Pre-Feasibility Study, a PFS, the concept is really what it should be. What’s the best method to extract this resource? The objective is to have a realistic analysis. You’re looking at realistic economic and engineering studies, sufficient to demonstrate economic viability and to establish mineral reserves. What you’re trying to do here is say, ‘This is the value case of this project, it costs this much to build, this is the process that you should follow, your cost accuracy is around 25%,’ so between 20% and 30%.

Your input data should include some quotes from, for example, the mining or the pre-stripping or whatever it is. You might get an EPCM quote from the deliverer of the plant. It’ll have some factors, so the team doing the Feasibility Study for you might say, ‘We’ve just built one of these, yours is 4/5 of the size, we can factor down costs by X amount and this is an accurate figure for something that we’ve just built.’ Of course, you should really rely on benchmarks. You cannot use inferred resources in the calculation of what’s going to be mined for a PFS. I that to be measured and indicated resources and once you’ve applied the modifying factors, it will spit out a reserve figure. You’re getting close to now to a final answer of how much material at what grade, and at what tonnes, can be spat out of the back end of your plant.

PEA was what it could be, PFS what it should be, and the Feasibility Study is what it will be. The objective is a detailed study of how the mine will be built. You want to use it as a basis for production decisions, for now. Sometimes these things don’t actually pan out the way you want to. The cost accuracy in Feasibility Studies is typically 15%, 10% to 20%. Some will try to get closer than that. You’re using detailed quotes and a lot of rigorous benchmark checks. Your input again is measured and indicated resources and your output is an understanding of your proven and your probable reserves.

Just a quick note on benchmarks, this is so important because CEOs of companies and management teams will always say, ‘Oh, we can build this cheaper. Forget those guys, they spent far too much money on that whatever it was. They completely over-engineered it.’ They will put pressure on to try and put the Capex down. They say, ‘We know, we’ve done this before, we know that this is only going to cost that, and we know that we can get the operating costs down to this.’ A benchmark study will stop any mucking around with the numbers. It’ll just say, ‘Hang on, we’ve got 100 operations, they’ve all costs between this and this to do that job, it’s impossible that you as a management team are going to be able to do this at a fraction of the costs.’ Well, it’s not impossible, but it’s highly unlikely and if you succeed, hats off to you but let’s just put the average number that the industry knows in for this cost. It’s incredibly frustrating for management teams who feel that they’ve got a unique approach and they really can do it at a lower cost but time and time again, exploration development companies do end up going over budget and/or finding out that actually, this is a real cost. Again, I would say that if you as a management team can deliver something well below the average cost, brilliant, but let’s work on the basis that it’s going to cost the same as everybody else in the industry.

The CEO’s paradox

Imagine this: you’re Company A, and what you really want to do is grow value for shareholders. It’s a noble ambition. Company B however, wants to make sure that it makes good money on any mine that it develops. Also, a valid mission but the 2 may have different outcomes and different methods because making sure that you develop a sensible mine isn’t the same as necessarily getting the share price up in the short to medium-term because the mining sector is full of dreams and hope. In particular, if you look at the Lassonde curve of where value is created in the mining space over time, you go from exploration, blue sky, smooth pasture, you find something and the value goes up and then you go through the technical studies, the boring but important bit where you’re putting money into defining resources and grade and tonnes on your resource, and then you go through the construction phase.

We’ve also mentioned that there are different management teams. You can actually have a team that’s expert at finding stuff and then they sell it onto a different team that does the study, or that does the construction, and probably a different team that does the operating of the mine. By breaking up the ownership of this, you don’t have the same endpoint. An explorer company isn’t necessarily thinking about the mine at the end, or all the details of what’s going to make a commercial mine. They’re thinking about how we get this resource up so that we can sell it for our shareholders at the best point.

What this means is that for a CEO who is an explorer and developer, the technical studies aren’t so much about the final carrying this through to developing the mine, yes that’s important and yes, it’s in the code, but remember that these are more valuation milestones. They’re more enabling factors. The tech studies are more enabling milestones for the junior company to raise money. You’ve also got to remember that because a junior company typically doesn’t have income, it’s got time constraints, the funding model is that these things have no income, so they’ve got to pay for the G&A, they’ve got to pay for the drilling, and not only that but it’s really hard to find deposits. Once a team gets something that looks like a deposit, it’s really hard to find another one. It’s really expensive to buy another project and it’s really hard to find your own.

Teams often get stuck with their discoveries and what they’re trying to do is make it work. They’re trying to put it in its best light, show that it works, and then of course it’s harder if it’s marginal. What that means is that when it comes to technical studies, a CEO of an explorer developer has got a slightly different mentality from a producer. A producer when doing a Feasibility Study is just going through de-risking milestones. They’re not looking for extra funding on the back of a Feasibility Study. They’re not time-constrained by the money coming out of the till and the G&A. Yes, they might get a bit of pressure from their shareholders but effectively, what they’re really trying to do is de-risk it as a gating process. Often, they have the same technical teams reviewing many projects. You’ve got a really experienced in-house team who can say, ‘This isn’t going to work, this might work.’ They can afford to take the best and they can also afford to buy someone else’s best or discover their own, and therefore it becomes easier to reject.

Just going to flag that up. For investors, this means that you can trust it more when it’s real. You do need to understand that to some degree, these resource studies are capital markets gain, and that’s okay but it is cycle dependant, so the valuation is going to vary depending on where the cycle is going. You’ve also got to understand the background of the team. Is this the team that’s actually going to build it or is this the team that’s got a history of selling their asset at a point along the curve? That’s completely fine but you might not always have the same trust in the NPV figures or the Feasibility Studies as you would in a team that’s done it before. The really dangerous one is when you’ve got a team that hasn’t built things before but is going through to build it again. You’ve got to make sure that this is vigorous. Finally, when it is vigorous, then you can absolutely trust the NPV because these are good studies.

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Moving Data Sets

Another challenge for exploration companies and development companies, in fact for producers as well, is that you’re not dealing with a final data set when it comes to doing these Feasibility Studies. I call this the moving feast problem. It’s especially pertinent for exploration and development companies because they have this time pressure. They raised $5M or $20M, they need to advance the project before the money runs out and they need to raise another bit of capital. What tends to happen is once they’ve got a first resource together, they start wrapping an economic study around their first resource. There’s time pressure, so they do the study in parallel with exploration. What you can often find is that companies that are too keen to push ahead with the Scoping Study then move into the Pre-Feasibility Study, for example; suddenly a year later they’ve actually got much more data, and either the deposit is better or worse, but if you’re on a good project, what you’re going to find is that the project gets better and better, there are more tonnes, and 10km north they’ve just found a high-grade thing. Actually, what you find is the scope of the project changes and it renders your earlier study obsolete. This is a waste of time and money, but management teams fall into that trap of thinking it necessary at the time. It’s always worthwhile getting your shareholders to understand what your objectives are and aligning your objectives with the geology that you’ve got in front of you. It comes back to one of the earliest sessions on the Con that I did which is about your strategy. What are you trying to do as a management team? Are you trying to find and build a small mine or are you exploring for the biggie? It all comes down to strategy and companies can make and waste a lot of money on this. Again, a producer will have more time and more money to make better decisions but even big companies can spend a lot of money on a study, then with some further exploration can show that that first study is obsolete and therefore that constitutes a waste of money. But they’ve got the balance sheet to measure it.

Spent years on Massawa in Senegal. It’s a big deposit, it was high-grade, above 2g/t. I think it was 2.6g/t, 3Moz, and they went over and over it again, doing study after study, reinterpreting the geology, and eventually, they sold it. These bigger companies have got the time and the luxury to be able to afford to really make sure that they understand the deposit before they know what they’re going to do with it. The junior company has that time pressure. They can often spend a lot of money on a stud and then they have to redo it. Not good.

A further point is to understand the capacity that these companies have to do these major studies. Most exploring companies, explo companies, start small. They’re lean and they’re mean, they don’t really have engineering capacity, and it’s often run by a charismatic founder CEO who is very good at licking rocks and raising money and selling a dream, but perhaps not quite so well equipped to run a data-heavy Pre-Feasibility Study, let alone a Feasibility Study. And so one comes to the question of how the team grows, does it have an appropriate owners team, and can these projects really be run efficiently when they are farmed out to consultancies? Remember a consultancy, an SRK of this world, will have a different set of values and different sets of incentives. Their aim is 2-fold. One is to make sure that they don’t mess up on this project and have a disaster. The second is that they want to keep the contract, they want to keep going, so in a sense, they want to please the client. For them, it becomes really hard to make the right decisions because they’re stuck between trying to avoid risk and actually trying to show that this thing really works.

The further you go in your study chain, it’s absolutely vital that you’ve got a strong member’s team embedded with the consultancy. I often say that when you’re looking at an exploration development company, one of the key things is to see whether they’re actually driving their own geological model in-house. You need to have someone who can actually model the resources, otherwise, they’re going to be led all over the place by the consultancy. It’s not a clincher but it’s certainly, for me, a massive red flag if a company doesn’t have its own in-house resource modelling capacity.

McKinsey Mining Study

The final thing I would say is that the industry has got a terrible track record of actually delivering on their studies. McKinsey rather cleverly did a comprehensive study in 2019, and they looked at more than 40 mining projects that had been completed in the previous 10-years. It’s quite startling. Having gone through this, remember that the Feasibility Studies that will be completed are by and large done by reputable houses and by sensible mining companies. There is diagram that’s from the McKinsey report from 2019. It talks about optimising Feasibility Studies to save $100Bn in the future. The graphic that I really like says that 20% of the 40 projects were at or under the sanctioned budget. They typically overran by 6-months in terms of time. To get both on time and budget is very, very hard.

Almost 20%, 17%, were wishing their estimate. Typically, a Feasibility Study is 15% accuracy and 17% of the companies were in that 15% over budget. Interestingly the ones that slightly overspent or were within their sanctioned budget, delivered slightly early. On average, they were just before their timeline. That’s really interesting. You’ve got 37% of the group who were within 15% of the sanctioned budget and more or less on time. That’s great but that does, unfortunately, leave 2/3 that were way over budget and late. There’s actually 44% of the sample that they looked at were between 15% and 100% over the sanctioned budget. McKinsey called these project disasters. Over half of all projects exceeded the sanctioned budget by at least 15% at an average overrun of 49%.

The final category is what McKinsey calls corporate disasters, which is when they’re over 100% of the sanctioned budget. 19% of the projects surveyed, this is 1 in 5 projects surveyed, overran the original budget by over 100% with the average cost 3 times the initial estimate, and not only that but the average schedule overrun is 29-months, 2.5-years more or less. It’s scary stuff. This is why benchmarks are so vital.

Conclusions

It’s important to know what the different studies do and why.

  1. Just as a recap, the PEA or Scoping Studies are all about what could this project be.
  2. The PFS, Preliminary Feasibility Study, is all about what should this project be, what process route or mining of choice.
  3. The Feasibility Study is all about what will this project be. How much money are we going to make, how many tonnes, at what grade, are we going to mine, and then how much product are we going to get out at the end?

The second key point is that there’s what I call the CEO paradox, which is that the explorer or the developer has got different priorities to a producer, so the explorer developer sees the Feasibility Study or technical study as a valuation milestone, but the producer sees it as a technical milestone. It really changes the interpretation of what the study is really doing. If you go back to Berkshire Hathaway’s Charlie Munger, he says, ‘Show me the incentive and I’ll tell you the outcome.’ You’ve got to actually think why this company is doing this and understand the nature of the technical study despite all the rules.

The third problem is the moving feast. When and how to incorporate new data that could come into a project and potentially change the scope. It can end up costing a lot more. Watch out for companies rushing to produce a study too early.

The fourth point is about internal capacity. Beware teams that haven’t grown enough and the key thing is, is the resource being done in-house because that drags so much. Have they got capable people on the owners’ team embedded with the consultants?

The final point, illustrated by McKinsey, is that even when it’s done at the Feasibility Stage, the industry has a terrible track record of delivery. 1/3rd were within guidance, 2/3rds were not. Of the total, 20% were way over budget. Come back to benchmarks, benchmarks, benchmarks. Watch out for the incentives, why people are doing what they’re doing, and have they got the right team?

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Technical Studies: Moving Data Sets & the McKinsey Mining Study
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Hello and welcome to another episode of the Con. Today I'm going to be talking about mining and mining methods. Once you've found those positive internal studies, the next thing you've got to do, and perhaps the most important part of the process, you've got to get it out of the ground is absolutely why we're here. That's why it's called the mining sector because that's what you're supposed to do. Surprisingly, not that many companies are actually any good at it. It sounds like a relatively simple thing to do, get stuff out of the ground but actually, there are quite a few ways that you can trip up. When one looks at mining and getting things out of the ground there are 2 key factors which determine everything else in the mining methods, that is the scale of your deposit and the other is the grade of the deposit. Everything else kind of follows on from that the logistics, commodity prices, the physical terms, the ground conditions, they all have a role to play. But fundamentally, you're talking about scale and grade. One of the earliest things that you have to do when you're looking at mining is you have to try and work out what is going to be the most appropriate way for you to mine the deposit that you've got in front of you. And they're all different kinds of mining but essentially, you're looking at either an open-pit or underground. I'm talking mostly about hard rock here. There are soft rock mining methods such as alluvial or placers or hydraulic mining, when you're dealing with a very weathered product, or when they're all has already effectively been mined by erosion and mother nature and winnow down, or you're doing solution minded key division for hard rock mines is really going to be in an open-pit or an underground mine.

Open-pit

If you're in an open-pit, what you need to understand is the strip ratio and how your ore bodies is going to change with depth at the surface. It might have been weathered your rock the sulphides or the metal minerals in it that you're trying to mine may have been oxidised by atmospheric conditions, rainwater and oxygen. You might go through a transition zone as you go slightly deeper where you've got some material which is still oxide but some material which is still sulphide, it hasn't been exposed to the surface and that was probably called the transition zone. And in some deposits that transition zone can be thick, or you can just go straight from oxide abruptly into fresh rock which is sulphide. And occasionally you can have fractures and faults which pull oxidised waters right down deep and so you can have largely sulphide material, but you can still get oxide material several 100m below the surface. I mentioned the word strip ratio. What I mean by that is, when you're mining ore, to get access to the ore, you probably have to move some waste material which has got no value in it, it doesn't have the value mineral that you're trying to mine in it. And you have to move a tonne of that, for example to one mine of ore, and the ratio is how many tonnes of waste you have to mine to get to your tonnes of ore. So if you have to move 5t of waste to get to 1 t of ore for the strip ratio of 5:1, because it can be 5:1 you strip away five times to get to the 1t of ore. So we're going to strip ratios a bit more. But basically, in an open pit, you've got to understand your strip ratio. And you've got to understand the kind of rocks you're dealing with, and how you're going to get down to the bottom of your pit and the logistics and the whole engineering aspects of that.

Underground Mine

In an underground deposit. There are many methods to choose from. The way that you select the appropriate mining method will depend on the depth of your ore body, how steeply it falls away into the ground below the geometry of your ore body, the thickness and its width. The breadth of the strike length of your ore body, the depth that your ore body continues to, its morphology underground. Is it tabular, does it have plunging shoots of high-grade material, so many aspects of the shape of the ore body in 3 dimensions underground? And then on top of that, you've got to account for at least understand many, many other aspects of the way that the ore presents itself underground. For example, faults, most ore bodies in the world are linked to faults. I can't think of a single ore bodies that doesn't have faulting in it. And it can create a rich zone, it can be a factor in the location of the ore but equally it can be a conduit for water. And it can be an area where there's been movement over the years and so you might have rock fractures, you might have for clays generated through Cataclasis which is the grinding movement of rocks upon each other along a fault surface or it might just be because the water penetration has come through and that has degraded the quality of the rock but essentially faults mean you might get richer or you might get water but you might get less stability and they call them fault gouges or friable and incompetent rock. Most mines are related to faults and faults are related to weakness and so you've got rock weakness and instability and that is going to affect the way that you mine and the geometry and the methods that you use.

So, if you're underground, and you want to be safe, your ground conditions and your roof stability and your floor storage, and your water stability is absolutely key for production rates and productivity. Let's just work on the basis that we're dealing with a standard hard rock ore deposit. One of the first decisions you need to make is whether to go underground or to tackle this as an open pit. It's your first and your biggest decision. There comes a tipping point, when the economics of going from open pit become less good to the economics of going underground. That analysis, that tipping point, I mean, it's a huge decision and it should be decided later on the scoping study level or possibly in the PFS level. What you're trying to do is trying to save the Capex and the simplicity of an open pit are attractive, it's much in ‘easier to do an open pit operation than it is to go underground’. So the holy grail is something which has high-grade sitting at surface, and that you can mine for a low cost and with low risk of death, because open pits are inherently safer than underground. But there comes a time when your ore body, let's say it's a tabular ore body, for example, a steeply dipping vein deposit, high-grade Gold is relatively narrow, it's relatively tabular, and it goes down a depth. Now obviously, when you're trying to mine an open pit down the depth, you're going to have to start moving more and more material to get to the deeper part of the vein. So depending on the width of your ore body, that will determine how far down you can go with an economic pit. And that's really governed by your strip ratio.

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Mining: Open-Pit & Underground Mines
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Mine economics

There's a whole host of other aspects such as slope stability, how steep the sides of your open pit can be, how wide the benches have to be, you know, the engineering of an open pit, it's a thing of beauty. Really, it is a remarkable piece of engineering, and planning and scheduling and organisation. But at its simplest, it's a balance between the cost of stripping it and accessing your ore and when it becomes more expensive to mine your ore than it is to sell your ore then you're making a loss. And you want to avoid that generally as good business practice, you want to be making money not making a loss. I worked on a project, for example, that had a sterile cap to it, the mineralization came up to within 75m of the surface and extended from minus 70m for another 200m down. And it was a very, very substantial tabular ore body that came up to within 70m of the surface. The CEO of the company that I was working with wanted to get into production quickly and for very low capital, he didn't want to spend a lot of money on developing the deposit. No matter which way you looked at it, you needed to spend some money upfront because the pre-strip, to clear away the 70m of crud off the top was going to cost $20M and it was going to take 18 months, you might have been able to push it down. But you know, this was in a remote location, you might have been able to pull in some extra vehicles and shovels. But still, it's going to take you over 12 months to do it. And then we'll have a big pit 70m deep already and then this tabular body going down from that level. The strip ratio on that to get down to 300m below the surface was prohibitive. The grades on this actually gradually got better and better as you went down. So the highest grade material was right at the bottom but the economics of this open pit were terrible. Because the further you went, the more you had to strip, the wider your pit got the more tonnes that got incorporated, the more tonnes of waste got incorporated as the deep he went. So, the open pit idea was unattractive because it didn't work economically. Then we had to look at going underground and we had to put the development down to 70m but actually that was just the top of the ore body. That what we established when we're talking to the engineers was actually this was the best thing to do was to go down 80m below the top of the ore body and then what work up in 4 levels can be extracting this from the base in 20m sections over 4 raises up to the top of the ore body, and then continue the development and go another 80m below that. And then another until these 4 development levels each 80m to get down to the bottom of the ore body.

Now to put that development in, it was going to take 18 months and it was going to cost $17M to develop the whole mine. And the CEO just didn't want to have to deal with that kind of complexity and that kind of capital upfront, even though the economics on developing that deposit were phenomenal. So, it was such a difficult conversation we kept going round around in circles. Eventually we managed to do it, it was that kind of a PEA level work, we did quite a detailed bit of engineering on both the open pit and on the underground variety of types of underground mining, with stressed and test. But effectively, we came out with a single mining method. And it was a slam dunk, it showed that this was much better than going with an open pit. What I'm effectively trying to say is that quite early in your evaluation process, you have to choose whether you want to go underground mining or open pit mining.

Underground mining methods

Now, I highly recommend that you spend a few minutes on YouTube looking at some schematic videos of how underground mining methods are done. And depending on the width of your ore body and geometry of it, you're going to use the different kind of underground mining methods. For example, if you've got a small scale steeply dipping ore body, you'll probably want to do something called cut and fill. It's essentially imagine, just kind of pulled your hand up at an angle in front of you, with your fingers pointing away from you is taking the bottom slice of your hands getting to a little finger out in one bite, and then filling that back up again with waste material, perhaps tailings and cover paste backfill, and then coming up the next finger and take that off, and then the next slice along the bottom and then suddenly work gradually upwards. And that is highly selective, very low productivity, very good recovery, it’s backfilled and each time you backfill the water level that you've just mined, it becomes the floor of the next drift that you're doing, you've got to drill and charge and blast it's extremely flexible, got very low dilution, and use the same equipment for mining development. But its small scale and is expensive and you really need to have extremely high grades to be able to cover the cost of that. Then from that narrow cut and fill model you're going to gradually go up in scale through I don't know something like room and pillar which is used for very shallow dip continuous horizontal or sub horizontal ore bodies.

Sublevel stoping ,which is more versatile is kind of larger scale mining on your tabular ore body. When you've got more scale you mine it from the bottom, but also from one end. And so you can be dropping it down using gravity, it works well on steeply dipping ore bodies, it works particularly well when there’s regular shape, and it preferably has good competency boundaries or clear boundaries between the waste rock and the ore. And you mine first on primary stopes, you backfill and you come back and do the secondary stopes later. It's quite high-rate productivity, you can develop a mine with lots of production points. Again, it's really worth just going through these mining methods on YouTube. Because the 3D animations that you can see on the videos will explain it much better than I can do over a podcast. You go up through sublevel caving, which is essentially a system where you're dealing with a larger ore body, you have to put in all of the development in place. First, your drilling deviation is absolutely crucial. You've got to make sure you put all your drill holes, no charge points in exactly the right point. It's very good for automation, it's very good for not having lots of people underground. When you start caving, you're beginning to deal with dilution, you're beginning to deal with substance on surface and you go from sub level caving all the way up to the daddy of them all, which is block caving. These are huge volumes. This is the lowest cost operating underground method you can have. But problems with it, you've got these enormously long development times, you've got extreme stress changes.

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Mine efficiency

So, everything has to be planned out absolutely perfectly. The capital cost on this is huge, the timelines on this are phenomenal as well. What does this kind of mean in terms of investor and understanding what a company does or say when they're going to be targeting this kind of mine? Well, I think the most important thing to look at is cost. How much does it actually cost? What are these different mining methods mean in terms of profitability and reliability?I’ve previously done a review of some Canadian underground mines looked just over 10 deposits. And what we've seen is that the companies, even if they're well established, mining companies tend to overestimate how efficient they're going to be mining. So, the estimate costs versus the actual costs varies considerably in this. In particular, if you're dealing with a company that's producing a Feasibility Study or a PFS, which is going to be made economic by the efficiency of its mining method, then you've got to really stress test it and put a big question mark over this. The Analyst’s Notes that we're working on at the moment involves SSR mining, Alamos, Kirkland Lake, Eldorado Gold, Evolution Mining, Agnico Eagle, RM Gold and Hecla. Looking at a range of deposits, which produce between 60,000oz up to the biggest being 300,000oz. What we've seen is that the operational cost per tonne is highly proportional or related to the throughput rate. And the throughput rate is effectively a function of the width of the ore body. So the wider your ore body, and I'm not talking about strike length, I'm just kind of pure width or thickness. The wider your ore body, the more productive it is, and therefore the lower cost per tonne it's going to be.

Now what we see is that these well-established, very experienced Canadian companies would typically underestimate their operating costs between 30 and 50%. And that's a good working average, is that it's going to cost about $150/t, all in to mine your underground mine. Now, if you consider some prices and basic metals, you can say, well, I mean at $1500 Gold, you're talking about $47/g. So 1500÷32.15, $47/g and at a 90% recovery let's say that's a kind of a standard, you're going to get about $42 back, maybe there's some delusion in there, maybe let's call it $40/g. Now, if you know that your operating cost is in the region of $150/t and your recovered value is around $40/t clearly, you've got to mine at probably around 4g/t to get up to $160/tonne before you're going to make any money at all. So grade is crucial to making money.

If you're going to be operating in Canada, the numbers pretty much show that 4g/t for an underground deposit is the bare minimum. It’s slightly different up at $2,000/oz, you know your recovered value per gramme is kind of probably between 55 and $60/g. So on 4g you're talking about just over $220/t which starts to get pretty punchy, but that reliant on $2,000/oz right through your mine life. Obviously, you can't plan for that, you can't mitigate on that, because the average price has been nowhere near $2,000 over the, let's see, got a 5, 10, or 7, 8-year mine life. So you have to take a conservative number so that you don't go bust through the cycle. And it pretty much means you're unlikely to make any money unless you've got 4g/t. So you're looking at 5g/t or above. Now, that $150/t is for a bunch of operating mines it's an average. Clearly, the narrow you go if you're doing cut and fill, which is a highly selective kind of low productivity rate, it's going to be higher than that; you're probably talking about a cost of 180g/t. If you look at some of the bigger block caving operations around the world, they're running at around $20/t all in. They're probably quote their operating costs, they'll probably say it's $2.5 or $3/t but by the time you've added everything back in, and you actually include the G&A and all of the dewatering in normal environment, it's much closer to $20/t than it is to $2/tonne.

Yes, we've seen some examples where they're in the low teens as well. When I've last did analysis, there was a range it was went between $12/t and $20/t, but it always pays to be slightly more conservative. When you want things $20 a tonne and you look at Copper for example, when copper $6,000/t or $9,000/tonne, 10% grade, you're talking $600 rock, $900 rock 5%, $300 rock to $450 rock per tonne this is and then of course you look at the global average grade of Copper mines around the world at the moment and it's $30, it's 0.5% maybe 0.6%. And so depending on whether the Copper price is $9,000/t, you're talking $45/t rock in the ground. And you think oh look that block caving, they can do it for less than $20 a tonne. So that's why they're doing all these big underground Copper mines as block caving on the big porphyries. Well, yes and no. Big block cave is a highly specialised operation, you've got to really understand your techniques or otherwise you're going to run into troubles with recovery and dilution. And then of course, there is the biggie, which is Capex. A big block caving operation takes years to develop, probably from the financial final investment decision, we're looking at 5 to 6-years of actual development and that is preceded by the large number of years of the studies and the analysis and the technical work to get this actually right and then the Capex is huge as well. So, for something like the resolution copper in Arizona, you're looking at $6 billion worth of Capex to get that mine built or to go in Mongolia, huge Capex figures. So block caving is really only suitable for a handful of companies worldwide, just because the cost and the skills required to do it.

But long hole open stoping, underground mining, very common. And of course, it's got many key advantages to underground mining. One is that the operating temperature doesn't vary very much. Yes, it can get hot underground, particularly the deeper you go or if you're mining in area with a very steep geothermal gradient, but you don't have to deal with weather. So for example, it's suitable for up in the Arctic. It's also got a much, much smaller environmental footprint. It's just a portal at the surface, all you can see is a portal. And if your ventilation raises, or shaft perhaps, but you don't have the scars of a big open pit. And in this current environment of environmental vigilance, shall we say having a reduced surface impact is generally viewed as a good thing. And not only that, we can use the voids you've created from taking out or as a space to store waste material. So you can segmentation you can put in your tailings into the backfill. So the environmental impact of an underground is generally footprint is certainly much smaller, and the environmental impact as a whole can be much less for an underground mine.

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Alluvial mining

So I've made some general observations. But what I haven't really spoken about is the other kinds of mining. I think it's worth just touching on alluvial mining. Remember that an alluvial deposit is somewhere where the mineral processing has been carried out by weathering. The concentration has been done by nature and therefore what you've got is an opportunity for very low cost mining because you've got essentially an unconsolidated, massive material which is enriched in the mineral that you're looking for. And these are alluvial mines yes, they have been done commercially over the past. De beers famously did a lot of alluvial mining off the coast of Namibia for Diamonds, and some mining cooperatives have been processing gravels and placer deposits and alluvial. But essentially, this is the preserve of private companies and family businesses and artisanals. I should note, however, that the artisanal deposits in around the last 8 or 9 years before went into hard rock mining and it was a very similar story on the main kind of Gold fields globally apart from in Russia with huge river systems, and they're still being mined on an illegal basis. And so you've got dredging, it's a low cost route for mining.

It's particularly relevant for some smaller minerals and indeed for Gold. So if you look at Tin or Cobalt or Coltan, Columbite Tantalite, and indeed Gold, there's a huge alluvial mining swing factor that's very price responsive. For example, Tin probably got 47% of the production between 40 and 50% of the production comes from alluvial mining in Indonesia, in Myanmar Burma, in the Congo, in Nigeria, in Bolivia, you know a lot of the Tin is mined by small scale cooperatives by family groups, by indentured labour, by artisanal. These words for the private individual that goes out to make money or to make money by panning for Gold or Tin. In Indonesia, for example, you can have wash plants, where the actual grades of Cassiterite in the material is very, very low. You can have it down to kind of 0.05% grade 0.03% actual Tin but because it's been winnowed and separated by nature, all you've got to do is just get some volume of material through here, and you slice it through and you've recovered, because density differentials, we'll come on to this in mineral processing in the next version of the con. But essentially, you can get important swing supply of these producers, because the mining has been already done by mother nature. And what this actually means is that when the prices spike the production globally, is very price responsive. For example, Congolese miners, given just the geological abundance of where they live, they can wake up in the morning, they can look at their mobile phone, they've all got mobile phones, and they can see what the metal prices are doing that day. And depending on whether the Gold price or the Tin price, or the Cobalt price is running, they can choose where they're going to mine that day. And if you speak to any of them about price arbitrage and trading of metal said look at you completely blankly, but if you ask them where they're going to go mining that day, they will tell you, absolutely, they can get $2.5/day from that hill over there and they can get $3 a day from that hill over there and they're going to get to that hill. So it’s hugely relevant for Tin and Cobalt, Coltan and Gold. For example, in West Africa, because of the Islamic insurgency and the destabilisation of West Africa what you've actually got is 10s of 1000s of people going peros panning for Gold and mining in artisanal mines. And this is a $4Bn/annum business, which is funding this call it or they call it Jihad of gangsterism in West Africa is $4Bn a year it's a lot of Gold.

Sudan, for example, it's sometimes the second highest Gold producer in Africa, and yet it hasn't got a single modern Goldmine. These are people that don't have to pay taxes, they don't have to pay rehabilitation for safety or the training or community social relations, they don't have to pay for licences. They go out there and they just mine it. It means that the cost curve for something like Tin is stacked in the favour of the artisanals. But it also means that if you're looking to buy products that got kind of good provenance that you know, is got environmental safeguards associated with it and good working standards around it, you're going to have to pay more to make sure that it comes from a hard rock mine, where you know that it's being done properly by a responsible mining company.

In-situ recovery

There is, of course, another type of mining that I haven't really spoken about. And that's an in-situ recovery. It's famously done for Uranium; it works extremely well in Kazakhstan and in the US. This is a kind of mining, which is not really mining, it's more kind of mineral processing, and it's related to fluid flow, porosity, permeability, rock chemistry, and your injection fluid chemistry. It's a very specific operation, the flow dynamics are absolutely crucial. The chemistry and the flow rates are absolutely crucial. It's very, very specialised, probably works best. I know, it's being applied occasionally on some Copper mines in the US, but it's a whole different kettle of fish. It's not that relevant in terms of understanding how mining works as a whole unless, of course, from the Uranium space, I think it's much more important to get your head around the fact that underground mining is fundamentally related to scale and productivity costs range from $20 to $200/t of operating.

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Mining: Alluvial mining & In-situ recovery
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General observations

I think I will finish off by just making some general observations. Firstly, running a mine is a dirty and a difficult and a laborious exercise. It needs mining people to do it and really, unless you've got a properly big organisation, it's incompatible with exploration. So, if you come across a company that says, we’re going to start a small mine and with the money, we're going to build out the big mine, or as they say, with the money we're going to explore for a big deposit. In my opinion, it's just much better to walk away at that point. The reason is that small mines take just as much effort as big mines, and they rarely make any money at all. Okay, so much better for the company to, instead of starting a small mine and trying to use the profits to build a big mine or to explore for a big deposit it’s much better for that company to raise capital, do the job properly, and build a big mine or explore for a big deposit, but small mines, waste of time and effort. There are very, very few occasions when this is not quite the case. The general rule walk away from a small mine.

2nd observation, avoid narrow underground mines in public companies. They've just got too few tonnes per vertical metre to make any money. You've got to have so many developments going these narrow underground mines unless they're spectacular grade they're just better suited for a family office to mine a few 1000oz per annum. But anything less than 2 or 3m it's just too hard. Small mines beware when small mines come into production, because you just need a lot of development. Making profit is a function of volume and margin and small mines do not work. It's very hard to get momentum, it's very hard to get some commercial relevance or getting traction on the market. I mean, for years, some of these smaller mines have struggled to grow their market capitalization, which means that as they can continually come back to the market for extra dilution, effectively, what you're seeing is a falling share price walk away.

I think my next point is that when you see a new mining company coming up with their operating estimates of how much money they're going to make, I would say add at least 50% to the operating cost and 50 to 100% of your capital cost. It's much safer to do that. And if the ore deposit and the mine stacks up, once you've done that, then fine. But if it doesn't, walk away. Another point is that working capital or the lack of funds can kill a project, especially in a falling commodity price environment, and especially during the development phase. So you really need to have a properly funded development phase and obviously, beware huge downturn in commodity prices, it’s much better to get out in 10 sectors if you are in a structural downturn.

I think the next observation I'd make is that mines work better when you're in a mining area. It's good when you've got skilled people, it's good when you've got spare parts. I've seen a mine coming into production in Liberia, it was the new Liberty Gold mine by Aureus Mining. And yes, the final hablo was the Ebola virus but they were in trouble long before that. And that was a function of not having mining people in the country and also not having any spare part. And it's not just mining, but it was the mineral processing as well. But there was no kind of spare part inventory, so the mine had to carry a much higher inventory of spare parts and the Capex. The cost of that put a huge strain on the finances. So mining does love company. I mean, it's pretty obvious.

My next point is that underground mining is a very, very specialist expertise. Well, all mining is specialist expertise. You really want to have people who've done it before and last few points in a downturn. What happens is that mining companies start high grading, which impacts the overall grade of the deposit. They cut down on development Capex and they cut down on maintenance and training. So typically, this means that there's often a significant lag on a recovery of prices. So underground mines can't necessarily just restart in a higher price environment. They've got to re hire, you've got to train people, you've got to rescale people and, in some cases,, you've got to dewater the mine. So this is why you get a lag in the production response to a price recovery after a downturn.

And my final point is that grade is absolutely King, is crucial to making money. Yes, we've talked about the cost per tonne being a function of your production rate. So, your cost per tonne of mining goes from in an open pit $10/t all in through to a certain small, narrow underground deposit at depth up to $200/t. And the throughput rate is a fundamental controller of your costs line but grade is the controller of your revenue line. So, grade is king, the high grade the better. Thank you very much.

Mining
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Mining: General observations
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Hello, and welcome to another episode of the Con. Today I'm going to be talking about mineral processing and extractive metallurgy. When one talks about the con, this is it. This is the point where you get the ore and you turn it into a concentrate. Now, today, it's a massive, massive topic, I find it one of the most interesting and amazing things that we do in the mining sector. It's an art and a science. When I first studied it, I was doing a Master's in mineral deposit evaluation and all that kind of stuff, how to get things out of the ground. This one course was like, oh, my goodness, really, this is how you do it. So, what is mineral processing, and what are we trying to do? We're trying to get metal out of the ground. Many mines around the world don't actually get to the metal stage, they produce a concentrate, which then has to be rich enough in the metal of value, that you can transport it a long distance, and then you take it to a place where it gets further processed. There are also lots of mines around the world where they produce the metal on site and that metal then has to be transported to the end user, or possibly to further refining. But all processes start with a rock in the ground. And what you're really trying to do is you're trying to separate commercially valuable minerals from other rocks.

So, what is a rock? let's just start with that. A rock is an aggregate of minerals, which are all mushed together or held together or bound together, and we determine a rock as ore when some of those minerals in the aggregate have got commercial value and we know that we can extract that value mineral at a profit. Because if you can't do it in a profit and extract it, and that includes the mining, then it's not all. So, in your aggregate of minerals in your rock, let's call it all let's assume that we're going to be able to make money out of this, you've got some particles, which you want and other particles, you don't. You've got waste, and you've got value. Now what you have to do is you have to separate those grains, well, first of all, you've got to break them apart. So, it's a relatively simple process, you do size reduction, and then you have to liberate the grains, you have to liberate the value grain from the non-value grain. And then what you'll have is a fine mix of value minerals with non-value minerals. And at that point, you have to then separate it. You have to get the value minerals to one side and the non-value minerals to another side. And what you'll often get at that point is a concentrate and you'll get some waste products which can include what normally includes tailings.

There's a vast amount of complexity that one can go into but essentially comminution is the process of size reduction and that can be split into 2 phases, one of which is crushing and the second is grinding and that is incredibly energy intensive. Now, when you are looking at a new investment possibility or looking at a process, you're going to want to understand how hard the rock is and how much crushing it's going to need. People will often talk about, oh, this is free dig or this is an oxide, what does it actually mean? Typically, an oxide can be a softer rock, so you don't need to blast it, it might be free digging, you can just go in there with a big digger and rip and take that off. And sometimes it doesn't need a lot of grinding or crushing. So on a hard rock mine typically the Sulphide are fresh rocks, they haven't been weathered, they're much more competent, particularly if they've been flooded with Silica, you can have these incredibly hard kind of bound rocks, they can be almost welded together with heat. There's a rock called the Hornfels, which is often found in skarns, which is a mixture of kind of next to igneous rocks, where there's lots of water circulating. And you can have them mineralized as well, but they can be just incredibly hard. So your hardness is going to influence how much crushing you need and that is going to influence how much energy is going to be acquired and also how much corrosion is going to be in your part and so that can be an important factor. You do want to understand what you are crushing and how hard it is because not every mineral processing operation is going to be dealing with the complete separation or the liberation. Of course, you do have some dimension stones like Granite or Marbles, which you're trying to get out of blocks. But I'm really just focusing on the metals here. I mean, I'm going to run into trouble as well because you've also got other brand of mined material that contains useful minerals, such as Diamonds or Gemstones, or perhaps Baryte or Chromite where the concentrations are high, but the value is low. So they're kind of the mineral themselves as approaching a kind of a chemical grade and typically these are kind of industrial minerals.

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Mineral processing: Types of rock
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The most of this talk is about the separation, the liberation of value bearing minerals from waste to get the metals out of them. Comminution stage has got 2 stages, the crushing and the grinding. It actually starts with the mining. As soon as you start mining, you're starting to break it down into smaller bits. You use explosives, use excavators, you use scrapers for softer materials. And this is very much kind of a sequential process, you take the big material, you screen it, i.e., if it's too big to fit in the truck, you've got to break it up again. You would probably want to speak to your blasting engineers to make sure that the fragmentation of your rock is good. But it needs to be able to fit into the top of the machine, which is your primary crusher. These are often jaw crushers or gyratory crushes who use this equipment, and sometimes they are located in the mine themselves. There's been a lot of progress recently with X-ray sorting, X-ray diffraction techniques. So actually, now some mines, they do the primary crushing and they actually do a split underground and so that they can take out quite a lot of waste quite early on. And then you can either convey or truck already beneficiated material up to a kind of a secondary processing plant. But essentially, whether your primary crusher is underground or at the processing plant, you check your stuff into the top of the primary crusher, and it gets broken down to. There'll be some fines in there, but there shouldn't be anything over 10cm, it might be 5cm in diameter. You can get some slabbing or bits which are longer, but still slide through the process. But typically, they'll go through a screen even before your primary crusher, you'd have a grizzly out just to stop the really big bits going into grizzly as effectively a mesh or a set of bars, that stops the really big stuff going in, and that can be removed with a digger.

So typically, there are 2 stages of crushing, sometimes you might need a 3rd stage of crushing. Primary Crusher, as I said, is a big bit of equipment, a jaw or gyratory crusher. And these are effectively using compressive forces, you take the movement in a static place, and it's a course run of mine that comes in and it's much better sorted smaller material is typically as I said less than 5cm. That will then go into a secondary crusher, which are typically a cone crusher. The cone crusher is kind of just like a gyratory crusher but a bit smaller, often they've got a shorter spindle and a wider diameter. And then you can also go on to these roll crushers which are getting into the realms of grinding. And so each stage of crushing in combination takes you down, down to the grain size. So how fine are you going, and why are you trying to get there? Remember, what we're trying to do here is we're trying to liberate the value mineral from the non-value mineral. And the rule of thumb is that you have to grind down to half the diameter of your average value mineral grain size. Yeah, so if your value mineral is about 1mm across, you need to grind down to 0.5mm to liberate your value minerals at an economic level. That's a rule of thumb and each individual deposit will be slightly different. But that gives an indication that if you're dealing with a fine grained, very, very fine grain mineral, you've got to grind your ore down to dust pretty much. And that takes a lot of energy. Now obviously, if you've got a coarser grained value mineral, then you're going to save a lot of energy. And it's much easier to handle a sand than it is a dust. So the mineralogy and the petrography and the way that the mineral forms actually really does influence the cost of processing of your ore deposit.

When it comes to grinding, quite often you'll find that there's a primary mill and that these days, often a semi autogenous mill or an autogenous mill, which means that the weight of the material in this big drum that's rotating will actually break it down and break it down. And in the semi autogenous mill, it means that you chuck in about 5% to 10% by volume of the material that you've got in there in the form of steel balls and they help to break down this big drum. These mills are very large diameter relative to their length. So they can have a diameter which is 2x or 2.5x their length and as they rotate they got little baffles inside, sometimes not, they lift the material up the side because they're spinning at the right speed until it gets carried up beside and then when it gets close to the top, it falls down. It can't go too fast but otherwise it just gets stuck on through centrifugal forces to outside and they can't get too slow because otherwise it just rolls back. So you've got to get the speed just right so that the material essentially falls from the top to the bottom on every circuit and that takes material from about 5cm diameter down to 100 microns, 0.01mm. Sometimes you need to go into a secondary mil 100 microns might be fine enough, your value mineral might be liberated from your non-value mineral at 100 microns. Or you might need to go further down than that in which case again, a secondary mill which could be a rod mill, ball mill, pebble mill, these are kind of wet processes. It's all in the presence of water and essentially what you're trying to do is you're still focused on that liberation. Only once you've liberated, you've got everything jumbled up. And now you're into separation and concentration.

And so what you're trying to do is you're trying to take your liberated material and your classified particle size distribution, because what I haven't mentioned through all of this is you've got various screening and classification, so for example, you might do a kind of a slightly coarser cut in a Gold mine. For example, if you've got a coarse Gold fraction, and the gravity on it, the density of it is such that it can separate out very quickly under gravity, you'll have various streams coming up with different particle sizes. But this just look at the way that you separate can be done using a number of physical or chemical properties of the value minerals, and indeed, of the waste minerals. Some of the properties that you can use are, colour, texture, optical properties and radioactivity. And so that's kind of sorting and so this is where the X-ray sorting comes through. You can use the density of the material, the specific density of a metal will feed through to its physical properties. And so you can either use its behaviour in a cyclone at the specific gravity of the value mineral relative to the specific gravity of the waste material, and the way that it behaves in a cyclone in a spinning setting where the dense material will go to the edges, the light will gather in the centre. And you can also use dense media separation. For example, you can create a mixture of something like water and magnetite or ferrosilicon, to give you a very specific density, and if you've got a mineral which is denser than that, it will sink and if you've got a waste mineral which is lighter than that it will float and therefore you can separate it that way. So you can separate it, and then you can clean it and then you can reuse it. You can use magnetic properties of a mineral to separate it from its non-value members. Typically, an iron ore magnetite mine, that's a clue in the name works very well in magnetic separation. The thing about that is you've got to grind it fine. So, then you're suddenly into the whole complex processing of what to do with fine magnetite, do you slurry it? Do you turn it into pellet? How do you handle a magnetite fines, huge topic probably not for now.

And then what you see around the world, often in Copper and Gold mines and in Zinc and Lead is you get this thing called froth flotation which is separation based on the surface chemistry properties of a mineral. The surface property of the mineral which can be natural, or it can be modified in some kind of pre process that you've done. But the surface property of the mineral determined its ability to attach to an air bubble and float to the surface. And in some situations, you'll attach the waste product to the bubbles and the froth up to the top and then others it'll be the Sulphides themselves to value. So, there's a little bit more each of those I'll just mention the X-ray sorting methods because this is increasingly being used around the world. It was first demonstrated for use for Diamonds and Diamonds emit light when they are hit by an X-ray and the resulting light is then picked up by detector. What you do is you make sure that all of your little particles are coming through in a very, very fine mono lead it’s one particle fit lead comes a stream of rocks and Diamonds which fall through the X-ray beam. And the detector when it responds in a certain way it emits light. The detector activates jets of air which knock the particle, the value particle into a separate bin. So you can sort your Diamonds through X-ray sorting. This is being applied through kind of various variations on other mineral systems using laser. The laser reflects from the rotating mirror drum you can scan a falling stream of rocks 1000s of times a second. Photomultiplier detects the reflective light, reflected light and an air jet moves exactly right in an instant and so it's being used more and more in the mineral processing world. It's already proven on Barite and Talc and Tungsten but I think we will see more of that in the future.

It is worth mentioning the gravity side of things. The gravitational properties of minerals are really important. It's often used for Gold because the specific gravity of Gold is 19.6 times that of water and so it behaves very differently to water. You can use that property in cones and spirals and in sluices and this is a key feature of artisanal work, the panning, the washing, the screening that is done for Cassiterite, for Gold the world over and it's what the Romans used at Las Médulas in northern Spain. You can go there's this extraordinary site where they processed very, very low-grade gravels through a series of water powered sluices. So, in a sluice, what you've got is riffles in the sluice which retard and slow, heavy material from flowing in the slurry. It forms of material bed, traps heavy particles and creates turbulence and the turbulence causes the heavy particles to tumble and then they get kind of trapped on the baffles. Effectively, that is what the Romans used; they had sluices with baffles and they also use the fleeces of sheep to trap activated carbon, the organic matter of the fleeces also trap the Gold. You can have shaking tables, the shaking table is a bit of technology that has been around for hundreds of years, but it's still incredibly effective at trapping those heavier, denser minerals such as Cassiterite, the Tin or even for Diamonds and for Gold. Gravitational properties are absolutely key, the one that is probably applied, most commonly I've seen the most are these Knelson concentrators, the Falcon concentrator which companies that manufacture 2 of the most common centrifugal gravity concentrators. These are kind of a rifle cone or a bowl that spins at a relatively high speed to create forces in excess of 50, 60G. You then inject your slurry at an angle down the wall of the cone, and the centrifugal force produced by the rotation drives the solids towards the wall of the cone. That slurry then migrates up along the wall, where the heavier particles are captured by rifles is pretty cool. I mean, there's injected water, you can fluidize the rifle area and there prevents compaction, and it lasts for very efficient separation of heavy minerals, particularly Gold. And so you get a fine overflow and you get the course under flow. It's often used to capture the coarse element of your Gold stream when you're coming through. My goodness, we're getting there.

We've gone through all these different kinds of separation techniques, probably just worth a bit more on froth flotation. Because in terms of the daily tonnages of all that are treated globally, it's probably the single most important mineral recovery process. What makes it special is that you can tweak the reagents so that you can selectively separate different minerals. It's a physio-chemical process, you have these big tanks, which are either mechanically with baffles or pneumatically with bubbles or flow, you agitate the tanks, you generate air bubbles, which is the physical aspect of the process. And then the chemical aspect is provided by the reagents, which vary the surface properties of minerals, and the properties of the slurry medium. Typically, most common for Copper, Lead and Zinc but also for Sulphides and Gold as well. And you can use it for oxide minerals, you can use it for tin, because it's right you can use it for Malichite, Hematite and Fluoride and Phosphates and you can even use it for fine coal as well. flotation often involves modification of the surface properties to the desired minerals, and to do all kinds of clever chemistry kits and surfactants that which can change the mineral surface either make it hydrophobic, or hydrophilic. So your value mineral may preferentially adhere to the air bubbles and float to the surface. That's where the hydrophobic ones go into the air bubbles. And then the hydrophilic ones stay in the water and don't attach to the air bubbles. You can tinker the surface tension with other reagents, it's a pretty cool bit of chemistry kit. Then you scrape off the minerals, which are hydrophobic and are on the bubbles is skim the froth off the top, and you keep the hydrophilic minerals in the slurry. And that is your separation process.

We've done separation, what you've then got once you've separated it, you've effectively got a concentrate of minerals. In the case of a Gold plant, for example, you might have some coarse Gold coming off as kind of a Gold concentrated powder or dust with maybe some nuggets in there. But you're also very likely to have Gold in Sulphides, Gold locked up in pyrite, and iron sulphide, it might be Gold associated with other stuff, but it might be that the copper and whatever it is in Gold might be locked in. It might also be still bound in the oxides. Similarly, in a Copper mine, you may have separated your chunk of pyrite or your chalcocite or whatever the value mineral is, you might have separated it from the coarse and from the other non-value minerals, but it's still a Copper Sulphide or a Copper-oxide or Copper, whatever. And the same goes for most of them for the metals. What you then have to do is you have to extract the metal from the value mineral, you've created the concentrate. What happens at this point is you've got your concentrates and you've now got to work out what to do with them.

Mineral processing
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Mineral processing: Crushing, grinding, separation & concentration
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Depending on the scale of your operation, the size of your operation and the kind of mineralogy you've got; you've got lots of different routes. If you are operating a small mine in the Congo, you might at this point bag up your concentrate as a Cobalt concentrate or a coal ton concentrate and it gets banged up in your local town and then fix a price and it gets taken up by a trader and you've got people who are buying trucks and driving sacks of concentrate out. If you are in Niger the French from Cominak, they put a yellowcake, which is a Uranium concentrate, it’s Uranium oxide, they put it into these barrels and they seal them up and they drive them 2200km down the road to the port of Cotonou. If you're in one of the big, Endian copper mines, you're producing a concentrate, which you then don't dry it completely, you make it into the texture of almost slightly wet toothpaste, and you put it in a slurry pipeline. And you can get 60,000t of the stuff down that little toothpaste tube all the way to your port, and then it's shipped off for processing.

Quite often at the mine site, you just get to a concentrate and then you chuck it off for subsequent processing. Equally, there are other places where you can get to a metal on the mine site. This is the stage where you've done your liberation, you've done your separation, you've done your concentration, you've put your concentrated bagged up and at this point, you are ready to go into one of the 3 disciplines of either hydrometallurgy, electrometallurgy or pyrometallurgy. So it's more or less split in Hydro and Pyro. Hydro- water based aqueous solutions, leaching. Pyro- fire heat smelting reduction of hot processes. Now, given the Capex of these big bits of kit, quite often what you'll find is that they are built in places where there's good port access and there's cheap power and they act as central hubs, which is why the big pyrometallurgical complexes are either at the centre of a massive mining hub, up in Sudbury or they're on a port so they've got good access for shipping, which is a low-cost transport medium, and they act as central hubs. It's very rare for mineral deposits to have enough value to be able to pay back the cost of the smelter, and the processing. Typically, they get the economics from drawing on concentrate feed from a number of sources.

On hydrometallurgy, however, you can get away with sometimes the cost of it is actually low enough for it being economic to build your own little metal producing plant on site. At this juncture, it's quite fun to look back at the history of metallurgy because we've been doing this for 1000s of years, the Romans have been doing it and just looking at the history of hydrometallurgy itself because in the old days, it was gravity concentration and then heating it out to separate out the various portions of it. But the history of hydrometallurgy actually goes right back to the 7th and 8th Century and in the 8th century there's an Arab alchemist who discovered Aqua regia, which is the two assets of hydrochloric and nitric acid put together. It was the only known solvent for gold, we've now established others, but it's still used today in assaying and in Gold refining. In the 1500s in the Harz mountains in Germany and in Rio Tinto in Spain, the mining engineers or the metallurgists established heap leaching of Copper from Copper rich Pyrite or Copper sulphide and gradual progress has been made. I think there were two key developments. Well, I mean, goodness me there's so many developments that you've had the buyer process which started the precipitation of aluminium from bauxite and pressure leaching and so, you start to be able to kind of extract aluminium on commercial basis in the late 19th century. And then really, it was the kind of invention of the cyanidation process, which is the dissolution of Gold by using a dilute sodium cyanide solution and then subsequent precipitation of Gold from the solution to using Zinc so that there’s Merrill Crowe process. In the 20th century, it went through copper leaching from solution, in the 1960s, we had bio-leaching and then in the 1980s, you had huge advances in Gold metallurgy with activated carbon technology and the oxidation of refractory ores using various processes so that what was once a locked up mineral that you couldn't access the Gold, you couldn't leach the Gold out of it, you did a pre-treatment to the mineral, and then you could leach the Gold.

Let’s get back to Hydrometallurgy. So, you're effectively precipitating metal out, what you're trying to do is you're trying to put the metal into solution, and then you are going to precipitate out you can use an electric current for example, around the world, about 40% of Copper production is one through solvent extraction electrowinning. It started in the 1980s. What you do is you put your fine concentrate into a solution which preferentially upgrades the solution or concentrate into a solvent and so you get a pregnant liqueur, pregnant solution, which has preferentially selected and reacted and found with the Copper. What you then do is you take that solvent it reacts in a strong aqueous acid and in electrical current, it will deposit Copper onto cathodes. So if you go to a Copper mine which has got its own SX-EW plant, we have the tank house where they're producing Copper cathodes on a daily basis. You produce pretty much an LME grade Copper, which sometimes might need to go for refining but typically doesn't. Similarly, in Gold mines around the world, you'll have a carbon activated process cyanide leach or cyanide and pulp, you use the absorption properties of the cyanide and hydrogen peroxide into the concentrate with the in-solution you mix in this great VAT with the fine ground liberated concentrate of sulphide with the Gold in it. You mix in the cyanide and it leaches and preferentially get a pregnant liqueur which has got the Gold into it and then you go through to an extraction process. What that creates is a gold Doré once it's melted and that gold Doré is then transported out of your Gold mine, normally sell it at the mine gates to one of the bullion companies and that is often taken out by helicopter sometimes or by an armoured vehicle.

On the pyrometallurgy, again, typically this is not done at a single mine site unless you're dealing with an absolutely massive mine. Really what you're doing here is a very high temperature process it's smelting and you're converting and then refining of the metal. You've got 3 types, you've got oxidising where you take your sulphide, for example, a Lead sulphide, you add an oxygen, you produce a lead-oxide and sulphur-dioxide. You've got a volatilizing smelter where you remove oxide, and you've got a chloritizing process where you convert metal to chlorides for later reduction. It's not something that most mineral companies have to deal with intimately, it's not something they have to build. It's a cost that they pay for down the line. And it's very important to understand your smelter charges, your treatment charges and your refining charges, because it affects how much of your payable metal you get. It has a huge impact on what constitutes or not because for example, if you're dealing with Zinc process, the smelter will take 7 or 8% of the value. So your grade and your Zinc project has to be higher than it would be for a Copper one because the smelter takes more of the Zinc than it does out the Copper in terms of value. That was a bit of a gap around the main processes.

What you will see in the Feasibility Study, and the Pre-Feasibility studies will be a focus on the mineral processing side down to a concentrate, sometimes they will go on and talk about the metal extraction. But that's not always the case. It's worth remembering that your original metallurgy can be established quite early on from doing a very simple petrographic analysis. You take some thin sections of your rocks, and you can look at it down a microscope and you can see the grain size and the way that the value mineral is encapsulated or entrained with the waste minerals. And that can tell you a lot of whether this is going to be refractory or not. That's another thing that people often use the word refracturing. What do they mean by that? It just means really how easy it is to liberate or how easy it is to leach.

I haven't really spoken about in-situ leaching or heap leaching but essentially these are part of hydrometallurgy, where you're trying to get access of the reactive solution with the reactive value mineral so you can get the value mineral into solution and then you can collect it and then you can extract the metal later. Heap leaching is all about flow dynamics, which is a function of porosity and permeability. You don't want too much clay in there. And again, it's reaction time how long does an active leach solution have in contact with the metal portion of your ore because remember, in a heap leach, you haven't gone through that extensive liberation, separation and comminution process, you're dealing with just the natural flow dynamics of fluid through the original or rather than through a separated or liberated concentrate. The mineral processing side of things is absolutely fascinating. And it is something that you can get a grasp of early through, as I said, very simple petrographic study will give you most of the indications of where this thing is going to behave metallurgically speaking, for example, I've worked on a Gold project where on drillhole 4 I mean, even before we knew how to deposit a commissioned a Petrographic study, we went to a really good guy who rushed up and he effectively gave us an indication of what kind of things we could expect from the challenges through the metallurgy or the opportunities. And that guy did a lot of the mineral processing metallurgical test work that we did later on and he was absolutely spot on. That's not to say that you don't have to do the mineral processing and the test work. It's absolutely vital, and you really do have to do it but it can certainly help you out.

So this is a really, really key thing is that quite often, the team that will work on the process flow sheet in the design doesn't really understand the geology. And you can have these variations in your ore deposit, which are not picked up by the metallurgist but have a huge impact on the recoverability of your material going through. So, it's absolutely crucial that is not just grade mapping that you do when you are evaluating your resources, absolutely vital that you do metallurgical mapping. In some places, the grade is not the driving factor. For example, if you're in a leaching environment, your Copper grade may stay constant but the leachability of it may vary enormously through various chemical or physio-chemical changes through a deposit. The question of ‘have you done representative sampling on your geology before your metallurgical test work is really crucial’. And I say time and again, because quite often, what happens is that the geologists will select what they think of the best examples of the mineralization but actually, because of the inverted commas ‘the best’, it actually can be high-grade.

So what happens is that the metallurgical test work is done on high-grade material and think, oh, great, we've got this accurate, granular geology that mineralogy that leeches perfectly and we're going to use this process and the recoveries are going to be X or Y. And then when it comes to it, you don't have that perfect mineralogy put in the plant. And so you often end up with very, very unhappy investors and shareholders as your plant loses money, and then you could redesign things. So, it's the proper metallurgical test work. It's not so much the theory is to practice, you know, is this all representative? You've got to do a lot of tests where it's probably wise to do bulk samples, take it from different areas. And then of course, you've got this whole thing about the varying between the surface and deep. How does the mineral change in the process plant when it's been oxidised? When it's got some sulphides in the ores, that's kind of a transition ore, and or you're going deep into fresh rock. So that is the trick is to make sure that you match up the test work, and you've got an appropriate mineral processing facility for the deposit and that you know, what's going to be going through it. There are some real horror stories out there on things going wrong. But I hope that this guide around mineral processing side of the business has been interesting for you. Thank you very much.

Mineral processing
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49
Mineral processing: Processing, hydrometallurgy & pyrometallurgy
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Hello, and welcome to the con. I think this is the final episode of the Con. And today we're going to be talking about permitting, exploration licence permitting, mine permitting, and all the permits in between. An earlier session of the con, focused on jurisdiction and to some extent, or to some degree, there's a certain amount of overlap between the two subjects. But by splitting them up like this, I can get away from perhaps some of the broader political risk points and strategic points and focus a little bit more at some case studies and examples of really what goes into the permitting. A key aspect of the risk about permitting and why it's important to investors and the general public, is because permitting generally takes a long time. It costs a bit of money and of course, there's a time value of money. So £100 pounds or $100 in your pocket today, is worth more than $100 in your pocket in 2, 5, or in 10-years’ time. So, it's really important to understand if you're looking at a smaller company where it is in the permitting process. And then again, if you're looking at this sector as a whole, and you're looking at some of the bigger projects coming on, it's worth understanding the permitting process with the risks associated with permitting, so that you can accommodate the timeline of when that big project is going to drop into the system. If you're looking at a Copper porphyry, or Copper-Gold porphyry, which is going to have a meaningful impact on the supply of a commodity, or Copper or Gold or any other positive just going to have a meaningful impact on the supply of that commodity, then you're going to want to understand when it's going to come on. Because it might affect the deficit supply demand deficit, or it may push the commodity into surplus, for example, in a smaller market, like PGM, or Cobalt or Tin.

So what do we mean by permitting, and at its most basic, you're talking about the exploration licence or the prospecting licence it's your ability to walk into a country to say that you want to explore, having done the research or spoken to the locals or met a businessman in a bar, whatever the process is about your area selection, you want to get a new licence area from the government. So it's the ability for you to start exploration in a new country, and then advance that exploration permit through the various phases probably got relinquishment phases, we have got spending commitments, and after a certain amount of time, you have to relinquish 50% of the licence area typically and so on, and so on, you spend more money in a smaller and smaller area as you focus in on the hopefully on an economic project, or you drop the whole area entirely. Then you have to go on to a mining or an exploration licence, which is typically got a much smaller curtilage, a much smaller area, rather than 1000s of hectares, 10s or 1000s of hectares, you're talking about hundreds of hectares, or less around your mine. And that is where you have the right to extract ore from your mining licence. But I'm just dividing your permits into exploration or prospecting licence or mining and exploration licences, of course, have a simplistic because there are so many components that fall under the bracket of permits.

In some places you need to once you've got Feasibility Study and once the returns on the prospective returns of the ore deposit are known, you need to finalise some of the floating elements in a mining code for some mining codes need degree of flex. So you might have to pin down the exact Royalty rate that you're going to pay on your deposit because the government is going to change that there's a sliding scale of Royalties depending on your profitability. And all of that needs to be agreed. Of course, when you're looking at getting a mining permit, to get your mining permitted, your final permit you have to get lots of pre- permits beforehand and you have to maintain those permits in good standing. Typically, the most challenging suite of permits that you require to get your mine permit is of course your environmental and your kind of your social or your First Nations permits.

While I was researching this podcast, I came across a worked example for a mine in Alaska. It listed the agencies that wanted to speak to and various environmental permits that it needs to achieve. And I think that's just worth me running through them. The agency or the departments in American or the US departments that you need to speak to, just to engage with them so that you understand you're not missing anything includes the Department of Natural Resources, the Department of Environmental Conservation, the Department of Fish and Game, the Department of Transportation, Public Fisheries, the Department of Commerce, Community and Economic Development, Department of law, the US Environmental Protection Agency, the US Army Corps of Engineers, the US Fish and Wildlife Service, National Marine Fisheries Service, Bureau of Land Management, US Forestry Service and the National Park Service. Those are just the department's you've got to deal with. Then you've got a whole series of states level permitting you to get and then you to get federal level permits.

The list I'm about to give you here is not exhaustive, okay, this is just for one mine in Alaska. Obviously, it's a large mine and obviously interacts with the watercourse. It's you're not just dealing with land use, but also water use. So the majority of the permits you need at the state level include the plan of operations approval, reclamation and bonding, waste management permits and bonding, water discharge permits, certification of ACOE. I don't know what that means. The sewage treatment system approval, air quality permits, fish habitat and fishway permits, water rights, right of way and access, tideland leases, dam safety certification, cultural resource protection, you need a monitoring plan for the surface, the groundwater and wildlife. That's all at the state level and it's not exhaustive and then at the federal level, you need to have US Environmental Protection Agency air quality permit review, US EPA Safe Drinking Water Act, US ACOE section 404, dredge or fill permit, section 10 rivers and harbours act, section 106 historical and cultural resources protection and MFS threatened Endangered Species Act consultation and MFS Marine Mammal Protection Act and MFS essential fish habitat, fish and wildlife coordination Act, US FWS threatened and endangered species act consultation, USFWS bald eagle Protection Act clearance, USFWS Migratory Bird protection, USFWS Fish and Wildlife coordination act. You know that's mining in Alaska, it sounds like a nightmare. It is a nightmare. And it's not surprising, but in the US, it takes about 10 years to get your mine permitted.

Permitting
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Ep
50
Permitting: Exploration & Mining Licenses
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There's been a lot of pressure in the US to move to a more Canadian style system. But actually, if you look at the Canadian style system that's been going through a whole heap of change as well and not all of it good. Interestingly, though, over the last 15 years, things have got more and more onerous, increasingly onerous. You've had First Nations, you've had a lack of coordination to the environmental departments and gradually, the timelines of getting a new permit after stretch and stretch I was speaking to one producer who said it took him 10-years to get a mine licence for a simple build operation in Northern Ontario. Going back into the Uranium field, it's taken up to 30 years to get a new Uranium mine permitted in Canada. So certainly not very easy. It is worth noting that in Canada, there have been a whole series of changes recently trying to make it more streamlined process. One of the beautiful things about Canada and Australia is that you've got departments that understand the mining sector. And I'll come on to this later, when you have a group of people that don't really understand the mining sector, that in the legislation that can create these problems, where you get these overlapping responsibilities or overlap and sign offs.

But before we get into the Canadian example, I think it's just really worth just taking a moment to remember that you can gorge incident by root and toe, and the impact on the way that the world is looking at Native Title these days. So, in the fourth round of the UN guidelines on extractive industries, and one of the key changes whether the voice of the indigenous people would have a say, or the indigenous people would have a say, in the development of mining projects. And in the summer of last year, June, July last year, Rio Tinto blew up the 46,000-year-old tribal monuments of Juukan Gorge. And so far, all of the major heads of the people who had some degree of responsibility for the head of corporate relations has gone, the head of the iron ore division has gone, the CEO has gone and just recently, a month ago or so the chairman has gone of Rio Tinto. So these are things that the mining company wants to get right because they're going to lose their jobs otherwise, and that's hugely damaging to their pocket and to their reputation. People are always motivated for personal reasons. It's really bad for shareholders, because business can get slowed down, you can have a withdrawn, and it just impedes your entire business model, which is trying to show people that you're doing a responsible job of delivering vital minerals to the world as we need them in our ever increasingly commodified life.

So that whole Rio Tinto thing was an absolute disaster, it was 10-years in the making. They got their mine permits early and then there were some discoveries made later. The local indigenous communities were not properly engaged. They weren't properly listened to. It was a classic disaster from start to finish. And in some ways, it's a function of lack of joined up thinking in the company. The terrible irony is that Rio Tinto for so many years, as for so much time were the leaders in community relationships. Actually, there was the Pilbara that were the first people to acknowledge Native Title, there was the iron ore division in the Pilbara. It was Rio Tinto that laid so many markers are making progress about understanding and engagement level communities actually working with them to streamline the permitting. But of course, nothing stays the same. And then 2015, there was a shake-up in how Rio Tinto would run and it all was centralised again. And this is the main complaint of the local the Aboriginal communities and people sitting in London's James's square in London don't have a clue as to what's actually going on 1000s of miles away across the other side of the world.

Going back to the Canadian example, addressing the First Nations in Canada and understanding how the permitting processes has got increasingly delayed and stretched out in Canada. From 2005 onwards really, right up to 2018, the government realised that you had all of these competing departments who didn't understand what the other departments doing, they didn't understand who was able to give authority. And so they've actually done a federal environmental assessment. And that's resulted in across Canada that's been recently implemented an Impact Assessment Act. And the main aims of this Impact Assessment Act was it was trying to show that if you've got a mining project, then that mining project would have a single review approach aimed at integrating provincial and federal environmental assessments. This is really what the mining sector needs, it needs a place where you go, and it's a joined-up conversation. So yes, you might want to protect a plant or a bird or community but there has to be a balanced analysis. We may stop the mine here, and it may preserve this kind of culture. But is that culture dying anyway? And would the mine actually enable it to be preserved in a different way that it's gotten more sustainable? It's a joined-up way of thinking. The Impact Assessment Act involves a statutorily enacted indigenous review and consultation through the public process. They have got a coordination of reviews, by applicable Government of Canada departments and a more comprehensive approach to the assessment of cumulative impacts, including social, regional and strategic impact assessments and changes to how cumulative impacts are considered for individual projects.

Okay, so in some ways, it's a more rigorous approach, but actually, by being pulled together, the intention is to streamline the environmental review process to add transparency and add the voice of indigenous communities with respect to consultation and accommodating their views. It's also aimed to increase public confidence in assessment and the public confidence in the conclusions of the process and the outcomes of the review. And even though it's more rigorous, it should speed up the permitting situation in Canada. I've mentioned that the UN Declaration on the Rights of Indigenous peoples in the latest draft of guidelines, Canada is really essentially trying to move more towards to meet those UN guidelines. It's not the same across Canada, you've got different states, different provinces with slightly different mechanisms. One of the particularly bad areas for slow permitting was British Columbia. And as part of this review, they decided to split the chief inspector of mines role, his responsibilities or her responsibilities and so there's actually now a mines permitting officer, which is the aim to have quicker but better regulation.

Permitting
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51
Permitting: Permit review process
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I remember speaking to a consultant in Sweden, and she's based up in the north of Sweden, and she's saying the thing about Sweden is that it got a cover strong mining cuts, but they don't really in the government departments, they don't really understand the risks and the problems associated with mining. They don't really get that involved in actually what I'd rather have more regulation, I'd rather have more control and more oversight, because then some of the sloppy practices that the mines do wouldn't happen, that we'd get less bad press. There'd be fewer spillages or slips or accidents and the whole thing just be tightened up. It's akin to having like a well run secondary school where there's a good head teacher with lots of clear rules. And it just hums like a good machine rather than, you know, being a bit loosey goosey and things can slip out of control quite quickly. So, Canada have been improving their permitting process. There are lots of countries where there is that expertise in the government, for example, if you want to do exploration in Ireland or development in Ireland, people will say oh, no, you can't go to Ireland. It's kind of Western Europe or some parts of Germany go to the Saxony part of Germany. Oh, my goodness in Saxony, Germany and Ireland. They've got these experienced government administrators in Ireland within the exploration and mining division is the EMD they've got fantastic expertise and they've often worked in industry or they've assisted industry for years. And there's very clear and transparent way to get your prospects in licences and to get your mining leases and licences, they're super, super nice people and its really good fun. And you can drink a bit of Guinness, of course, but they've been associated with the mining industry in the decades and they've really know what they're talking about.

Not only that, but the government has supported something called iCRAG, which is the sci fi Research Centre for Applied geosciences. And you've got a bunch of researchers, several of them have worked in industry before, who are dedicated to creating solutions for sustainable society. They're linked to the University of Trinity and particularly University College, Dublin. If you're looking at some modelling or some structural analysis in Ireland, you can call up iCRAG and they will help they will say, Oh, yeah, we looked at this, we've done some kind of inversion modelling on the geophysical data, or we've done some structural analysis. And this is where we think that the Lead, Zinc is associated with extraordinary supportive service. With country also funded the teller service, they remapped entire country over a number of years with detailed geophysics, which has enabled a complete rethink of the geology of the country, which is super.

But in 2018, the Zinc price picked up at the 2016 or 17 and in 2017, everyone was looking for Zinc. And that translated into a bunch of companies exploring for Zinc in Ireland in 2017, 2018. And in the middle of that kind of mini-Zinc boom, the EMD the Exploration mine department for Ireland, suddenly put out a notice saying we can't issue any drilling permits, because we've realised that for the last few years, we've been operating illegally under EU law because in order to do a drilling permit, you have to get an environmental licence. And that has to be granted by the environmental agency and it can't be granted under EU law, it can't be granted by the mines department. So there was a sudden panic, the EMD called a conference, everybody met in the hotel in central Ireland, there's a big discussion. And they tried to get a workaround, because what happened was you went from trying to get your exploration permit for drilling, which involves, you've got to get your water from somewhere. So you need to have a permit to show your drawing water from a sustainable source. You also need to show that you are not discharging internally water courses and you're not putting any chemicals effluence into the water system into the groundwater or anywhere else. And then you need to show that you rehabilitate the site and you're trying to tidy up job afterwards.

All of that previously was monitored by the EMD who know exploration drilling, they know RC, they know Diamond, they just know the whole process. And suddenly, it was handed over to an environmental agency who, when they were faced with 100 kind of drill hole applications. They know nothing about exploration drilling. And they started saying, well, if you're going to be doing an oil well, and it's going to cost you $200M and it's going to take you however long, we're going to need to have a full environmental impact assessment. And it's going to take 2-years or so to get the industry code went up in opposite it was chaotic. Because of course, you were ending up dealing with an agency that doesn't understand mineral exploration drilling. There was a hiatus, it got sorted out the responsibilities, the oversight got to fed back to the EMD. And then the sign off came through the environmental agency to make sure that you could all be kosher under European law, but actually, it was ineffective work around. And you see this time and again in Europe. So for example, in Sweden, and to a degree in Finland, you've got your mining permitting, your environmental permitting, all being done by different committees, all who have got different responsibilities under EU law. And in a country, which is so polite, and so democratic, like Sweden, and Finland, nothing happens. And it's not just the fact that people have got different responsibilities. But I think it's in the very modern sense, you know, we're very careful about other people's feelings. And it's not just about the feelings of other people. It's also the feelings of the reindeer. My sister was trying to convert her house or she was trying to put an extension on the back of her house in Wales and she got involved with the local surveyors, who said, Are there any bats here? And they came to the backside of it, oh, we found the bats in your roof. And it delayed the process for a year or two. And eventually she was resorting to ask who runs this country? You know, is it people or is it bats?

And if you go to Scandinavia, you could well ask the same question who runs the country? Is it the people or is it the reindeer, because in Scandinavia at the moment, the Sámi have got a veto on mining projects because of the reindeer migration and it is something very complicated that you've got to get involved with and it does ask time and money. Now, I love that and I also love reindeer and I also love respecting other people's feelings. But the problem arises when you have people making decisions about things which they have no idea and no experience in their training. And so you say right, we're going to build the mine and they go oh, because they don't know what’s involved which is why it's important to be working in a country where the decision making people have got expertise in the area that you're trying to get permitted.

Permitting
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52
Permitting: Government & laws
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Now, the flip side of that is that there are some countries where it's extremely easy to get a mining permit, but they carry different risks. And in a country where it's easy to get a mining permit or possibly even an exploration permit, you've got to ask yourself, why is it easy to get resources permit in this country. And the case study, of course, for me is Niger, where the two Canadian Uranium companies have both got their mine licence in less than 6-months, I think it was even less than 4-months. So both GoviEx and Global Atomic, managed to get their mine permit in double quick time and that's great. It would take 30-years to get the same licence in Canada. And you might not even be able to get the same licence in Australia. So, if you're looking to develop a Uranium project, you kind of need to go to a Uranium country, Namibia, Niger but in Niger, there are plenty of other risks out there. And so it's a health risk, really in Niger, you've got the stability, but the political instability of the area, the security risk, you've got the added complication of Malaria. So you may be able to get your licence easily out there. But my goodness, you've got other headaches when it comes to operating.

In the DRC, for example, you can get licences, and that's a mining country. So it's not as if they're desperate for you to come in and mine their stuff because they want to get the economy going. But you can get your mining licence in the DRC but as soon as you get it things get expensive. They're expensive before you get there. So I know long time Lubumbashi resident who's been in the resources sector and he always says that your company in Lubumbashi or in the Congo is always under attack. And I know that because when you go into land in Lubumbashi, you've got a parking attendant who is trying to scam your luggage guy, the airport was trying to charge you five bucks for doing something, the passport guy, every single person is trying to take a slice out of you. And he says it's exactly the same when your company operates in the DRC. He said, you've got to essentially patrol the borders of your company. As if the searchlight at night to make sure that your legal situation, your tax situation, your title, every department, every government department is trying to shake hold of your grip on title and try and take your company out for a slice. It's the culture of the country.

So, permitting, I think it is worth just getting back to the contrast between Ireland and Scandinavia. In Ireland, you've got a joined-up group that really know that what they're doing. And in Sweden and Finland, you've got this charming, very nice democracy committee of people who have great respect where the other people's opinions, but actually nothing happens. And then you go to France and I can take you to places where there's a 4Moz deposits with good metallurgy and potential for 10Moz deposits. There's a great cup of project I know, there's nothing wrong with the geology of France. But you try and get a licence, my goodness me even an exploration licence, the government just doesn't want to engage. And the local community is often suffering from rural flight, the young people are leaving, they're looking for jobs, they're looking for economic stimulation, but nothing happens. So France is a bit of a headache. And then you go to somewhere like Saxony, in Germany, where you've got the oldest mining school in the world is 100 years old. And they've centralised all of them to one department. So what am I trying to say here? What are the general rules, I'm just trying to say that mining is an important timeline element of developing a project. The bigger companies producing companies with income and multiple assets can afford to have a comprehensive department which is looking at this and also the time value of money is less critical, because if they've got income and other projects coming on stream, they potentially got a pipeline. And let's say the gestation period of the pipeline is 2 years or 20 years, as long as that pipeline is full, and they've got regular things coming on stream, it doesn't really matter how long that pipeline is apart from a cost basis.

But for a single asset company, which is trying to grow to a second asset or from a non- producing asset company, that’s trying to bring something into production, permitting is a crucial and critical risk. I would say that countries which are more transparent, and where you've got traceable steps through the permitting process, you've got people thinking in a joined-up way, they're generally much more competitive. You've got more people operating there, because it's a better place to work and therefore the geological, low hanging fruit are harder to come across, they're less frequent. And when you're dealing in a country, which is more opaque where there's greater risk associated with getting your mining permits, either because the government has not got that institutional capacity, or because the government doesn't have the experience and has got this kind of this broken up rather than this unified approach. There's greater risk around your permits but equally there's probably greater reward and the geology because there's been less work done. So, really, when it comes to permitting, there's no easy win for an investor.

I recently was talking to a very eminent geoscientists, we were just talking about exploration potentials we ran through the countries and where would you want to explore. And on a facetious level, you know, you go to somewhere like Canada or Australia, and it's so competitive, and you've got to essentially be living there. And it's an incredibly mature exploration environment. You go to somewhere like, you know, West Africa, you've got the security nightmare. You've got East Africa with political problems, South Africa with political and permitting and social difficulties. North Africa, politics, you get to South America. Oh, God, do you want to go to Argentina? Mexico, yes, you can work but then you come into all these problems about security. It's really hard. There are no easy answers. And so essentially, what you end up doing is looking for the logical opportunity. And then sorting out permitting afterwards. In the sense you don't choose to go anywhere, because of the permitting. You just go there for the geology.

Having said that, Mark Bristow, when he was at Randgold, he always used to tell me that he much preferred the Francophone countries. He liked the permitting of the legal code, the mining codes of Francophone West Africa and he stuck to it. I mean, if you look at all of the African mines, they were all in French speaking countries, and the Napoleonic code. God bless Napoleon Bonaparte. So there's not a lot that you can take away as an investor other than just to have a better understanding of that permitting is complex. The closer you get towards a mine, the stronger the team that you need to complete all the engineering studies, all the technical studies, and the legal and the permitting studies. So, it takes time as an exploration company, which is a one man show, or two or three guys, is never going to have the right people to get a full permit in place. So you've got to bake in time, and you got to bake in the ability to grow that team. Actually, it's not true. I know that, you know, you go back to Niger, and you look at GoviEx and Global Atomic and both of those teams are small teams and they did manage to get their mine permits. But those are exceptions rather than the rules.

And then the final thing as ever, with resource companies is don't believe short timelines. There are occasional exceptions to the rule, but they're very much exception to the rule. So these things take time, they can't be rushed. And increasingly with human rights and the power of the individual, particularly with smartphones, you've just got to do everything properly, or else you're going to get yourself stuck in an uncomfortable and slow loop. Anyway, I hope that's been interesting.

Thank you very much.

Permitting
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Permitting: Jurisdictional differences
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