August 03, 2023
Mining is a tricky business. Most companies working in the sector are not making any money. They burn cash trying to add value to their assets. These companies either aim to make a discovery or to advance their projects toward the mining stage.
That’s where mainstream investors and analysts fail to analyze stocks. In most cases, common metrics and ratios make no sense. These stocks exist outside earnings seasons or Wall Street estimates.
Smart investors can use this odd nature of the mining sector to their advantage. Since these stocks do not follow the mainstream market, they can stay immune to macro events and provide diversification.
Understanding the mining sector can lead to potentially high returns. Yet investors need to know what adds value and what doesn’t.
This article will provide several main rules of thumb for investing in the mining sector. It will help you navigate it and potentially gain in the process.
1. Grade is king
When exploring for commodities, geologists aim to find the highest grade possible. High grades increase the value of the deposit.
Grades are measured in grams per tonne (g/t) for precious metals and percent per tonne (%) for most base metals.
For gold projects, 1.0 g/t is a decent grade for an open pit project (in most cases, no more than 250 meters deep from the surface). For an underground one (over 250 meters at depth), the grade has to go over 4.0 g/t.
Copper, for instance, requires at least 0.3% for an open pit and about 1.0% for underground-style mineralization.
These grades can vary based on multiple factors. Sometimes companies report grade “equivalents.” Here’s what you need to know.
If a company has more than one mineral in a mineralized body, it can report equivalent values. It would use the most valuable mineral as the primary one and add the value of other minerals present to it.
For instance, a drill hole with 5.0 g/t gold, 60 g/t silver, and 0.1% copper, should have gold as a primary metal. Using $1,800 per ounce of gold, $20 per ounce of silver, and $4.00 per pound of copper, investors can come up with the in-situ value of the metals.
In this case, it will be $289.36 for gold, $38.58 for silver, and $8.82 for copper. Gold has the most value; hence, the gold equivalent will be the right measure here. This mix of grades and prices gives us a 5.82 g/t gold equivalent. The extra 0.82 g/t came from silver and copper.
If you see a similar mix reported as 3.82% copper equivalent, be aware the company is doing something wrong. This warrants further questions to the team. Why did it feature copper and not gold?
Also, these calculations assume the company can recover 100% of all metals. That’s never happening, but it’s a good rule of thumb, nevertheless.
It's not enough just to define a mineral deposit with high-grade material. The company has to run metallurgical recovery tests to know how much metal (or metals) it can recover from the ore.
Good recovery for a single mineral usually stands over 95%. This number often gets lower if two or more minerals are in the mix. The reason for this is that complex deposits are harder to work with than single-commodity ones.
Junior mining companies usually try to keep the primary metal at the highest possible recovery. That’s where most of the value is. 60%-70% recovery for the additional metals is a good range.
But if the company reaches less than 60% recovery for each mineral in a polymetallic deposit, that’s not good.
Also, certain types of rocks are just too expensive to process. Like refractory ore, when the valuable mineral is encapsulated within another rock type. This is a red flag, as processing this type of ore can cost a fortune. Unless the company has an idea of how to control those costs, investors should be cautious.
4. Size matters
Another vital feature of any mineral deposit is its size. Even if it's a high-grade deposit with good recovery rates, it has to be big enough to matter.
Mining companies aim to reach at least a million ounces for gold deposits. For copper, this figure goes up to one billion pounds.
(These are resources that are only estimated and not guaranteed to be economically available.)
A deposit with lower commodity content can be deemed too small to bother with. However, these can become "feeder" deposits for an established mine in need of new ore to process.
These are the main things investors need to research before investing in a mining company. Yet, each mineral deposit is unique, and these metrics may vary.
Sometimes, open-pit mines can go over 1 km in depth... Sometimes miners can stay profitable working with a deposit with the grade as low as 0.5 g/t of gold. These require more detailed analysis and professional opinion.
The Canadian Mining Report educates readers and delivers unique insights. We constantly highlight the best companies in the sector and provide case studies. These will help investors find the best stocks and make the right investment decisions.
In the following article, we’ll talk about corporate aspects and risks investors need to consider choosing their next company in the mining sector.
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Disclaimer: This report is for informational use only and should not be used an alternative to the financial and legal advice of a qualified professional in business planning and investment. We do not represent that forecasts in this report will lead to a specific outcome or result, and are not liable in the event of any business action taken in whole or in part as a result of the contents of this report.
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