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This
is the third of my on-going series: “A Primer for the Lay
Investor” and addresses the following subjects:
- Which commodities should a junior resource
company explore for? The Good.
- Which commodities generally should be avoided
by a junior resource company? The Bad.
- Which commodities should a junior resource
company avoid at all cost? The Butt-Ugly.
Since
the majority of junior resource companies explore for and/or mine metals, I
will restrict today’s discussion to the metallic elements of the
periodic chart. This is not to denigrate energy fluids or solids (except to
say that no Venture Exchange junior should explore for geothermal energy),
industrial minerals, or agricultural minerals. Those commodities are another
musing for another time.
And
I truly wish it were that simple: The Good, The Bad, and The Butt-Ugly.
But it’s not.
I’m
just your basic dumb field geologist, a prospector-mapper in camo gear, a fairly simple soul with simple needs and a
simple lifestyle, and so I prefer to take the simple approach. Simple is
good; complicated is…well… frigging complicated. When working as
a geologist making a map, I avoid a complex solution unless field data forces
me to make the story more complicated. Here’s a simple way to say it: I
am a lumper, not a splitter.
But
I must add a complication to the simplistic three tier treatment of metal
commodities for investment: The geological environment and setting. As
investors, we need to know the type of deposit to look for and its
geological, geographical, physical, and chemical characteristics: The
lithology (rock types), the structure, the alteration, the mineralization,
and the metallurgy (recovery process) set in four dimensional space and time
(The Fourth Dimension, May 5, 2008).
For
example: An open-pit heap leach gold deposit in Mexico’s Sonoran desert
is an attractive target for a junior; a deep underground gold deposit in the
Witwatersrand of South Africa is not. The reasons some deposit types are good
prospective targets for juniors and others are not will become apparent
below.
Now
that the groundwork is laid, I will offer opinions on commodities and deposit
types that junior resource explorers or miners should (The Good),
should very seldom (The Bad), and absolutely should not (The
Butt-Ugly) select for flagship projects.
I
need to ask your indulgence, too. Be aware that these are simply Mickey the Mercenary Geologist’s
Rules of Thumb and there are exceptions to every rule of the
opposing digit variety. I can give you at least one company that contradicts
my “Rule of Thumb” for all of the Bad and even a
couple of the Butt-Ugly examples listed below.
The
Good:
Gold
+ silver deposits that are configured for open pit mining, heap leach
extraction, carbon-in-pulp recovery, and direct shipping of dore bars to a precious metals refinery: These deposits
can be developed in temperate climates in many places in the world, do not
require significant stand-alone infrastructure, and have low operating costs
and capital expenditures. There are many successful junior companies that
have, are, or will successfully sell out to a larger mining company or
generate cash flow, payback capital, and reward shareholders handsomely as
small to mid-tier gold producers.
Copper
oxide deposits that allow open pit mining, heap leach extraction, solvent
extraction and electrowining (SX/EW), and direct
shipping of copper cathode plates to a rod or wire plant: These deposits are
analogous to the gold deposits described above in mining, processing, and
economic valuation. Copper oxide mines require relatively low capital
expenditures, are environmentally benign, can be quickly permitted, and are
easily reclaimed. Since sulfuric acid comprises the highest percentage of
cash costs, a secure source of it is crucial. Therefore, geographical
preference is within a region close to an existing copper smelter, sulfur
mine, or sour gas field. Although many copper oxide miners are not
profitable at $1.50/lb copper, they are robustly economic at $2.50 or
$3.00/lb. Copper demand and price is currently depressed, but juniors
developing projects for copper cathode production in two-four years are
well-positioned to succeed and reward shareholders.
Uranium
deposits that are amenable to open pit mining and heap leach extraction or
in-situ leach mining (ISL), ion exchange recovery, and precipitation into
yellowcake: Deposits located in current or past-producing districts with
infrastructure and permitting processes in place allow successful development
within a reasonable mid-term period. Conventional open pit and ISL projects
in the western United States have low cash operating costs and capital
requirements within the financing ability of many well-run junior companies.
In the coming years there will be a consolidation of juniors, majors, sovereign
companies, and sovereign wealth funds into consortiums to develop major
uranium projects. Domestic USA uranium production currently supplies less
than 10% of yearly consumption and that shortfall will be exacerbated by
cessation of Russian imports in 2013. Worldwide projections show a supply
deficit of U3O8 for the next 10 years.
The Bad:
Polymetallic (combined base and
precious metals) deposits of any kind: These would include my least favorite,
the volcanogenic or sedimentary-exhalative massive sulfide deposits, and also
nickel-cobalt-chrome-PGE deposits and lead-zinc-silver veins and
replacements: All of these generally require extensive surface drilling
followed by underground sampling, drilling, and development, underground
mining, expensive infrastructure with grinding mills producing multiple
flotation concentrates, and shipment to smelters, often to two or perhaps
three plants across the world for pyrometallurgical
recovery of the various metals. Mining, milling, and recovery costs are relatively
high and profit margins slim. Capital expenditures are beyond the means of
junior companies.
Porphyry
copper + molybdenum, gold, and/or silver deposits: These projects are
very large and require ten or more years to explore, permit, and develop an
economic ore body. That is longer than the lifespan of most juniors. In
addition, the capital required for development is much beyond the capability
of any microcap to small cap junior or mid-tier mining company. Today an
economic copper porphyry deposit requires $2-3 billion or more to develop.
The sole business model that can be successful for a junior explorer is sale
to one of the few major copper mining conglomerates in the world. Those
potential suitors are growing larger and fewer as mergers, acquisitions, and
hostile takeovers continue in the global mining industry and their deposit
size thresholds continue to grow, too.
Iron oxide deposits of any geological type anywhere on the planet:
Because of the bulk material character, immense size of the deposits, and
large, centralized processing facilities required to compete economically in
the world, they require too much capital expenditure for a junior with
limited access to debt and equity financing to succeed. Again the only
successful “out” is if a sovereign-backed company or major comes
in with a buyout offer. Much like the copper business, there are fewer large
iron ore producers in the world today than ten years ago with world
production dominated by three multi-national mining conglomerates.
The
Butt-Ugly:
Molybdenum
porphyries: Molybdenum is the most fickle metal on the face of the Earth.
Price is controlled by supply as a by-product from giant porphyry copper
mines (60%) and recycled scrap steel (30%) and worldwide demand for alloy
steel, resulting in historically volatile price ranges. Ten percent or so is
supplied by primary producers; that amount is the “swing” and
this production is highly dependent on world economic health and cyclical
supply and demand of the steel industry. China is the largest primary
producer and the United States is second with four major, high grade western
mines. Three months ago it was projected to be five US producers with one of
the best orebodies in the world (Climax) re-opening
in 2010. But in a three week span, the molybdenum price fell from $33/lb to
$11/lb and development was suspended indefinitely by Freeport McMoran Inc. This is not a commodity where a junior can
successfully develop a competitive deposit or get taken out by a major.
Unconventional
deposits: This is a scientific euphemism for “not economic now and will
not be economic in the foreseeable future”.
“Unconventional” is a term coined by USGS Ph.D. geologists in the
1970’s to describe their pet research projects on metal occurrences in
unusual geological environments and deposit types not considered exploitable
because of grade or metallurgy. Examples include:
- The gargantuan Duluth Gabbro copper-nickel-PGE
deposit of northeast Minnesota which has been known and explored for
over 50 years or the similar Marathon deposit of northwest Ontario. Both
are low grade, metallurgically complex, and
would require billions of dollars in capital expenditures to develop;
- Vanadium-titanium deposits of northern Quebec
which cannot compete economically with vanadium produced as a by-product
from uranium mines, steel smelter slag, and petroleum residues and
titanium which is strip mined in heavy minerals sands near tidewater;
- Rhyolite-hosted uranium deposits which are too
small, low grade, and/or spotty to have produced a significant
“hard rock uranium” mine anywhere in the world.
Specialty
or rare metals: These metals include lithium, beryllium, cobalt, gallium,
germanium, niobium, indium, tantalum, tungsten, and rare earth elements,
among others. They have limited uses, small, tightly controlled, often
monopolistic markets, and sensitive supply and demand curves with the
world’s entire yearly consumption often supplied by one exceptional
deposit, one company, or one country, or as by-products from other mining
operations and processors. Junior explorers generally cannot compete in these
extremely competitive markets. Examples include:
- Tungsten which is used mainly in carbide and
composite metal alloys. Producing North American mines in California,
Nevada, and British Columbia were undercut and closed when flooded by
cheap Chinese production imported into North America in the mid to late
1980’s. China currently supplies 85% of yearly mine output;
- Beryllium which is used in metal, oxide, and
copper alloy forms in aerospace, defense, and high tech applications.
Over 85% of world production comes from unique rhyolite-hosted deposits
mined at Spor Mountain, Utah by a single
company.
- Niobium is used in nickel, cobalt and steel
super alloys and for electrical components in the steel and aerospace
industries. Tantalum is used mostly in capacitors for computer and
communication devices. These metals always occur together in nature.
World production of niobium is dominated by Brazil in carbonatite deposits (95%) and most tantalum (55%)
is produced from pegmatites in Australia and
the aforementioned deposits in Brazil (22%). The only North American
production is from a small pegmatite mine in Manitoba.
When
evaluating a junior resource stock for investment, it always comes around to
three key criteria: Share structure, people, and projects.
By
applying commodity and deposit type likes and dislikes to vet a
company’s flagship project, I can quickly eliminate more than half of
the junior issuers on the Venture Stock Exchange from further consideration.
With 1750 junior companies, that’s the idea as an analyst, eliminate
the many No’s ASAP and focus on the few possible Yea’s.
I
cannot emphasize enough that these are simply Rules of Thumb or guidelines if
you will, the deposit types presented are merely examples, the list is
nowhere comprehensive, and there are exceptions for many of the commodities
and deposit types listed above.
For
instance: I cover a rare earth element company that is one of my favorite
juniors because it has a unique, potentially world class deposit that may be
able to compete with Chinese producers; I own shares in a bauxite explorer,
ground usually tread by major multi-metal mining conglomerates; and I own
shares in a company with an advanced copper-gold-silver porphyry project. The
latter two were bought during the commodities bull market and I probably
would not choose to take down those private placements today even at the
lower prices where they currently trade. But they remain good, long-term
takeover plays and I have not sold a share of either since they became
free-trading.
A
critical part of an investor’s due diligence
in considering a junior for investment should be an assessment its flagship
property. It should contain a permissive commodity in a deposit type that is
appropriate for the technical and financial capabilities of a junior resource
company.
It
is my hope that these guidelines presented in the third installment of my
series, A Primer for the Lay Investor, will help you become a more
astute and better investor.
Now
let’s go make some money.
Ciao
for now,
Mickey Fulp
The Mercenary Geologist
Miningcompanyreport.com
The Mercenary Geologist Michael S. “Mickey” Fulp
is a Certified Professional Geologist with a B.Sc. Earth Sciences with honor
from the University of Tulsa, and M.Sc. Geology from the University of New
Mexico. Mickey has 30 years experience as an exploration geologist searching
for economic deposits of base and precious metals, industrial minerals, coal,
uranium, and water in North and South America and China.
Mickey has worked for junior explorers, major mining companies, private
companies, and investors as a consulting economic geologist for the past 22
years, specializing in geological mapping and property evaluation. In
addition to Mickey’s professional credentials and experience, he is
high-altitude proficient and is bilingual in English and Spanish. From 2003
to 2006, Mickey made four outcrop ore discoveries in Peru, Nevada, Chile, and
British Columbia.
Mickey is well known throughout the mining and exploration community for his
ongoing work as an analyst for public and private companies, investment
funds, newsletter and website writers, private investors, and brokers.
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