The months and years after a significant mineral discovery can be financially complex for mining companies. Getting to mining operations requires careful cashflow strategies to keep the venture afloat.
There is a path to cashflow generation that can take an organization through the stages of discovery to production. These strategies can enable such companies to keep moving through the much-needed work of early stage mine development.
Every mining project goes through a process, which can be thought of as a five stage cycle.
It includes exploration, discovery, development, production and reclamation. The three stages before mining production, however, can take decades.
The exploration stage, also known as prospecting, entails collecting research, current and historical, to locate a target area. Geologists and mining engineers are consumed with geophysical measurements, geochemical analysis, water, oil and soil tests, surveys, drilling and sampling. The results of such testing will often be put into a model to show a potential deposit.
Discovery and advanced exploration entail doing substantially more detailed assessments of the area, including ground geophysics, channel sampling, trenching and drilling. This is also the stage where important paperwork such as permits, leases and licenses are undertaken. Environmental assessments may also take place.
Development is where the mine’s infrastructure gets put in place, if the company determines the project is economically viable. The company will raise money at this point to begin constructing the mine and any needed infrastructure around it such as roads, power lines, processing facilities and housing.
These stocks often have low market capitalization, often under $50 million. Many of the projects these companies develop are not about taking a mine all the way to production, which takes a different level of expertise, but about getting the project ready for a larger, experienced mining operation to acquire it.
“The process from discovery to production is incredibly laborious. So many complex and diverse factors need to align in order to get to a finish line, which is why so few discoveries actually advance to an economically viable scenario. However, when things do come together it can be a very exciting and profitable time for the team and shareholders alike,” said Ian Klassen, president and CEO of Grande Portage. Based in Vancouver, BC, the junior exploration company is advancing its high-grade Herbert gold deposit, which is located 25 kilometers north of Juneau, Alaska.
Early stage mining development is all about balancing the investment in the potential future mine and keeping cashflow to fund the numerous steps involved — from the geophysical to the regulatory hurdles — and keep the project progressing.
Junior mining companies must engage a range of cashflow strategies to be successful in this high-risk aspect of the industry.
A strategy with a myriad of upsides is for junior miners to partner up with a larger, established mining company in a joint venture. Overall, joint ventures are on the rise in the mining industry, creating larger ventures, but they offer a great “yin and yang” for early stage projects. The junior is nimble and can devote time to the complex work of exploration, discovery and development without having to be distracted by any day-to-day operations.
Such companies are often willing to give up equity in the project to get cash in hand, expertise and access to talent to allow the project to advance the developmental timeline. Thus, a strategic joint venture between the larger operator and junior can emerge — leveraging each other’s strengths making a mutually beneficial partnership.
For many junior mining companies, the goal is not to take a mine to production, but either work with a partner to sell to one, and move on with more prospective mines.
As with joint ventures, more established mining companies, be they mid-tier or majors, will take a keen interest in early stage exploration projects with strong proof of concept, then leverage their own expertise to take the project into production. While not always, this usually takes place once a preliminary economic assessment has been completed or the junior is at the prefeasibility stage.
These deals involve a binding contract between a junior company and a future buyer. An offtake agreement ensures the mine and its products have a future and a future market.
Such deals aid cashflow in two ways: they sometimes entail cash up front, which of course, helps the developer. As well, the deal itself can help the junior mining company secure financing.
Generally, offtake agreements are negotiated after a feasibility study is completed and prior to mine construction; they help assure producers that there is a market for the material they plan to produce. That is beneficial for a number of reasons — most obviously, it means the mining company won’t have to worry about being able to sell its metal.
For properties with the right opportunity, embarking on direct-shipping ore (DSO) offers a quicker path to market, and therefore fewer cashflow challenges.
In iron ores, for example, the ores appear in hematite, which can be mined, crushed and screened and then exported, so requires no complex refining before being read for market. If the iron content of the hematite is over 60 percent, it’s suitable for direct shipping.
Grande Portage may also strategically pursue a DSO strategy for its New Amalga mine project (formerly the Herbert gold project). Klassen confirmed the company is taking a very hard look at the DSO pathway for an offsite-processing configuration providing a number of potential benefits, including.
Even with an already considerable high-grade resource, Grande Portage is just scratching the surface with its New Amalga Mine project. Exploration work to date has confirmed the deposit has significant potential for future expansion.
Investing in junior mining companies or early stage mining projects can be considered high-risk for some. Understanding the numerous options available to such ventures for enabling cashflow and financing themselves over the many years it takes to reach production offers good insights to investors willing to track promising companies and mitigate risk.
This INNSpired article was written according to INN editorial standards to educate investors.
INN does not provide investment advice and the information on this profile should not be considered a recommendation to buy or sell any security. INN does not endorse or recommend the business, products, services or securities of any company profiled.
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