One of the key processes that resource investors should understand is how mines are built. Each step may take years to complete and involves different levels of investment risk.
The early stages of mine building are particularly risky. Junior miners are still a long way from production, and will face many obstacles before they get there. However, even these companies can be a good investment for those who do their due diligence and ask the right questions.
With that in mind, here’s an overview of the lifecycle of a mine from birth to death. In total, there are five main stages: prospecting and exploration; assessment and approval; construction; production; and closure and rehabilitation.
1. Lifecycle of a mine: Prospecting and exploration
Prospecting and exploration are precursors to mining and often happen at the same time. Historically, prospectors would explore a region on foot with a pick and a shovel, but today there are a variety of more high-tech methods that companies can use when searching a region for mineral deposits. Prospecting can take anywhere from one to two years.
During exploration, experts use additional techniques to determine the possible size and value of the mineral deposit discovered during prospecting. Exploration involves sampling, mapping, diamond drilling and other work. This stage is estimated to last between three and 14 years depending on the project. It generally involves data collection for environmental studies and the completion of a resource estimate.
2. Lifecycle of a mine: Assessment and approval
Once prospecting and exploration are finished, deposit details and environmental and socioeconomic information collected during exploration are used to plan and design a mine.
Companies only build mines if they are sure they have found a deposit that is valuable enough to justify all of the money they will have to spend to bring the mine into production. Costs they will need to cover include mine design and construction and operating costs, as well as mine closure and reclamation expenses.
To discover whether the deposit they have found is economic, companies generally complete several technical studies. These studies include preliminary economic assessments, along with prefeasibility and feasibility studies. All three analyze and assess the same geological, engineering and economic factors, but the level of detail and precision is significantly different.
During this time, companies will also usually look to secure various permits, a process that can take one to three years or even longer. They also tend to spend time raising money to support these expensive and high-risk steps.
3. Lifecycle of a mine: Construction
All of the preliminary and technical reports completed during the first two stages serve as tools that provide companies with the information they need to make intelligent and strategic decisions regarding a project. Once they have all of this information, they will decide if they will go ahead with mine construction.
The construction process occurs after research, permitting and approvals have all been completed. Building a mine site can involve setting up roads, processing facilities, environmental management systems, employee housing and other facilities.
4. Lifecycle of a mine: Production
Once construction is finished the mine begins to produce. Production usually last from 10 to 30 years, but in some cases can continue for even longer than that. Mine production involves the extraction of ore, separation of minerals, disposal of waste and shipment of product.
The two most common methods of mining are surface and underground mining. Companies determine what type of extraction to do based on the characteristics of their mineral deposit and the limits imposed by safety and technology, as well as environmental and economical concerns.
Mine production involves three main stages:
- Processing: At this point, ore is treated to separate valuable minerals from waste rock.
- Recovering minerals: This is the process of extracting ore from rock using different tools and machinery.
- Smelting: This process involves melting concentrate to extract metal from ore.
5. Lifecycle of a mine: Project closure and rehabilitation
Once a mine site has been exhausted, the process of closure occurs; this stage involves dismantling all facilities on the property.
Reclamation then begins, allowing the land to return to its original state. This last phase can take anywhere from one to 10 years. Mining involves the temporary use of land, and the goal of reclamation is for areas affected by mining activity to once again host self-sustaining ecosystems that provide a healthy environment for fish, wildlife and humans.
This is an updated version of an article first published by the Investing News Network on May 1, 2013. Please scroll down to read the original.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.
This article has been updated. Please scroll to the top to read the updated version.
Birth to Death: The Lifecycle of a Junior Miner
By Dave Forest, May 1, 2013
With markets turning of late, there’s been talk of a “die off” for junior mining companies.
Eric Coffin of Hard Rock Analyst agrees; he stated at the same conference that investors “need to see 500 [juniors] or so go away.”
But do juniors ever really die? What does it mean for investors if they do?
Below, Resource Investing News looks at what might trigger a die off of juniors, examining how these companies begin, what causes them to fail and what effects a widespread die off would have on investors.
The lifecycle of a mining company
Listed mining companies in Canada generally begin in a few ways.
Usually, mineral projects begin as private firms. A geologist will incorporate a company to apply for exploration licenses in Chile or Madagascar, or a group of enterprising businesspeople will sign an earn-in agreement on a property owned by a third party, assigning this agreement to their own private company created for the venture.
Some of these companies then remain private. BlackRock Metals, for instance, is a privately held mineral development company that is advancing iron–vanadium projects in Quebec. The company has raised over $40 million, so management has felt no need to access the public markets.
But many companies need to go public. When looking for financing, a lot of investors simply won’t pony up their money if they don’t have an exchange where they can easily sell the company’s shares.
For entrepreneurs looking to make the jump from private to public, there are a few options.
Owners of the private firm can do a straight-up initial public offering (IPO). The private company simply applies to have its shares traded on a stock exchange, often with an associated financing.
Private companies can achieve the same effect by merging with a “cash box” listed company — either a capital pool company (CPC) or a shell.
CPCs are listed companies that are created with a few hundred thousand to a few million dollars in the treasury. They have no business of their own — the owners and management create the CPC in hopes of finding a private company that needs an easy option for going public. They then offer the CPC to the private group in exchange for a small percentage of ownership in the final, combined public firm.
Taking a swing
Once public, these companies get to work advancing their projects. They drill. Sample. Spend the money they’ve raised.
The hope of such companies is that this work will create a higher value for their projects, allowing them to raise additional funds at higher share prices and reducing dilution to early-on shareholders.
Ultimately, a successful junior aims to undergo the sublime transformation of being acquired by a larger company, with the incoming owner paying a much higher share price for the buyout than the existing shareholders paid for their stock — creating a capital gain for all.
The shares had enjoyed a spectacular run, rewarding investors with a 37-fold increase in the two years leading up to the buyout.
But few juniors enjoy this sort of success. For many, cash goes into the ground with ho-hum results. The company’s share price languishes and raising more money becomes difficult.
It is at this at this stage that death can come knocking.
The delisting stick
The technical term for death in this case is “delisting,” a situation where a stock exchange kicks a company off its roll for noncompliance with listing requirements.
There are a few things that can trigger such a dumping.
Often they are driven by cash. The TSX for instance, requires its listees to hold at least $50,000 in working capital. Firms also need to have enough funds on hand to cover operational and general and administrative expenses for six months.
TSX-listed companies must also continue some level of project activity. The exchange mandates that at least $100,000 must have been spent on exploration or development activities during the two most recent financial years.
If a company fails on any of these counts, the exchange has a few options.
It can delist a company completely, making the firm once again a private entity, without any trading home for its shares. Or the exchange can suspend the company’s shares, freezing trading until the condition of the company improves.
In such cases, investors generally lose out completely. Shareholders might still be allowed to sell their stock in a private sale, if they can locate a buyer. But the state of the company usually makes such purchasers few and far between.
In some cases, specialist restructuring firms will purchase shares in suspended or delisted companies to take control of the outfit and revamp it for a new launch. But these buyers don’t pay a lot — investors generally end up with pennies on the dollar.
Delisting and suspension, however, are drastic steps that are usually only taken when companies have dire problems like pending bankruptcy.
The alternative is the TSX graveyard: the NEX.
The dead zone
The NEX is a forum where failed companies can go on breathing. After a company runs low on cash and ceases its operations, it can transfer to the NEX and have its shares continue to trade while it looks for new options.
Investors in NEX-listed companies can still trade the shares (which carry the brand “.H” after their stock symbol). However, trading volumes and share prices on NEX-listed companies tend to minimal.
But from this death can come new life. Sometimes NEX-listed companies become desired, even sought-after commodities and are used to take new private companies public.
That’s because many entrepreneurs believe it is easier to go public by amalgamating their private company with a NEX shell rather than through a CPC or an IPO. Rules around NEX companies are less prescriptive, and it helps that these firms have an operating history — sometimes a lengthy one.
Such buyers will “groom” NEX shells, buying up available stock to increase their control and working behind the scenes to fix reporting or structural issues with the corporation.
That can provide an out for shareholders, who are then able to sell their stock to a would-be new owner.
But for shareholders in NEX companies, sometimes the best bet is to hold on for the ride during a restructuring. If a NEX shell is properly groomed and a new, quality project is vended in, the company’s shares can soar from pennies to dollars overnight.
Such was the case with Newstrike Capital (TSXV:NES), which bumped around the NEX before getting an injection of capital from billionaire financier Lukas Lundin. The firm then picked up a new Mexican gold project and shares subsequently went from pennies to as high as $3.
It’s for this reason that many seasoned junior mining pros believe most resource companies never die. They simply go on life support periodically, waiting for the next bull market to rise again.
Securities Disclosure: I, Dave Forest, hold no investment interest in any company mentioned in this article.