The Model

The most important factor in determining a stock’s potential for growth is information, and that information should be standardized in a step by step procedure or model. The usefulness of your model is determined by the quality of questions being asked and the quality of the answers given. As a caution I must state that this will not be an exhaustive list of those questions but will simply be an overview of the basics approach to my model. There is nothing fancy. No algorithms or chart analysis. There is a lot of data mining which is a fancy way of saying a lot of reading, or information gathering with much of it being saved and some being discarded. What are we reading? Source documents such as news releases, SEDAR filings, management bios and experience, and opinion pieces providing hints or parts of the story that might be missing. Furthermore, we look town down from the macro perspective: Politics, general economic factors effecting countries where projects are located, currency concerns, monetary policy and employment. Lastly, what is the supply and demand picture for the minerals?

We need to know is money coming into the sector. We acknowledge that markets move in cycles is to realize that there are years of feast and years of feminine. Is there money flowing into a growth cycle? Is their demand for minerals? Make no mistake, in this sector it must be broken down into three sections: The producers, the developers and the prospectors. Producers are giant mining conglomerates with actual mines. Developers are companies which build up a property or take it the next stage to become a mine or to hand-off to a producer. The third category is exploration companies. These models look quite different for the obvious reason that producers have massive mines to operate. The scale of data and analysis becomes large. My job becomes easier in one sense that with prospectors, we are not dealing with as much data. It is broken down stage by stage. Often the numbers we are dealing with are predictions, projections all being compiled towards a project and whether it is feasible. Are we reclaiming an old mine, is the mine adjacent or close to another discovery/mine or is it pure unsoiled land never walked upon?

Do the ‘Rocks Talk’… The Process outlines some of this.

The data, the numbers, the hard science. What story does the geography tell, and what is the mineralization indicating? It all starts from this foundation. If it is rocky or suspect, then moving forward will remain uncertain and precipitous. If you have outcropping, mineralization, and ground truthing then a case can be made to move forward.

The Management

  • What is their background?
  • Have they the necessary skills sets?
  • How trustworthy are they?
  • Have they delivered results?
  • What is their track record?
  • What projects have they been involved in before?
  • What relationships do they have?
  • How much money have they raised?
  • Have they sold companies before?
  • Do they have relationships with producers?
  • What does the corporate structure?
  • Is there room to make money?
  • Is the vehicle structured properly so that there is money to be made?
  • Any new financing or capital raising?

The mining sector is undervalued right now. There is a massive demand, and a resource glut. Between the US signalling a protective stance in starting to manufacture and make goods again, the desperate need for US infrastructure coupled with the massive One Belt One Road Initiative. There is money coming home to Canada in particular. Geopolitical instability is causing the producers to focus in on safer projects. Canada has stringent mining rules, but they are known and fair.

The Process

Exploration

Where? What country and what risk come with this country? The exploration phase can cost millions of dollars and reducing risk while allowing realising opportunity needs to be balanced. Knowing favourable countries not only for having resources but for investing is the foundation. A mine in Ghana is far less favourable than one in the Yukon. When? Mining up north in the Yukon has a defined season due to weather; unless you have already built an underground mine. There is a myriad of socio-economic and political risk to consider when deciding where to look. Figure 1 is a chart from CIM which illustrates investment ‘favourability’. There is no real surprise here. This covers the political climate, tax consequences, socio-economic, corruption concerns and reveals which countries are consistent and credible. Not only that there is a public relations component as that mine in Ghana can be publicly viewed harshly, compared to one in a developed country. Once you have decided on a country then two more questions arise:

  • (a) Will you prospecting in adjacent lands, meaning will you purchase and prospect land that is close to existing mines or discoveries. Deposits tend to form in clusters and exploration occurs outward from known mineralization. This strategy relies on comparable data from an existing mine or discovery and can yield tremendous results. These projects are usually near infrastructure which makes them attractive as costs to build will dramatically fall.
  • (b) Looking in regions that have no data or not within proximity to other staked land/claims or discoveries. Perhaps never considered because it was too far from infrastructure but there is thought to be a big enough find to warrant consideration. There could be special circumstance like glacial abatement. There have been spectacular discoveries in Mongolia that are enormous but of course require a massive scope of project. The second possibility is yielding incredible results and potential here in Canada. Glacial abetment in the north of Canada is revealing lands that are untouched and adjacent or close to excising discoveries. These rocks will have been revealed only due to climate change. The possibility of prospecting through areal or ground truthing was not possible.

Prospecting/ Exploration

In this stage, companies use aerial mapping and put boots on the ground ready to explore. Teams of investigators scour the land from helicopters looking for outcrops, looking for mineralization from air. The get dropped off and stake claims on the land swinging there pick axe taking samples or grab bags of rocks. They are scratching the surface, literally the surface of the Earth for clues.

What a good trained eye is looking for is mineralization and indication of resources/ore. Good prospectors have keen eyes and an uncanny ability to ‘read the rocks’. The outcrops, formations, appearance of sulphides and other indicators will begin to tell a story much like the television shows with CSI investigator who can visualize and interpret what all the early stage information is suggesting.

Companies will use whatever data that is already available whether that exists maps and or historical data, geophysics and geochemistry, trenching and comparable to see if there are potential drill targets. Using comparable is of great value as a story begins to unfold that looks like a mine or major discovery close by.

The “Truth Machine”

Now we are drilling in our staked zones and pulling up cores samples. These samples are catalogued and assay results to determine the minerals or elements in the rocks, and how much. This data begins to take shape with computer programs. Drill programs can be at various lengths some 10 meters some 100’s of meters. This is investigative team interpreting and narrowing down where finds might be.

Discovery

A find! Your data thus far has confirmed a discovery but what is the size and scope of the find? The ‘rocks are talking’ but how loud and how much?

At this stage the project size is being shaped. Estimations are made, and the realization of the hard work is being mapped out. You have found a deposit, but you need to start drilling near, beside these whole and start to ‘follow’ the vein. This is still an arduous process to map out both on paper and with computer programs what the size and scope of the vein is, what depth and directions it goes.

Feasibility or PEA

This step is can squash the excitement quickly. Is it economically feasible to get the mineral? How much will it cost per ounce to get the mineral out of the ground? What kind of mining will be done? How much will the mine itself cost? Is it close to existing infrastructure/services such as roads, rail, shipping, power and housing?

This requires putting an entire package together to put all the pieces together. This can come in the form of Preliminary Economic Assessment (PEA) or a detailed Feasibility Study. It is the merging of the geophysical numbers with the financial numbers. You can imagine the amount of data required for this: political risk, economic risk both projected interest rate/inflation, current mineral price and future price; building costs, materials, energy and staffing.

That’s why your investors and backers will want you to source even more data – it’ll allow you to see a clearer picture of the deposit, and help your team see how it could take shape as a mine.

At this stage, drilling, metallurgical tests, environmental assessments, 3d models, and mine designs are used to increase confidence in the project. All of this is put together and a conclusion is made.

CIM risk of investment/ country attractiveness for investment
Figure 1 from CIM risk of investment/ country attractiveness for investment
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