The Stages of a Metal Mining Company

I spent the last month getting familiar with the mining industry and now I feel like a better investor. While there are thousands of corporations in this field ranging from basic to exoctic metals, very few actually generate revenue because plenty can go wrong from exploration to production in what is a 6+ year project. Below is a basic outline of how it all works.

An exploration company begins its business by staking land and receiving various permits to explore the region. The next challenge for a mining corporation is to scatter across their property and to find several concentrations of whatever metal they want. Higher graded resources are preferred since the extraction yield is better so the costs are lower. However with the current commodity boom and lack of supply to meet demand from BRIC (Brazil, Russia, India, and China), the cut-off grade continues to lower so even low grades are currently profitable. Many companies go belly-up by not measuring and indicating significant yields of resources and years of funding and patience from investors go down the drain.

For the ones that measure and indicate enough material for potential profitability, the next process is to conduct several feasability studies which breakdown the economics of the mine(s). Also, a company would need to apply for mining permits and comply with several regulations such as environmental standards which takes a long time. Some mines are vastly cheaper than others to develop as they depend on geography. Although most of the more economically viable mines are in foreign countries, they also carry their own geopolitical risks. For example in my province of BC (British Columbia), environmental regulation is very strict as opposed to other regions in the world and labour wages are higher, but the cost of energy and infrastructure is cheaper than in Ghana. North American mines operate with little intervention from government whereas a mine in Mongolia can be suspended by the Mongolian regime.

Should a corporation receive approval and funds for development, the construction of the mine begins. This stage is critical because poor planning can lead to future production problems in the future. A company typically experiences delays and cost overruns because a lot of emphasis is put on weather, labour, equipment, energy, safety, etc. Most companies further dilute their shares in order to finance their projects and the expenses can tally up immensively depending on the planning. The effect of poor economics can hurt a company like Novagold (NG) as represented by its chart. Novagold had to suspend their Galore Creek operations in Northern BC after cost estimates ballooned from $2.2 to $5 billion despite them having one of the largest deposits in the world. On a side note, several previously foreclosed mines have been coming into favor again because the CAPEX (capital expenditures) are low. Be aware on the same hand that old mines contain lower grades since the higher grades have been previously mined. If the spot price of metals fall, the cut-off will grades rise along with falling operational margins.

After the construction phase of the mine is complete, the process of commercial production can begin. The last step before the first pour is commissioning and that takes several months. Once final approval is granted, a corporation can begin commercial production and start generating income to finance more projects, acquire companies, pay back debt, or issue dividends, etc. A company can further ramp up production at any given time in order to take advantage of favorable metal prices and further increase their reserves by proving and making probable of the measured and indicated resources. The income from production fluctuates a lot depending on the production yield, grade being tapped, market spot price, cash costs from operations, etc.

Now you have a basic understanding of how metal mining corporations operate and a starting point with how to valuate them.