Sunday, December 16, 2012

Some Things You'll See While Driving Along a Mining Stock S-Curve

I sift through a lot of materials on mining stocks looking for anything that fits my risk tolerance.  A lot of movement in a junior mining stock's price is defined by an S-curve often attributed to Pierre Lassonde, a legend in the mining industry.  The Lassonde Curve posits that a mining company's life cycle has four stages:  exploration, feasibility, construction, and production.  Valuation is the vertical axis and time is the horizontal axis.  A company's valuation climbs rapidly during the exploration phase until it peaks with a pre-feasibility study, at which time it troughs during the feasibility and construction phases as the market realizes just how difficult it is to raise the large amounts of capital needed to make it to production.  The valuation bottoms out at the end of the construction stage, when the bulk of the company's capex budget has been spent.  Once in production, the valuation starts to climb again.

A lot of random stuff can drive an S-curve's movement.  Mr. Market can have his way with a junior stock's valuation.  Sometimes macroeconomic news clobbers a stock even if it showed progress with an NI 43-101 report showing above-average 2P reserve grades.  Announcements of positive developments like a pre-feasibility study, successful financing, and permitting approvals can "de-risk" a junior stock and make the S-curve jump northward.  I think the term "de-risk" is overused.  I chuckle when I hear exploration-stage companies say they've de-risked a project simply by walking around the site or looking at a map of old claims.

Juniors like to say they're exploring a Carlin-type mineral trend, but there's only one such trend in the world.  Nevada has a well-known geology and mining techniques useful there may not be applicable elsewhere in the world.

I'm a big fan of aeromagnetic surveys, especially if they save money by accelerating a drill program.  I've noticed that some old-school prospectors view them skeptically, possibly because such surveys pose a threat to their careers.  Exploration companies that use the hot spots from geospatial data to focus their drilling programs can reduce the possibility of striking dry holes.  One key limitation of these surveys is their usefulness only in areas with layers that generate contrasting magnetic signatures.  A uniform geology won't yield much useful data from the air.

LIDAR surveys can come in handy after an ore body has been mapped, so engineers can estimate the feasibility of mining with a given topography.  Competent mining executives can put these surveys in the proper order.  That's why I need to see a geologist as the CEO of an early-stage mining company.  I don't mind seeing a mining engineer running the company at a later stage once they have enough data and money to begin constructing a mine.  I don't ever want to see a mining CEO whose sole background has been finance or consulting, because that tells me the main investors and board members just want to flip a hopeless property to bag-holders.

Engineering studies can produce isometric models of an ore body.  These are pretty to look at but mining executives can easily gloss over them in presentations to non-engineer audiences.  It's easy to say "veins are open in all directions" because that's what investors like to hear.  It's harder to point to a vein and explain why that part of the geology leaves it open.  It's also easy to ignore now complex the geology can be while drilling down into an ore body.  More complexity means a higher cash cost of production; that S-curve's movement upwards will be slow and sticky.

Driving along a mining stock's S-curve is a little bit like driving a coastal highway.  It can be thrilling and nail-biting.  The difference is that the highway's curves are defined on a map but the stock's valuation curve always changes, even after you've convinced yourself it shouldn't.  The long-term trend of a junior's S-curve should be upwards if they are prospecting good grades, because that's what major producers want to acquire.  There's an old truism:  "If you've got grade, you've got it made."