Making Money on Miners, Part III

In Part I of this series, I outlined the seven stages of development which characterize the evolution of almost every mine, and then described the preliminary exploration which occurs with a mining project. In Part II, I discussed the drilling-phase of development, and how to evaluate whether a property is being developed in an efficient (and potentially lucrative) manner or whether management has fallen into the “dilution trap”.

Resource Estimate:

We are now ready to move on to the third major phase of mine-development: calculating a resource estimate of the ore deposit which the miner has been drilling. While this may seem like a very straightforward stage in the evolution of a mine, there is certainly the potential for “surprises” here – and also opportunities for the astute investor who takes the time to do his/her homework.

At some point during the extensive drilling necessary to identify a potential, commercial ore deposit a mining company will make the decision to prepare a resource estimate of the mineralization contained in the ore being drilled. As I hinted at in my previous commentary, there are many factors which go into the decision of when is the appropriate time to engage in such an assessment.

Generally, a mining company will not engage in the time/effort/expense of commissioning such a study until they are reasonably sure they have uncovered a sufficient body of ore so that a completed resource estimate will show a deposit with sufficient profit-potential to justify (at least) an economic assessment. They then hope that the economic assessment will conclude that the body of ore is large enough, and the grades good enough so that it is commercially viable to construct and operate a mine.

Occasionally, however, a miner will engage in a preliminary resource estimate as merely a stepping-stone in the drilling process. In other words, as I explained in Part II, when a miner is engaged in extensive drilling, this generally requires several infusions of cash to pay for this capital-intensive activity.

To avoid the “dilution trap” I warned about, it’s important that a miner be able to do each new financing at a significantly higher share price, otherwise the equity financings used to raise this cash result in too much dilution – and shareholders will be unlikely to reap much of a return by holding such companies over the longer term. Thus sometimes a miner will conclude that doing a small, preliminary resource estimate is the best way to raise more capital at an attractive price.

This is not a decision to be made lightly. Not only is there significant time and expense involved in calculating a resource estimate, but it requires a considerable amount of “in-fill drilling” to connect-the-dots with the previous drilling holes – in order to provide enough data for the scientific calculations which go into such an estimate.

This in-fill drilling is not considered “newsworthy”, since it is only adding to data which has previously been released. As a result, unlike exploratory drilling where a news release of the results can (and often does) cause a “pop” in the share price, in-fill drilling generates no news, and thus no additional appreciation in the share price. Indeed, since most activity on a project will usually be put on hold (pending the results), the time spent in preparing these estimates tends to be one of those uncomfortable lulls in the evolution of a junior miner.

Often this period will mark some erosion in the share price, as short-term oriented investors and traders will pull out in impatience. However, for true long-term investors, the short wait required for this report to be assembled is justified by the concrete information yielded on the size of the mineral deposit.

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