What are investors looking at when deciding on where to invest in the junior mining market? There are typically five main metrics investors consieer when evaluating a junior miner.
1. Management
Qualified leadership and management teams are crucial to the success of a junior miner, and any company or organisation that does not have a cohesive and qualified management team is often destined to fail.
Just like any other business, investors want to make sure they have all the boxes ticked when it comes to having people that have considerable experience and a proven track record in geology, operations, finance and marketing. In the digitally connected world we live in today, there are many tools that help investors conduct research on professionals. Ensuring that the management team is qualified is an extremely important consideration for a prospective investor.
2. Demand
The price for a product or service is almost always linked directly to supply and demand.
When investing in any company, investors always want to define the market in which they operate and determine the economic fundamentals (supply and demand) of the products and/or services the company provides. There is no doubt about it, the global population is only increasing and the lifestyles of many in developing nations is improving. This creates an increasing demand for metals used in infrastructure, transportation and daily life.
Also, there is a focus on green initiatives such as renewable energy and other technology-based initiatives. If wind turbines, solar panels and electric cars all were to become commonplace worldwide this would require a massive increase of production in the metals used for the manufacture of these technologies.
Demand changes over time and it is known that both metals and subsequently, mining, are cyclical industries. For example, lithium is a good example of the ‘boom and bust’ cycle that metals commonly experience. Since 2015 demand growth for lithium has been increasing at 13% per year and demand is expected to increase six-fold between 2018-2028. Initially, the increasing demand led to what some say was an overshot increase in prices for the different types of lithium supply used in battery technologies (lithium carbonate and lithium hydroxide).
Whenever the price of a metal spikes, you can often assume that mining companies are anticipating the upward price movement and will react with increased production of the metal if they have the capability to do so. This can lead to oversupply such as what happened with lithium in 2017 – in the face of a dramatic increase in future demand there was a glut of supply that may take a couple years to clear. A lack of processing facilities has also created a bottleneck for lithium supply, thus the reason for the downturn in prices. This in turn causes producing companies to scale back operations and investment, which ironically may be the main cause of the next boom cycle if supplies become insufficient to meet demand.
Historically, however, depressed prices for a metal do not always indicate the future demand of said metal. Investors will be doing their research on future demand for the metal from each industry the metal is used in, and will try to anticipate demand risks for each industry. By completing this research, investors have a good start on an investment thesis of a company that they may want to invest in.
3. Supply
Obviously, the availability of supply (and associated demand) directly impacts the price of any mined product, and the origin(s) of supply for most commodity types is usually diversified, a by-product of the increasingly globalised world we live in today.
Whenever the industry is struggling, major miners will often reduce their spending on exploration and development to focus on increasing the profitability and efficiency of their operations. When the situation is improving, the majors begin to look at the projects owned and operated by juniors. Junior miners are leaders in identifying minerals deposits and developing them to a point where a major will enter into an agreement to earn-in to a majority interest in the project. This type of agreement is usually referred to as an Option/Joint Venture partnership. These partnerships are lucrative for junior miners in the short term and the majors in the long term once production occurs.
A way for the junior miners to receive longstanding benefit from the deal is to negotiate a ‘royalty’ on the project which essentially means the junior gets a percentage of the profits from the site until the mine is exhausted of all its mineral resources.
To determine what future supply might be, an investor might screen the market to determine the major producers of any particular metal, and where these players are operating in the world. By looking at the actions of the key players like the decisions being made relating to expanding or reducing production they can gain an idea of whether supply is growing or decreasing. A prospective investor should also be aware of the projects in the pipeline that juniors are exploring and developing in order to better predict when new supply will come online for the producing companies in the future. Like demand however, there are always factors not commonly known that can derail the demand or supply of any mineral in question. Investors will be appropriately assessing these risks before investing.
4. Jurisdiction
Some jurisdictions are extremely risky to operate in as a mineral explorer or miner.
A resource might have the right geology for profitable extraction but if political and/or social unrest is occurring in the area, sometimes this creates too much risk to justify commencing operations.
Governments who feel they have not been getting their fair share often react by appropriating assets, introducing or increasing royalties/ownership, and banning exports of a specific ore (forcing miners to refine the metal in the country and/or attract manufacturing, for more value added domestically). Usually these tactics are more frequently used by undeveloped nations that have considerable mineral resources but lack other sources of revenue. It is becoming increasingly common for mining operations to have sophisticated security systems – but this adds to the overhead cost of the mine and reduces profitability.
5. Geology
Without the right geology presenting a business case for investment, there is no way a mine should be built. It is up to a company’s management to accurately dictate the potential of a resource based on what they know and what information is public.
Bringing in a third-party consultant is a common way for a company to confirm the geology that their projects have. These consultants will develop ‘Mineral Resource Estimates’ (MRE), which is essentially the first report in identifying a resource after a considerable amount of exploration work has been completed. Following the MRE in order is a ‘Preliminary Economic Assessment’, a ‘Pre-Feasibility Study’ and finally a ‘Feasibility Study’. These reports are extremely comprehensive and can collectively cost millions of dollars, not including the costs for exploration and development. A positive Feasibility study outlining a mining operation is usually required by most mining companies before they even consider building the extensive infrastructure needed for a mining operation. Investors would want to read these technical reports, available to the public, in order to gain a better understanding of a junior miner’s project(s).
Once juniors have developed a considerable Mineral Resource Estimate or completed a positive Preliminary Economic Assessment for a project, it becomes easier to attract a major mining company as a joint venture partner or get bought out.
Junior miners contribute greatly to the pipeline of projects that will become the mines of tomorrow. Much of the value that investors receive from a junior mining company occurs immediately after a junior makes a significant discovery and again when the project is sold to a major mining company.
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