In a struggling market it’s more important than ever for juniors to stand out if they want to attract investors. A leading industry consultant group shares its expert advice for making a small project take off.
By Karen Dingley
While mining majors take cuts across the board, juniors still have many opportunities to strike gold. With the current market, however, it’s more important than ever to get everything right to appeal to investors. Even highly valuable reserves are not always enough to get the attention of the right people at the right time to realize a project. Juniors must also be strategically astute and manage a project so that revenue starts flowing quickly, investors recognize long-term intent, and the mine’s role in the larger supply chain is fully appreciated. No small task, but it is absolutely possible.
Essentially, there is still much money for investment out there. Investors are struggling to find projects to invest in, and there is a gap between what juniors offer and what investors want. To close this gap, a couple of top tips are crucial to keep in mind.
Tip 1: Getting an Early Source of Income
Joint Ore Reserves Committee (JORC) and NI 43-101 compliant feasibility studies can drive a focus upon maximizing net revenue. Investors, however, are looking for projects that can give them a relatively rapid return on investment, and a means of income generation to raise crucial capital for re-investment to drive growth in the medium term.
Instead of focusing too much on maximizing the net revenue, juniors should therefore aim at generating revenue in the short term, providing capital for re-investment. Being canny and starting small to establish an income stream could secure that initial boost of investment juniors need to really get an operation under way. Without such injections of funds, proven reserves may remain in the ground.
A good example of how to get the cash flow going comes from a privately owned mining junior that Golder is currently supporting. This junior is backed by NRG Capital Partners—an independent natural resources-focused investment and merchant bank—and holds licenses over an historical mine with a view to developing a substantial base metal and iron operation. Having ceased operations in the 80s, the tailings remain relatively rich in lead and zinc and there is a material copper resource that was not taken by the previous operator due to the prior mill’s relatively simple configuration. With today’s processing technology, the junior plans a faster startup, with lower capital to achieve positive cash flow, by initially mining the tailings. This operation will then provide the capital required to go underground on the copper resource and, thereafter, substantially increase the likelihood of establishing a viable long-term iron operation once the market stabilizes.
Investors are usually looking for prompt returns. Starting small to introduce a source of income is therefore vital for appealing to a significant portion of the investor community. For a brownfield site, as with Golder’s client, such alternative sources are often easier to identify than at greenfield sites. But for greenfield sites as well, analyzing all possible sources of early income generation can give juniors a great head start with investors.
Tip 2: Being in it for the Long Run
At the same time, investors are looking for juniors who want to stick with a project all the way into operation. Many juniors take an entrepreneurial approach, preparing a mine for operation with a view to selling it once permitted, maximizing the immediate return on their initial investment. Investors, however, want to invest in projects where they know management is committed through to operations, and are in it for the long run.
Investors, fundamentally, need predictability in their investments. If they trust the management, and are assured that they have the competency to move the mine into operation, they will be much more easily convinced to contribute with extra support when needed. Dedicated juniors, who demonstrate their willingness to give investors the long-term reliability they seek, will most often be preferred to others.
All investors know that assessing a junior’s management team is one of the absolutely vital vetting processes when considering an investment. Golder’s junior client has been able to establish a level of trust with their current and prospective investors because they are committed to a long-term operation and have a sound management structure.
Tip 3: Understanding the Whole Market
When it comes to identifying which mining sites are profitable to develop, commodity prices are obviously an important indication. But there are also other, more commanding factors to consider before undertaking a project. Essentially, a mine is only one part of a larger supply chain. It’s not easy to make money from a rich ore deposit without a practical mode of getting the extracted minerals to the marketplace.
First of all, juniors must ensure that they have a customer base and that they can afford to move their commodities to their prospective markets. The junior that Golder worked with did a thorough market analysis. In addition to their primary base metals output, they established a clear customer base for a byproduct that can be produced in bulk at relatively low cost, introducing a crucial secure revenue stream. This meant that they could account for their mine’s place in the larger supply chain and incorporate the full transport route in their profit projections. These finished and clear-cut calculations helped them attract investors.
On a broader level, with prices currently coming down across the board, supply is expected to shrink and in turn drive renewed demand. Taking a somewhat simplistic view of the marketplace, this should make prices go back up again in the not too distant future. Juniors may not have the luxury of capital to wait for this, but they should be aware of the broader trends.
Tip 4: Maximizing Value and De-risking
At the end of the day, what juniors have to do is to maximize the value of their mine site in the short, medium and long term, responding to market forces. They must also minimize the risks for investors, taking into consideration the regulatory climate, and engaging stakeholders and local communities. The basic principle underlying all investor action is to look for robust returns and low risks.
As an example, an important element of Golder’s client’s development plan is to use re-processed tailings as backfill to the underground operations. Mining is planned to continue for at least 30 years, thereby providing a generation of jobs, and when operations cease, the plan is for no tailings dam or waste to be left at the surface. This powerful combination of employment and site rehabilitation will materially benefit the community and ensure strong local and central government support.
Simply put, juniors must get all their ducks in a row. They must ensure that all permits are in order, their stakeholders are engaged and supportive, and that their technical and environmental risks are understood at an early stage and effectively managed. A comprehensive environmental and social impact assessment (ESIA) is essential to achieve this. They must also prepare a solid and compliant feasibility study, which highlights the full value of their venture throughout the mine life. All of this, however, must be done without forgetting the lessons above. By presenting a watertight proposal with every possible risk planned through and mitigated, juniors can position themselves as a much more attractive investment opportunity.
In the difficult climate the mining industry still finds itself in, all these tips are essential for juniors looking to develop projects. Juniors must deliver rapid income generation, predictable management, a realistic plan for market engagement and robust returns coupled with low risks. Only when a project excels on all fronts will it be able to attract the investors needed to take it into full bloom. If juniors are able to excel, however, the investor money is certainly out there waiting for them.
Karen Dingley is the mining sector leader at Golder Associates.