Mining In Armenia

What is the state of mining in Armenia? How should foreign investors view this country? I’ll spend some time reviewing some recent developments in the country and formulate a view.


  • Gained independence in 1991
  • Had been governed by Serzh Sargsyan since 2007 as part of the right-wing republican party
  • Serzh Sargsyan was reelected for a fourth term in April 2018, peaceful protests started which were concerned about what was starting to look like an indefinite rule
  • Serzh steps down and the leader of the Civil Contract Party is elected (Nikol Pashinyan)

It would be impossible to look at Armenia without investigating the state of affairs with Lydian. Lydian received approval to build the project (Amulsar) in 2014 but construction has been impacted by local protests. 

In August, Armenia’s inspectorate for Natural Protecion and Mineral Resources suggested that the environmental assessment be re-evaluated. 

The inspectorate stated that new ecological factors should be considered for the property. Specifically, there are new sightings of red plants and animal species. 

But get this, so the head (Artur Grigoryan) of the Environmental and Mining Inspection agency directs Lydian to refrain from any mining activities until the ministry can conclude if these new “red plants” are actually at the site. So Grigoryan sends in his team. The team concludes that these new organisms cannot live at this site and are not there. Lydian appeals the original directive, but the appeal is heard by Grigoryan. Obviously, he rejects the appeal which is predicated on information from his own ministry. So now Lydian has challenged Grigoryan’s position through an administrative court. The court has accepted the appeal which suspends Grigoryan’s edict. Great! It doesn’t matter though because the place is still blockaded.  

It’s pretty amazing that a country with 16.8% unemployment is challenging industry and preventing the creation of hundreds of jobs. 

Seems to me that Armenia is not a jurisdiction you want to be developing a project in. 

The McNulty Curve

In general, mining companies have a poor track record of delivering projects on time or on budget. Today, for the first time, I heard about the McNulty Curve; a graph which predicts the level of pain that companies will endure when ramping up a project.

Some previous studies on project cost overruns highlighted a few key reasons for process plant failure (defined as major cost over-run or inability to achieve design capacity):

  1. insufficient effort was devoted to understanding process chemistry
  2. insufficient continuous pilot-scale testing was conducted
  3. the plant lacked parallel process streams and/or in-line spare equipment units
  4. the design incorporated sequential unit operations that either were first-of-a-kind or the largest ever built or both

Terry McNulty advanced this concept and derived ramp up curves for various types of processes. He defined the types as follows:

  1. Series 1
    1. The owners relied on mature technology.
    2. Standard types of equipment were selected.
    3. Thorough pilot-scale testing was done on potentially risky unit operations.
  2. Series 2 
    1. If the technology was licensed, the project was one of the first licensees.
    2. Some equipment was a prototype in size or application.
    3. Pilot-scale testing was incomplete or was conducted on non-representative samples.
    4. Process conditions were unusually severe or corrosive.
    5. Non-innovative parts of the flowsheet received inadequate attention
  3. Series 3
    1. There was very limited pilot-scale testing and important steps were ignored.
    2. Feed characteristics such as mineralogy were poorly understood.
    3. During process development, product quality received little attention.
    4. There were serious design flaws.
    5. Engineering, design, and construction were on a “fast track” with inadequate planning to offset added risk.
  4. Series 4
    1. If continuous tests were run, they were only to make the product.
    2. Equipment was downsized or design criteria were compromised to reduce cost overruns.
    3. The flowsheet was unusually complex with prototype equipment in two or more unit operations.
    4. Process chemistry was poorly understood. 

McNulty highlights a few other factors that were correlated with project over runs, some of which are particularly relevant for the mining industry.

  1. Corporate management had a promotional or overly aggressive attitude.
  2. The owners had very little day-to-day engineering input.
  3. Driving forces underlying the project were ill-conceived.
  4. The ore receiving and preparation areas received little attention.
  5. Translation of the testwork to design criteria was flawed.

Sources: Most of this information was from a paper called Minimization of Delays in Plant Startups. It can be found here:

Asymmetric Returns For This Gold Developer; Not For The Faint of Heart

Positive asymmetric returns are those with limited downside and much higher upside. This article looks at the prospects for a gold developer whose share price has been battered. Orca Gold is developing the Block 14 gold property located in Sudan. Their share price is down 40% YTD even after significantly advancing their flagship property.

In early November, Orca released the details of an updated feasibility study which describes an open pit operation producing 167K oz per annum. Reserves contain 80 million tonnes grading 1.11 g/t Au for 2.85M ounces. The property is expected to produce gold at an all-in sustaining cost of $789/oz. The after-tax NPV of the project is estimated to total $403M; at a 5% discount rate.

If you look at the chart below you will notice that the share price did not budge after the release of the study (early November) and the stock continued its downward march. So what’s the deal? The enterprise value of Orca is $37M and their 70% stake in Block 14 is worth US$282M. They are trading at 13% of the NPV5% of the property. This is a massive discount. The implied discount rate of the property is approaching 50%. So, the market is pricing in a serious chance that this asset does not make it to production.

This is interesting. The discount rate assumed for this property is egregiously high. Maybe the worst is already priced into the stock price?

So why is the market pricing in such a steep discount? Well, Sudan -the location of their asset- is still designated by the United States as a State Sponsor of Terrorism. In 2017 the U.S removed some of the economic sanctions for the country but it is unclear if financial institutions could lend money to Orca to fund the project (the government has a carried interest in the property). I think that as long as Sudan is on this list, Orca’s share price will suffer.

This is where it gets interesting. Sudan is progressing talks with the US to be removed from the terrorism sponsor list1 (which would remove the associated sanctions). If this were to occur, it’s reasonable to assume that Orca would be re-rated to a much higher level.

The project is probably still riskier than the typical gold mine. It’s located in the desert, away from infrastructure, needs a well field, and Sudan does not have an established mining workforce.

That being said, and as shown in the chart below, Orca is amongst the most discounted juniors out there with a near-term development project. This investment is not for the faint of heart. If talks with Sudan do not progress than the share price could easily continue to suffer. A successful resolution, however, could result in 1X share price appreciation. This is asymmetry.


Preg Robbing

There are numerous reasons why a process plant may miss recovery targets. Gold can be more encapsulated in insoluble material, other elements can consume important reagents -limiting availability for gold-, and sometimes the ore is characterized as “Preg Robbing.” Refractory ore is an issue and has been for a while. Notable mines with refractory ore are Prestea, Tarkwa, and Carlin.

What does this mean?

Sometime ores contain carbon. This carbon absorbs gold particles which would have otherwise been absorbed onto the “reagent” carbon. In “The Chemistry of Gold Extraction,” that author states that as little as 0.1% carbon may produce preg-robbing properties.

Carbonaceous ores can be separated into two categories: mildly and highly carbonaceous.

  • Mildly Carbonaceous: contain small quantities of organic carbon, typically less than 1%.
  • Highly Carbonaceous: contain carbon >1% and contains carbon that has a strong gold absorbing tendency. This material can reduce gold recoveries to below 80%.

Ways to deal with preg-robbing:

  • Use a CIL process rather than CIP: a carbon in leach flowsheet completes the leach and absorption process in the same location simultaneously. In completing this process simultaneously, there is less time for the organic carbon to absorb the dissolved gold.
  • Add Kerosene:  hydrocarbons can passivate the surface of carbon, decreasing the propensity to absorb gold.
  • Chlorine Treatment: Aqueous solutions of chlorine have strong oxidizing capabilities. It’s not well understood why this process works. Between a pH of 3 and 5 hypochlorous species are predominant and are thought to passivate the carbon surface.
  • Roasting: Burn it off!


John O.Marsden, I. H. (n.d.). The Chemistry of Gold Extraction. SME.

A Review of Price to NAV – Ollachea, Valentine lake

The valuation of mining companies often starts with a calculation of Net Asset Value (NAV). NAV assessment is a cumulative discounted cash flow analysis of a company’s portfolio of assets (mines) minus associated corporate and other overheads. Enterprise value (value of equity + debt – cash) can be compared to NAV. If enterprise value is higher than NAV then the company trades at a premium. If enterprise value is less than the NAV, than the company trades at a discount.

Generally, NAV is calculated using a 5% discount rate but there are often occurrences where this value will be increased (geopolitical risk, asset risk, permitting). The fact that NAV is generally calculated at 5% is very impactful. If Franco Nevada trades at a premium to the 5%NAV than that means that the market is pricing in a lower discount rate. A 2% discounted cash flow analysis is probably a value that brings Franco closer to its market price. Conversely, if Alio Gold is trading at a large discount to their 5%NAV then the market is implying that something closer to a 10% discount rate could be utilized.

Sometimes the market can be become irrational and punish projects/companies. A discount/premium to NAV analysis can be a useful way to identify “value” plays in the space.

The banks have teams of analysts that produce DCF models for each of the mining companies. I do not have this luxury. I do have, however, published technical reports, and market prices. Almost all technical reports include a summary of NPV and most of the time it utilizes a 5% discount rate. This is great. For single asset companies, I now have a view of the company’s NAV (ignoring adjustments).

Single asset companies are the most interesting as they provide the most direct view of the company’s NAV; less noise. The chart below plots project NPV as disclosed in technical reports versus company enterprise value. These are recently published technical reports that contain over 1M oz of gold. You’ll notice that the highest value is 50%. Minera IRL Limited’s Ollachea property commands the smallest discount while a group of companies are currently trading at only 10-20% of their project’s NPV.

It’s an interesting mental exercise, hypothesizing why some companies are undervalued relative to their projects. A few ideas:

  • Time/Stage: technical reports usually display the NPV as of the time that a construction decision is made, not the current time period. If we assume that the standard PEA is 6 years from a construction decision and use an 8% discount rate, the discount value is 58% when compared to the published NPV. It shouldn’t be a surprise that Valentine Lake and Mt. Todd are at such a large discount as they are at the PEA stage. Conversely, the highest ranked project (Ollachea) is currently in construction.
  • Jurisdiction: This goes without saying and explains why a project like Block 14, located in the Sudan, is not generating much share value for Orca Gold.

So how do we use this information? A value investor could look at this and see if the market is mispricing any assets. We could also look at the development path of an asset and predict a share price appreciation.

A useful example would be Valentine Lake. Marathon released a PEA on the property at the end of October which showed an after tax NPV5% close to $500M. The company currently trades at an enterprise value of $80M. A pretty strong discount but probably warranted given the project’s state. Their recent investor presentation shows that a PFS will be published in 2019 and a FS in 2020. They are having exploration success, the project looks to be improving. Obviously, there’s a due diligence component to this investment but there is a hypothesis for a re-rating over the next two years. If their discount jumps from a measly 15% to a more justified 30% in the next two years that’d provide a pretty strong return.

Seems like Valentine Lake could be an interesting opportunity.

What do you think?

Bombore Gold Project – Orezone

Orezone gold corporation is a Canadian listed explorer with an enterprise value of US$51.8M. YTD they are down about 16%. They’re primary property is Bombore, located in Burkina Faso. They own 90% of the project with the government carrying a 10% free interest. Let’s see what we have here.

In July Orezone released a Feasibility study.


Ok. Lots of gold. Grade is very poor.

What does the reserve look like?

Hopefully this has a null strip ratio. Nope. 1.68:1.

Recoveries aren’t special. Get pretty low at lower grades (80%). Large grind size (125um) and low cyanide consumption should make this a pretty cheap process plant. 12,000 tpd.


Not for me.

Skeena, Eskay Creek, Exploration Results

2018 has seen its fair share of stock price reactions to exploration results. The release of Cuale’s trenching results sent Evrim’s stock to 200% returns within a matter of weeks. Great Bear Resource has seen more than a 600% return since releasing the results from Dixie Lake in September. Conversely, Skeena Resource’s Eskay Creek results have garnered zero impact at all. This discussion will investigate some of the market responses to Skeena’s 2018’s exploration results and try to understand the context behind some of the reaction.

Evrim Resources, Great Bear Resources, and GT Gold had great years, achieving 150% to 700% returns so far in 2018. The charts below track cumulative AuEq gram * meters from intervals >5m in length and over 100 g*m. As I would’ve expected, there’s no clear relationship between cumulative AuEq meters and total stock returns. There is, however, a very strong relationship between the timing of the exploration results and the positive reaction. These folks found something that people weren’t expected.

To contrast possible exploration outcomes, look at the Skeena Resources vs. GT Gold. Similar cumulative AuEq meters, very different outcomes. No reaction at all from Skeena’s results. What gives?

Well Skeena resources is pretty small which I would’ve thought would work in its favor (enterprise value of 22.2M). Ok, so what’s wrong with the asset? Eskay Creek. Results looks pretty interesting. 30g/t for 28 meters at 62 meters from surface. Similar lengths and grades from a couple holes. Project is in BC, that’s good. Barrick used to own it. Lots of ounces produced in the past. Hmmm. Ok. So we’ve got a tired old mine that people are discounting. I imagine these results are as the public has expected? Pretty low enterprise value for 1.4M oz of resource in a good jurisdiction with a site that’s probably easier to permit than most. What am I missing here? Let’s go to their website and check it out.

Ok, interesting. Technical report issued on Nov 1st.  What’s this property all about:

  • Geology: VMS
  • Location: BC, Golden Triangle
  • Access: All season road
  • History: Mining started in 1995. Barrick mined it until 2008. On care and maintenance until 2017 when Skeena entered into an option agreement with Barrick.
    • 270 tpd mill
    • Drift and fill
    • Very high grade, 3.3M oz produced from 2.55M tonnes of ore
  • Resource:
    • 207K oz of open pit
    • 589K oz inf open pit
    • 814K oz of indicated underground
    • 261K oz of in underground
  • Option agreement:
    • 10M to Barrick
    • Need to spend 3.5M before 2020
  • Metallurgy:
    • Concentrate production
    • Lots of penalty elements
  • Mining

Ok, so Eskay creek is a tired old mine. Small. Not too surprising that the exploration results didn’t yield too much excitement.

The strip ratio is pretty low for such high grade in the open pit. Kind of interesting. 700K ounces at ~ 5g/t. That could produce a decent amount of cash.

Overall, it’s tough to make an investment thesis. The exploration results didn’t do anything for the share price and they are a long way out… I’m kind of surprised that the exploration results didn’t garner any interest. The property would check a lot of boxes. Nothing special but good jurisdiction and appears to have a decent shot at reopening in the future. Skeena seems cheap.

Underground Development Rates, What’s reasonable?

Imagine you’ve got a gold deposit that’s 500 meters underground. It’s marginal, 5 g/t, 90% recovery, and a fairly expensive mining method. US$400M in capex is alot and your IRR is probably getting stretched. You’re building a 12% ramp so we’re looking at ~4.2km of decline length. 

You’ve already pushed the limit on every other variable, so what can you do to juice up that IRR. Well, what about the underground development rate. Get to the ore 6 months earlier, increase the IRR by 5%. This could be the difference between a stalled project or one that receives financing. 

I can see the motivation to push the limit with this variable. And you can certainly justify a rate that the average investor won’t be able to question because they won’t know any better. Heck, unless you’ve been on the ground at an UG mine most, people in the industry won’t understand what a reasonable underground development rate looks like.

I found a paper called “Selecting an Appropriate Decline Development Advance Rate” by S.M. Rupprecht that summarizes some information on development rates in South Africa.

Repprecht started off talking about the impacts of accelerating cash flow and the NPV benefits. Ok, nothing unexpected there. 

The most useful/interesting component of the article was the development rate/month for South African operations. It’s unclear if these are FS parameters or actuals. In any case, I think this is a pretty useful chart that presents the ranging assumptions that companies could feasibly use. 

High Level:

  • Standard Dev – 70/80 meters per month, anything more should make you ask questions.


“There is something (here, perception, ideas, theories) and a function of something (here, a price or reality, or something real). The conflation problem is to mistake one for the other, forgetting that there is a “function” and that such function has different properties.” – Nassim Taben, Antifragile

People often look at something and determine the value. They can be right or wrong and not know why. The physical characteristic of the subject can bear no resemblance to its function. I think this is a pretty powerful statement.  

The function of something can be completely different than the subject and inform the observer of what is relevant. In our context, the something is drill results. The function of something is the price action. Great results can lead to great price action or none at all. What does the price action tell us? Maybe the something isn’t that important. Maybe it’s a function of the jurisdiction, operator, the team (f(grade, team, jurisdiction)). If we look at comparatively positive results maybe we can learn something about the other variables in the equation. 

I’ve continued the analysis of 2018 exploration results, looking at average price returns after the release of significant drilling results. In the chart below you’ll see the price return in daily increments after the release of exploration results. 

I’ve sorted the data by the return two weeks after the information release. The range of results is quite large. Moosehead, Dixie Lake, Fenelon, Tatogga, and White Gold saw share price increases continue for quite a while after exploration results. Other properties not so much. So what distinguishes these properties from the rest? If there’s a steady stream of exploration results than this could propel the stock higher. Maybe it’s the the quality of release?

The chart above shows that there is a weak relationship between price returns and au grade*interval length. There are properties, however, that have great results with poor share performance… What separates Moosehead from Madsen? Tatogga from Copperstone? 

What was the function that resulted in Sokoman Iron Corp’s share price appreciation??? Could we have predicted it?

North American Intercepts – 2

I did some more digging into the drilling data. I wanted to create a more definitive list of prospects before I start to looking into more details.

First off, what do these charts show? They show drill results from properties located in North America. The drilling occurred in 2018 and the minimum interval width is 5 meters. Why 5 meters? While I’m sure that this will eliminate a lot of interesting data from some properties, I want to focus on robust results that are consistent over mineable intervals. Narrow vein mining is fine. Too complex for me though… Also, these are exploration/development properties. No producers.

The chart above shows all of the North American exploration results, grouped by property and coloured by gold grade * interval meters. If we whittle these down to grade meter levels > than 400 g/m than the image shrinks to:

Ok, this was helpful. Now we have some properties to look at. So what ones stand out? 

  • Railroad Pinion – Gold Standard Ventures Corp
  • Windfall Lake – Osisko
  • Madsen – Pure Gold
  • Cariboo – Barkerville
  • Kiena – West Dome
  • Cheechoo – Quebec Precious Metals Corp
  • Dixie Lake – Nemont and ???
  • Tatogga – GT Gold
  • Goldlund – First Mining

Some of these are familiar names, some not so much. This seems like a good list to start digging into. In my next post I’ll start investigating Railroad Pinion.