Is Grade King?

The purpose of this analysis is to answer the question: “Is Grade King?”

I’ve heard this line often and am interested in correlating mined grade to cash flow from operations to see if there is any relationship.

I’ll start with a broad assessment, ignoring the obvious impact of mine type (UG/OP).

The chart shows a couple of interesting points. Pretium and Kirkland Lake are really in a league of their own in terms of reserve grade for producers with >200K oz per annum of production.

The chart isn’t that useful with these higher reserve grade operators. Let’s take them out.

The chart, with a 5 g/t cap looks as follows:

Moreover, unfortunately, there really isn’t any relationship between reserve grade and CFO/oz (darn). This isn’t that surprising as reserve grades aren’t mined grades and there are countless other factors that impact the profitability of an operation. I was hoping that grade would be king-enough to prove some relationship.

This investigation will require further analysis. While we’re at it. Let’s look at 2018 production.

The chart shows that, as expected, more gold production = more CFO. It’s interesting to note which operators fall above or below the trend line. Kirkland Lake, Newcrest, and Sibanye stand out as a strong performers while Anglo Gold Ashanti is a laggard.

The last chart we’ll look at is a comparison between 2018 CFO per oz produced vs. current enterprise value per ounce. Now we wouldn’t expect CFO to directly translate to enterprise value but I think that this chart is interesting because it provides commentary regarding how much reserve value is going to be captured by the company (or at least the market’s perception of it). The shading of the dots reflects the comparison between these two metrics.

The variation in this metric is very impressive. Take New Gold for example, in 2018 the CFO per oz was close $550 while the company’s enterprise value per reserve ounce is only $100/oz. As mentioned, there are innumerable other items to consider (asset quality, assets not in production, CFI, capital structure).

Not really sure how to conclude this. Relating grade to cash flow is going to be tricky.

Reserve and Resource Additions in 2018

Most of the miners have released 2018 production results and reserve and resource updates. I thought it would be interesting to see which properties added or lost the most ounces during the year.

Out the list there are a couple development projects that saw some serious jumps:

  • Cerro Blanco
  • Cote
  • Kharmagtai
  • Transvaal
  • Misisi
  • Camino Rojo
  • Block 14
  • Curraghinalt
  • Rackla
  • Windfall
  • Eskay Creek
  • Valentine Lake

Would be interesting to look at the corresponding jump in share price of the single asset owners.

Franco Nevada Continued

Mining is risky. With a commodity output, they operate in an environment of perfect competition. It’s capital intensive and they don’t need to contend with depreciation alone, there’s also depletion. Pit walls can fall, people can get injured, and governments can penalize mines at will (nationalization, permitting, fines).

In a previous post I looked at Franco Nevada’s negative retained earnings and meager returns on capital invested. Given historic performance I thought it would be interesting to look at implied returns from prospective investments and the sensitivity of project failure.

Let’s say that Franco invests $250M in eight projects and the expected post-tax return is 4%. Well, what needs to go wrong to obliterate the return of the portfolio.

Well, this would do it:

  • 1 project fails immediately
  • 1 project fails at year eight
  • 1 project fails at year ten
  • 1 project ends two years early

What are the odds that this could happen? That’s an interesting question. It’s certainly higher than 5%. I imagine 50% is closer to reality. There’s also the impacts with grade issues and ramp up.

So what is going on with Solgold?

Yesterday Newcrest announced that they were increasing their stake in Solgold (owner of Cascabel property in Ecuador (85%)). This will take Newcrest’s ownership of Solgold to 15.33%. Newcrest had previously purchaed shares of Solgold in 2016 and 2017. What makes this interesting is that BHP has also shown interest in the property, purchased 100,000 shares in October. Newcrest will not be the larget shareholder in the company, followed by DGR global (11.24%) and BHP (11.18%). 

So what is going on here? Well SolGold has an enterprise value of US$810M so this company is not cheap. Cascabel must be one hot ticket. Yup sure is...

Resource update in November showed 10,900,000 tonnes of copper and 23.2M oz of gold. Wow. Amazing. The resource contains 2.95B tonnes at 0.52% Cu.  Perhaps even more interesting, there’s a high-grade core of 420M tonnes at 1.47%Cu; almsot $100/tonne rock at $3/lb Cu. 

The November 2018 investor presentation highlights the fact that modern exploration activities have allowed the for the discovery of the property. Drill results contain some of the best porphyry copper gold intervals ever recorded. For example. Hole 12, 1560m at .59% Cu and 0.54 g/t. 

The image above (from November 2018 investor presentation) shows the gargantuan extent of the deposit. Based on the geochem data it looks like there are a bunch more targets as well. 

Given Newcrest’s experience with block caving, it’s not surprising how interested they are with the property. Look at the benchmarking!

Solgold also owns multiple subsidiaries with a 3,200 km2 land package.

Well. Solgold is pretty amazing. That’s what’s going on with Solgold.

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.

Politics:

  • 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: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.126.1359&rep=rep1&type=pdf#page=119

Conflation

“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.

156 North American Gold Intercepts

First off, I’m not a geologist. I’m just interested in this domain.

I was wondering…

What was the most successful exploration program in 2018? What is the most interesting development project in North America (based on 2018 drilling results)?

Who knows? What do you think?

Projects with best intercepts:

  • Windfall Lake
  • Madsen
  • Fenelon
  • Kiena
  • Clarence Stream

Projects with a lot of good intercepts that weren’t mentioned:

  • Cariboo
  • Railroad-Pinion
  • Premier
  • Val-d’or East

I wonder who drilled the most? Should probably normalize for that.