A key concept for potential investors to understand is the life cycle of a mineral deposit and it’s potential relationship to stock price. Knowing the potential risk and the project value (real or perceived) any any stage can help determine entry and exit points for the investor.
Almost every project undergoes a standard exploration life-cycle. The activities can be subdivided many different ways, but here they are divided into six broad categories or stages. These are:
- exploration,
- discovery,
- feasibility,
- development,
- production and
- closure.
It’s also worth noting that any of these stages can take years and may require several rounds of funding with no guarantee of success.
Exploration
At this point most companies will have some indication that a property has economic potential and a general idea of where to begin. This “potential” can be a surface mineral “showing”, historical exploration data, government maps or studies, or proximity to a known deposit.
Early exploration programs are generally designed to identify drill targets. Using the aid of geochemical, geophysical and geological exploration techniques the company examines the property for signs of a potentially economic mineral targets.
At this point stock price is usually very low. Although relatively little money is required at this point, there is also little chance of success. Often the goal of a company at this point is to find a tantalizing bit of evidence that the property has greater potential. Some investors may choose to invest at this stage since it has the highest potential for profits, but there is also the highest risk of total loss. Many companies never make it beyond the exploration stage for a variety of reasons.
Discovery
Once a drill target is identified and the first few exploration drill holes return promising assay results, the company may have discovered a possible deposit. A company press release is often made, highlighting the best drill hole intercepts with the highest grades, and their stock price can be expected to rise..
The coming months will tell whether the find is significant. This is when, as an investor, you need to be asking questions.
- Is the company reporting new findings, or did they just drill hole duplicate historical findings?
- Was the drill program well designed and executed?
- What to the reported results mean? Is there missing or misleading data?
- Do the management and geologists involved have the reputation and experience to earn your confidence in their work?
Asking these questions can help you avoid a bad investment. It is at this point that a junior exploration company must make a decision; either to either sell their discovery to a larger company or try to raise enough funds to proceed with mine development. This is highly dependant on the exit strategy of the company involved. Many companies focus on being “Project Generators” and are solely focused on developing a project to the point where they can hand it off to a mid-size or large company. Others may be focused on bringing a project into production. From an investors standpoint this stage may represent a spike in stock value and may be a good time for early investors to take a profit.
Feasibility
During this stage the target is heavily drilled in order that the full size and grade of the resource can be reasonably defined. An Indicated Resource or Measured Resource may be reported and ultimately a feasibility study may be undertaken in order to establish a Reserve. (Read more on Reserves vs. Resources).
This stage consumes a great deal of cash and time. Stock prices may slump or slowly slide at this time unless offset by better than expected results. Beyond the technical requirement of defining an economic deposit, many other risks, or “modifying factors” must be taken into account before mine development can proceed. These factors include things like mine infrastructure, environmental assessments, public sentiment and governments. This is a risky stage because a failed feasibility study will lower stock value. However, the reward comes if the mine is deemed to be economic and development is approved.
Development
During the development stage everything needed to extract and either transport or process the ore is built. This usually involves a large investment, but it’s easier to raise the required cash since the economics and permits are in place and the risk is lower.
The stock price may increase a little with the anticipation of the start of production, but the risk of failure may keep the stock from rising too high.
Production
Stock prices may fluctuate up and down during the production phase depending on a economic conditions. Companies can offset volatility and help maintain their value by efficient extraction and mine operation. The discovery of a new deposit in the vicinity of the operating mine may also increase mine life and stock value. If no new deposits are found then production winds down as reserves decrease, moving the mine toward the closure stage.
Closure
Once a mine has exhausted all of the available resources in the area it will begin the process of closing. Obviously, once all available ore has been processed production stops and with it profits cease. If a company has more than one operating mine a closure may not drastically affect their stock price, but it does not help it. Additionally, if the company has not put away adequate funds for site clean up the costs of site reclamation can bankrupt them. Either way the closure stage is not a good stage for the investor.
Knowing the right time to buy stock and the right time to sell is obviously the most important aspect of investing. While commodity prices, economic conditions, investor sentiment and other market forces play a role in the perception of a company’s value, we can predict and understand broad general trends in the life cycle of a mining company that can help increase our chances of success and understand the risks involved.
