John Meyer, mining analyst and partner at SP Angel, runs though some of the technical mining terms that tell an investor about a mining project.
Where will the mine be located and what commodity will be extracted?
As a miner looks to set up a new mining project the first two questions that it must answer are simple: what commodity will it mine and where could the new mine be located? Mining companies often focus on either one or a select group of metals that it wants to extract, like gold (which often comes with silver and other metals), platinum group metals, or base metals like copper, tin and zinc.
For example, the rising demand for batteries (for the likes of electric cars and energy storage being developed by firms such as Tesla) has swayed many miners to develop lithium mines as they attempt to plug forecasted supply gaps and capitalise on more favourable prices. Bacanora Lithium (previously Bacanora Minerals) is one of the most advanced lithium miners listed on AIM and is developing the Sonora project in Mexico, regarded as one of the largest known clay lithium deposits in the world.
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The location of a mine is also extremely important. Some commodities are concentrated in certain regions or countries. Metal-rich South Africa is thought to produce around two-thirds of global platinum and hold the vast majority of the world’s reserves, while iron ore and copper are particularly prominent in Latin America and Australia, although also found elsewhere.
Companies will look for opportunities in countries with stable governments and a favourable business environment, which can be harder if their chosen commodity is only found in certain areas. Geopolitical activities also play their part. Western sanctions against the likes of Russia and Iran made both countries less attractive for natural resource firms.
Location is also important for supply routes. Returning to lithium, another AIM-listed miner named European Metals Holdings is developing the Cinovec project in the Czech Republic as it looks to open a rare lithium mine in Europe, placing it in a better position to serve neighbouring countries than those operating further afield.
‘New’ mines are not always necessarily that new. Miners are increasingly re-exploring old mines as updated technology means metals that could not previously be extracted now can be extracted. Some even target old tailings dumps (essentially the waste that builds up from a mining operation) with the hope of squeezing out whatever mineral is left inside.
Before we go through the lifecycle of a mine it is important to understand two other core elements that feature throughout the process and form the foundations of taking a mine from the exploratory stage to one that is in full production:
Mineral resources vs mineral reserves
The backbone of any mining company is its mineral resources and reserves that categorise the quality and accuracy of the estimates of what minerals lie in the ground. While there are various models used to categorise these, the main model used by the vast majority of the international community is set by the Joint Ore Reserves Committee (JORC), aligning standards across the world. Countries like Russia and China however, can often use their own system.
There is a relationship between mineral resources and mineral reserves, demonstrated by the chart below. Miners prove up their deposits with the hope of gathering proven reserves which can be produced, primarily done through drilling and technical work, although the economic viability of the project is constantly being tested. The data used to estimate how much metal is in the ground forms the basis of what category the deposit falls into and the confidence behind those estimates.
For example, the data used to calculate probable reserves is not too different to that used to determine proven reserves. However, proven reserves are estimated using detailed data over one entire area where the boundaries of deposits are fully understood, whereas the measurements and samples used to calculate probable reserves can be more spaced out, leaving blackspots which need to be drilled (called infill drilling) to fully understand the entire area, not just sections of it.
Resources and reserves are extremely important to natural resource companies, including oil firms. One of the reasons the share prices of natural resource companies are so sensitive is because the value of their resources and reserves – their biggest and most important asset – fluctuates in line with commodity prices. This is why movements in crude price usually also shifts the share prices of firms like BP and Royal Dutch Shell, or movements in the price of gold sway the share prices of firms like Fresnillo and Randgold Resources.
Reserves and resources also play an integral role when it comes to the finances of natural resource firms. Many banks lend to natural resource companies depending on their resources or reserves, known as reserve-based lending, although this is more common in the oil sector. Importantly, lending is based on the value of the resources and reserves, not the size or volume. When determining the price of resources and reserves, certain discounts are applied to each category of mineral to reflect the level of confidence behind the estimates.
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As miners produce proven reserves they attempt to replace them by proving up other minerals so they too can be produced. This is why many firms will often continue exploring even after they have set up a producing mine, as they need to ensure they have adequate time to replenish their production, and have many batches of minerals at different stages of the proving process.
What studies have to be undertaken for a new mining project?
There are a number of studies that miners must complete before they can get their project off the ground and these can be considered as the major milestones that companies need to achieve to demonstrate the progress being made. Share prices are particularly sensitive to these studies as each one de-risks the project. Here are some of the major studies (not necessarily in order) that miners must complete to progress their project to the construction stage:
- Desktop or conceptual studies. This is one of the first studies undertaken. These studies are based around benchmark and industry data, as well as any historic information that has been collected about the site.
- Environmental and social impact assessments. These are used to outline how a project would impact the local community and the environment, including items like the effect on local employment and how the area will be reclaimed once the mine has been exhausted. These are integral to gaining government and community support for a mine.
- Scoping studies. These studies outline the different options (usually three or four) that could be considered for the project to try and identify the optimum operational plan to get the most out of the mine and the chances of success. Ultimately, these studies must prove that further work on the site is warranted.
- Preliminary economic assessment. This is the first snapshot of the economic potential of a project, estimating the financial outcome for the different operational plans that are being considered and proving there is a profitable and viable option among them.
- Pre-feasibility study. The pre-feasibility study is one of three studies that can be considered the most important for a company looking to open a new mine. The pre-feasibility study will only use measured or indicated mineral resources and collects all of the work done so far to outline all the elements for each proposed plan. These include how the mine and plants will be designed, the rate of production, recovery rates, what labour is needed as well as operational and capital expenditure projections.
- Feasibility study. This is a more detailed and accurate version of the pre-feasibility study, which narrows the options being considered into the proposal that the company will take forward, defining the route that the company has opted for. Miners start to seriously consider the financial requirements for the project and start preparing where it will source the necessary funding before moving on to the next and most important study.
- Definitive/bankable feasibility study. This is what all the previous studies build up to. This is the final and most detailed version of the feasibility studies and is regarded as accurate enough to take forward. This is the key document for any miner that does not already have the funds needed to develop the project, as lenders base their decisions on this study more than anything else. This will also include other elements such as any commercial agreements (like offtakes) that have been signed.
The lifecycle of a mine
Once a mining company has identified a site to set up an operation, the lifecycle of the mine begins. As a broad guideline, the lifecycle of a mine consists of the following stages:
Mineral exploration and prospecting
The initial aim of exploration is to understand the characteristics of the land. Water, oil and soil is tested and firms starts to consider the socio-economic effects that a new mine would have on the local area.
This is followed by prospecting, which includes more detailed surveys being carried out including airborne or ground geophysical surveys that read the Earth’s magnetic field, radiation and electrical conductivity underground. Airborne surveys allow larger areas to be covered, while ground surveys can provide more detailed data deeper underground. Some companies use one method, some use both.
These surveys help identify possible targets and allow a company to start drilling to find out more about what lies underneath. Drilling and sampling work will provide the first glimpse of the type of ore (the rock containing minerals) being mined and the grade it could yield. The surveys, drilling and sampling work allow a miner to draw up a 2D or 3D model of the geological ore, which is essentially a virtual underground map showing where the minerals lie. This is a very preliminary outline of the potential size of the deposits or veins found.
Mine design and project development
Once confident that there is an opportunity lying in the ground, miners can now start to design the project and begin early stage development. Companies will evaluate the various options it has and will draw up multiple plans that could be used in order to identify the best available one. For example, a company may draw up one plan proposing to mine all the estimated material in the ground over 20 years and one plan over ten years to estimate the different financial implications, or numerous plans that consider using different types of equipment. This is when the miner will start to outline the possible profitability of its future project.
More detailed technical work is completed and drilling often continues to test the flow of information coming out of the ground. Understanding the ore and minerals will allow firms to consider what metallurgical process will be used to extract the commodity from the rock.
The multiple mine designs and development plans that are drawn up ultimately test the viability of the proposed project and, if viable, prepare everything for the construction phase.
Major contracts and financing
Once all of the studies have been completed the company will know exactly what it needs to create the project and how much it will cost. A new mine does not come cheap and the bankable feasibility study will propose where the funding will come from. Funding can come in a variety of forms and smaller firms tend to blend a mixture of debt and equity, but other options such as vendor financing can also be considered.
Running parallel with the financing, companies will start to tender work to attract bids from different providers, with the aim of driving down the cost of the operation and, once awarded, clarify the exact costs of some of the major elements of development. Some mining companies choose to operate their own mine, some hire contractors. Some will outsource only one element of the operation, such as processing.
The front-end engineering and design (FEED) contract covers the basic engineering work and is usually awarded around the conceptual or feasibility study stage. This forms the basis of later contracts like engineering, procurement and construction (EPC), which tasks a contractor with executing and delivering the project within an agreed time and budget.
Construction: underground mines vs open pits
Once the miner has addressed all the regulatory, funding and technical aspects of the project it can finally start construction. The construction process can be very different depending on the mineral being mined and the size of the project, and will often take considerably longer than exploratory and design stages.
Although this kickstarts tangible progress on the ground, it is also when the company is likely to suffer the most hiccups, particularly for smaller miners that don’t boast the same track record as more experienced players. With so many moving parts it is almost impossible for a company not to be hit by some issue or delay during this stage.
There are two predominant types of mines that can be built: underground mines and surface mines (an open pit).
Underground mines are built to access ore and minerals that lie deeper underground and their construction is highly complex, involving tunnels and shafts that can sometimes be big enough to drive a haulage truck down it. Safety, while always a concern, is even more important for underground mines.
Surface mining, or open pits, are for shallower minerals. Visually, these look like quarries and therefore have a bigger visual impact that underground mines. However, they are usually a lot cheaper to develop than an underground operation.
Mine production and a gradual ramp up to full-scale output
Eventually, the project is constructed and ready to begin producing. However, output tends not to go full throttle from day one. It can often take years to ramp up to peak production as everything comes together.
Having said that, some (like Hummingbird in the previous example) choose to produce more in the initial years to help pay the high costs of building the operation, before lowering output later on. Equally, some miners take a phased approach in order to reduce the capital intensity, building a smaller operation in order to generate cash flow to fund the main project for example.
The amount to be produced each year dictates the life-of-mine (LOM), which estimates how many years it can economically produce for. However, many companies have shut mines earlier than planned because the economics became unfavourable, or extended the LOM at some point as new resources and reserves are found, such as a nearby satellite deposit that supplements the main deposit.
Mine closure and land reclamation
Many mines may be capable of producing economically for decades, but mining is still a temporary activity. The vast majority of companies now have to formulate their plan on how to close their operation before they have even built it, as governments require assurances that firms have a plan and the funds needed to close the mine before they are willing to issue permits. The detailed environmental and social studies that are conducted during the process form a major part of the plan on how the mining operation will be closed.
While some mines are closed because the resources and reserves have been exhausted, many are shut down because they are no longer economical. The latter means the mine is closed with minerals left in the ground. This may encourage another company to open the mine again in the future, when the economics become more favourable or because technology has developed and allowed new and possibly cheaper ways of extracting the minerals that were left.
Depending on the size of the operation it can take up to a decade to fully shut down a mining operation, and potentially longer if water in the area needs to be retreated or monitored for a prolonged period of time.
Mine closure plans can aim to renovate the site to varying degrees:
- Remediation. Cleaning up the contaminated area, including water.
- Reclamation. Stabilising the terrain, landscaping and topsoil replacement to make the land useful once again.
- Restoration. Rebuilding any part of the ecosystem that was disturbed as a result of the mine such as flora and fauna.
- Rehabilitation. Rehabilitating the site to a stable and self-rejuvenating state, either as it was before the mine was built or as a new equivalent ecosystem.
Some of the major steps that are common for companies to follow when shutting a mine are as follows:
- Mine shutdown. Production is halted, equipment is taken offline and the workforce is scaled back.
- Decommissioning. The operation and equipment is taken apart, waste is disposed of, buildings are demolished or repurposed and the site is cleaned.
- Remediation or reclamation. Returning the land, trees, topsoil, water and wider ecosystem to a satisfactory state while removing contaminants or hazardous materials.
- Post-closure. Monitoring programmes initiated to ensure shut down is effective and highlight any further work that needs to be completed.
Winning over regulators and retaining government support is key for mining companies
Some of the most resource-rich countries in the world are financially poor, highly unstable and corrupt. The Democratic Republic of Congo is one of the most commodity-rich countries in the world but is also one of the poorest financially, for example, while Shell’s oil pipelines are regularly targeted by militia in Nigeria.
Many of the countries that hold the majority of the world’s minerals do not have the capability to extract the value of those minerals, which is why foreign companies with the expertise and (more importantly) the cash needed to build a mine are brought in to improve the economy and infrastructure. Governments often insist foreign firms use local labour and that mines are partly owned by the local community or even the government itself. The Ethiopian government made sure it got a slice of KEFI Minerals’ Tulu Kapi gold project, and the likes of South Africa have rules dictating that the local black population must own a certain proportion of any project.
Ultimately, governments decide whether or not a company can set up a mine in a country. Drilling can’t go ahead without permits from the government, and permission is needed before it even conducts certain test work. Many governments insist miners complete a ‘minimum work programme’ to ensure they develop the site in a timely fashion. This allows governments to rescind the award of a project to a company that has failed to reach the agreed development milestones in order to award it to another firm that is willing to take it forward.
The once highly-regarded Acacia Mining is a prime example of how important local governments are. The gold miner had a good working relationship with the Tanzanian government for years before a decision was made to ban the export of gold and copper concentrate out of the country in March 2017. The impact was immediate and devastating, impacting about half of Acacia’s overall production. The ban remains in place today, and relations between the two have completely broken down with shares trading at a fraction of the price they were before the ban was implemented.
Conclusion: tracking development of new mines can present plenty of opportunity
Miners have to clear so many hurdles over the years it takes to set up a new mine, some of which are harder to clear than others. Reaching major milestones like completing major studies, upgrading resources and reserves, or securing regulatory approvals or funding can send share prices soaring while any problems or delays can be disastrous for stock prices.
Following miners on the long and complex journey of setting up a mine requires patience but can be an extremely rewarding journey for traders that can pre-empt the high and low points of the process.
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