Funding and Investing in Mineral Exploration: High-risk & high-return opportunities

Mining is an industry with high capital intensity, including large upfront investments and high cost of capital (risk is higher than other industries). Therefore, effective financing is an intrinsic aspect associated with any successful mining projecting, especially within the exploration phase.

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Figure 1: Airborne Visible/Infrared Imaging Spectrometer

Most mineral exploration, as well as development prior to the decision to build a mine, is financed either through internal funds or equity. Internal funds typically are used by companies with operating mines. Equity is typically used by junior exploration companies with no operating mines. This approach includes initial public offerings (IPOs) and subsequent equity raising and other “off-market” alternatives such as privately sourced seed and venture capital from ‘business angels, joint ventures and royalty-based finance arrangements. Lastly, debt financing for exploration is difficult to obtain because usually there is no asset (collateral) at the time of the loan for the lender to obtain should the borrower be unable to repay the loan (adapted from Eggert, 2010 and Guj, 2006).

During prospecting and exploration stages, there are usually an increase in stock price as investors speculate, based on preliminary drilling or other sampling results, whether the company has found anything. As the company defines resources and releases further results, institutional investors usually become interested in the stock. At these stages, the stock price tends to increase. Once a decision is made to proceed with feasibility, the stock price may decline as investors worry that a feasibility report may deem the project uneconomic or even some speculative investors facing the fact that the commodity discovery is still years away from being an actual producing mine. At this point, there is usually a significant correction in the stock price (Adapted from Baurens, 2010).

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Figure 2: USACE drill rig operator

Only a very small number of exploration properties will ultimately become mining properties, but until exploration potential is reasonably well tested, they have very little value. Additionally, all mining projects have risk components of varying degrees. The major components of risk include technical factors, environmental aspects, market and financial factors and political factors. Tolerance for risk is dependent on the size of the parent company and the financial and business approach to the project. The real value of an exploration property lies in its potential for the existence and discovery of economically viable mineral deposit (Adapted from Roscoe, 2007).

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Figure 3: Toronto Stock Excange

Canadian stock exchanges have a particular focus on mining companies, particularly junior exploration companies through the TSX Venture Exchange. Additionally, London and Australian stock exchanges can provide interesting platforms for funding and investing in mining as well.

Please see Interesting links below:

https://asmi.az.gov/sites/default/files/documents/files/guide%20to%20mining%20investments.pdf

http://www.investopedia.com/articles/investing/030813/mining-stocks-understanding-feasibility.asp

Please provide your thoughts about investing in junior mining companies. Would you recommend a stock?

Kind regards,

Ronaldo

References:

Baurens, S., “Valuation of Metals and Mining Companies”, University of Zürich, Swiss Banking Institute and Prof. Dr. T. Hens, (November, 2010). Last accessed on 06/14/2016 at http://www.basinvest.ch/upload/pdf/Valuation_of_Metals_and_Mining_Companies.pdf

Eggert, R. G., “Mineral Exploration and development: Risk and Reward”, Colorado School of Mines, International Conference on Mining, “Staking a Claim for Cambodia, “Phonom Pehnh, Cambodia, 26-27 May 2010, (May, 2010).

Guj P.,” An Introduction to Mineral Finance”, Australian Mineral Economics, the Australasian Institute of Mining and Metallurgy, © 2006, (April, 2006).

Roscoe, W. E., “Valuation of Mineral Exploration Properties Using the Cost Approach”, Canadian Institute of Mining, Metallurgy and Petroleum, © 2007, (July, 2007), Last accessed on 06/14/2016 at http://web.cim.org/mes/pdf/VALDAYBill_Roscoe.pdf

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