Importance of the exploration companies to the mining industry
Summary: The market environment of junior miner companies is very dynamic and largely dependent on the capital market and on investors. This opens up opportunities but also involves great risks. This market report highlights the importance of these companies to the mining industry and outlines the current prospects for this sector. A number of important junior miners are profiled, especially those which are on their way to becoming a senior mining company.
Junior mining companies are currently focusing primarily on trend metals such as gold, silver, copper, cobalt, nickel, zinc, lithium and rare earth metals, i.e. base metals, precious metals and technology metals which are currently trading at near multi-year highs or are otherwise on the upswing. The so-called junior miners fulfill two important functions. First, they give large mining companies (senior miners) access to new resources in the case of a takeover, and second, they provide for a preselection of promising new sources of commodities. In previous publications it was stated, for example, that only about every 100th mine or exploration is considered successful. But this also shows the risk involved in the business. Modern exploration methods may possibly have meanwhile improved this statistic.
A junior miner is a mining company focused on the prospecting and exploration of metal resources. Since these companies do not yet operate their own ore extraction facilities and therefore do not generate any revenues or profits from their current business, they are dependent on investors to cover their expenses. Capital sums in the mining industry range on average between US$ 350 mn and US$ 500 mn (Table 1). Of course, there are also companies whose capital cover is e.g. only around US$ 50 mn. If junior miners operate mines and extract metals in the course of their development, they can easily achieve magnitudes of up to US$ 1 bn. Such companies are referred to as intermediate miners. Companies above that order of magnitude are referred to as senior miners. These generate their cash flow from the sale of the mined metals. However, all in all, the revenue boundaries between the different classes of company are not firmly defined.
A junior mining company usually goes through 4 phases during its life curve (Fig. 1). In the several years of phase A, which usually lasts 4 to 5 years, the company is primarily engaged in initial exploration. During this phase, equity investment is taken up at the lowest possible cost. Phase B is a relatively short period of time with the greatest increase in value if there are proven potentials, high speculative transactions and the right point of time for investors to sell profitably. After that, disillusionment often sets in (phase C) when it is necessary to press ahead with exploration development. Companies that understand their business move into phase D, which generates the highest capital value, most often resulting in acquisition by a larger mining company or in further capital injections by institutional investors.
2 Exploration expenditures and private equity
Fig. 2 shows the evolution of non-ferrous metal exploration expenditures since 2005. This is based on data from S&P Global Market Intelligence (S&P Global), who analyzed the investment budgets of more than 1650 mining companies. In 2018, exploration expenditures were approximately US$ 10.1 bn, and are expected to grow by 5 – 10 % in 2019. The peak of US$ 21.5 bn was reached in 2012. Exploration spending largely follows the average metal commodity prices, which are shown here as an indexed value. According to S&P Global, with a reported budget total of US$ 9.62 bn in 2018, major miners invested US$ 4.97 bn, or 52 % of the overall expenditures. Junior miners invested as much as US$ 3.09 bn or 32 %, while intermediate miners and other companies invested US$ 1.56 bn. 50 % of the budgets is spent on gold, 22 % on copper and 7 % on lead and zinc.
The data and information provider Preqin regularly reports on the provided risk capital in the natural resources sector. In 2018, they forecast that worldwide investment capital would reach a new high of around US$ 93 bn, although it should be mentioned that a large proportion of this sum is related to North America and investments in the energy business (oil, gas, oil sands). The mining and metals industry receives US$ 4.6 bn, provided by a total of 13 funds. Four funds alone have provided a total of US$ 2.5 bn. These include Orion Mine Finance, which is considered to be a heavyweight among the funds, Resource Capital Funds, Waterton Global Resource Management and EMR Capital. Despite many contrary statements, the current outlook is not so bad from the point of view of the junior mining companies, since the currently provided amount of risk capital was only exceeded in the boom year of 2012.
3 Significance of junior miners and current developments
Although companies in the mining industry consider the exploration of new deposits to be extremely important for their continued existence, senior miners have recently allocated only a relatively small portion of their revenues to exploration spending. The main expenditures were invested in the development of existing mines and measures for the reduction of operating costs. In 2012, BHP Billiton alone spent US$ 2.1 bn on exploration, which represents 11 % of the overall investment . In the mining industry as a whole, the average proportion of expenditure devoted to exploration was 3.2 % in 2012. Meanwhile, this proportion has dropped to a 12-year low of 1.6 %.
In the case of major miners, the proportion of their revenues spent on exploration for so-called “grassroot” projects has even fallen to 0.4 %, which represents an all-time low. It is not possible to explain this fact by reference to the regular cycle of the industry, i.e. that when revenues are lower, savings will first be made on exploration costs, and that when revenues rise, exploration spending will increase disproportionately. In our view, pressure on mining companies has increased in recent years, leading to greater spending discipline and efforts to reduce operating costs. Investments are only made in the expansion of existing mines after extensive exploration drilling and if companies are sure that they will result in an extension of the mine‘s operating lifetime. Overall, since the end of the last millennium, the proportion of grassroots budgets spent on exploration drilling has decreased from around 50 % to less than 30 %, while the proportion spent on mining sites has grown from 17 % to over 30 %.
The junior miners‘ exploration expenditures, on the other hand, have recently mostly increased from year to year, even when metals prices were bottoming out. This can be seen, for example, in the exploration budgets in Canada (Fig. 3). In 2017, the exploration budgets of junior miners were nearly on par with those of senior miners, at nearly Can$ 1.1 bn. Since then, the proportions have again shifted slightly in favour of senior miners. Canada is so interesting for a comparison because the country has the world‘s largest number of junior mining companies. In 2015, the number of junior miners was 497, thus just under 500, while the number of senior miners was only 131. The dynamism associated with junior miners is evident from the fact that their number was 775 in 2011/12, when metal prices were at a peak.
The number of exploration drillings, and particular those undertaken by junior miners, rose significantly from 2017 to 2018 (Fig. 4). Overall, the number of projects increased by 11.4 % to 1261 and the number of exploration drillings increased by 13.7 % to 49 239. It is interesting to note that the number of successful projects has increased by 10 % and that of grassroots exploration drilling by 13 %, although the senior miners have mostly been very restrained in this field. The encouraging number of new exploration drillings has been especially driven by increases in cobalt (+ 83 %), nickel (+ 73 %), copper (+ 20 %) and gold (+ 8 %), all fields in which junior miners have gained strength in recent years. There is correspondingly no question that the junior miners are very important for the development of the mining industry.
4 Profiles of selected mining companies
4.1 Alacer Gold
In recent years, Alacer has evolved from a junior miner to a leading intermediate miner. The company, which is listed on the Toronto stock exchange, has an 80 % stake in the “world-class” Çöpler gold mine (Fig. 5) in Turkey, which is operated by Anagold Madencilik Sanayi and Ticaret A.S.. The Çöpler gold mine is located in eastern Turkey in the province of Erzincan, about 1100 km southeast of Istanbul and 550 km east of Ankara. The Çöpler gold mine is producing ore from two production plants. With the recent completion of its sulfide plant, a gold production output of 320 – 380 kilo-ounces (kOz) is planned for 2019, after approximately 171 kOz in 2018. In 2019, the average gold content in the oxidic ore is 1.6 g gold/t, and 4.75 g gold/t in the sulfidic ore. The proved reserves amount to 3.7 mn ounces.
With the Çöpler gold mine Alacer Gold is endeavouring to generate a stable free cash flow over the next 20 years. The main objective of the company to use the Çöpler gold mine as the motor for continuing its organic multi-mine growth strategy to maximize its free cash flow and thus to provide maximum value for its shareholders. The systematic and focused exploration efforts in the Çöpler district have been successful, as shown by the recently discovered Ardich1 deposit. The Çöpler district remains the focus, with the goal of further expanding oxide resources in order to ensure production using the existing Çöpler infrastructure. The company is continuing selective exploration in the other regions of Turkey, including an updated prefeasibility study and ongoing work on the technical studies for the Gediktepe project.
4.2 Aurania Resources
The Canadian Aurania Resources Ltd. is a typical junior miner. The company was founded in 2007 and focuses on gold and copper deposits in southeastern Ecuador. The flagship project of the company, the Lost Cities Cutucu Project, is located in the Jurassic Metallogenic Belt in the eastern foothills of the Andes in southeastern Ecuador. Aurania also owns mining rights in the canton of Valais in Switzerland. The company is listed on the Toronto and Frankfurt stock exchanges and the OTCQB Venture stock exchange in New York. Its management has an impressive track record of 69 % in discovering resources (Fig. 6 and Fig. 7). CEO Keith Barron, co-founder of Aurelian Resources Inc., discovered the Fruta del Norte gold deposit, which is currently being developed by Lundin Gold. President Richard Spencer led the teams responsible for San Carlos, Panantza, Mirador Porphyry Copper and Loma Larga.
To date, eleven veins have been identified in Cutucu for gold-silver mining, four for copper and one for silver-zinc-lead. The discovery of the mine dates back to the time of the conquistadors in the 15th century. In contemporary writings, the mine was called the richest gold mine of the Spanish Empire. But in 1605 the mine was abandoned and since then was almost forgotten until Aurania Resources purchased a concession from the Ecuadorian government for a 208 000 ha or 2080 km2 area along the copper-gold belt in the Cordilleras of Cutucu. Since then, several rounds of financing have been placed. The latest, in March 2019, flushed about Can$ 5.2 mn into the company. The current market capitalization of the company is Can$ 124 mn. Fresh capital is to be used primarily for pilot drilling for the prospective “Crunchy Hill” mining area.
4.3 Eldorado Gold
The Canadian Eldorado Gold has meanwhile evolved from an exploration company into a leading intermediate gold producer. The company has 25 years of experience in the development and operation of mines. It is currently mining gold at four locations in Canada, Turkey and Greece. In addition, it has obtained further concessions in Brazil, Greece, Romania and Serbia. Eldorado Gold is currently operating two mines in Turkey: Kis¸ladag˘ (Fig. 8) and Efemçukuru, both of which are 100 % owned by the company. In 2018, 172 kOz of gold were extracted in Kis¸ladag˘ and 95 kOz in Efemçukuru, representing 76.5 % of the total of 349 kOz produced by the company during that year (Fig. 9). By 2020, Eldorado plans to increase the output quantities to a total of 520 to 550 kOz.
The company is committed to the highest safety and environmental standards. After 2021, it is possible that the amount of gold from Kis¸ladag˘ could decrease significantly. To counter this, the heap leach times are to be extended from 90 days to 250 days, raising the gold yield from about 40 % to about 58 %. In order to achieve longer residence times, the stockpile capacities must therefore be significantly increased. Eldorado Gold is considering several other ways to increase its gold production rates. In 2017 it acquired the Lamaque Mine in Canada by taking over Integra Gold, a junior mining company. After extracting the first gold there in December 2018, Eldorado is now planning an output of 100 to 110 kOz for 2019. In addition to Lamaque, the Olympia and Stratoni mines in Greece, and Efemçukuru in Turkey offer brownfield expansion opportunities.
4.4 Equinox Gold Corporation
In two years, Canada‘s Equinox Gold has evolved from a junior mining company with just one mine to an intermediate miner owning several mines. The company, which was formed in 2017 from the merger of Trek Mining, NewCastle Gold and Anfield Gold Corp., has meanwhile reached a market capitalization of approximately Can$ 700 mn. With its acquisition of the Mesquite Gold Mine in California in October 2018, Equinox transformed itself from a pure exploration company into a gold producer. Equinox started out with the Aurizona Gold Mine in Brazil. This mine had been in production prior to 2015, but had been temporarily shut down because the ore properties had deteriorated and new grinding plants were required for the harder ore. Meanwhile, the upgrade of the grinding plants has been completed (Fig. 10) and the company plans to extract 95 kOz of gold as from the 1st quarter of 2019.
For the newly acquired Mesquite Mine, a gold production of 150 kOz is planned for 2019, which translates into a profit margin of approximately US$ 40 mn at an estimated gold price of US$ 1250/oz. The company‘s Castle Mountain gold mine, also located in California and due to open in the first half of 2020, will provide operational synergies with Mesquite, resulting in cost savings. Equinox Gold aims to improve its standing in the next few years, especially as regards its evaluation assessment (Fig. 11). At present, the price-to-net asset value (P/NAV), which is the most common method used by mining companies, is still at the bottom end of the scale, with a value of 0.57 x. Equinox is aiming for a value of 1.25 x, which is more applicable to leading intermediate miners. As one of the actions taken to achieve this, the company has spun off it‘s copper mining activities to the new company Solaris Copper.
4.5 Roxgold Inc.
Roxgold is traded on the Toronto stock exchange under the ticker symbol ROXG and as ROGFF in the open market. Roxgold is on its way to becoming a leading intermediate miner. The company describes itself as a “High Grade-Low Cost Producer”. Roxgold‘s most important asset is Yaramoko underground gold mine (Fig. 12), located on the Houndé Greenstone belt in Burkina Faso, West Africa. Yaramoko has been in production since October 2016. In 2018, its output of ore with an average grade of 13.5 g gold/t was increased by 10 %. The gold yield rose to 133 kOz and sales increased to US$ 169 mn. As a result of the mine‘s relatively low operating costs of US$ 740 to 780/oz of gold, an EBITDA of 49 % was achieved. With a return on equity of 22.8 %, the company is in an outstanding position compared to other gold producers in West Africa (Fig. 13).
In December 2018, the company announced the completion on schedule of its Bagassi South project, 1.8 km from Yaramoko, with the successful practical completion of its processing plant expansion. The project was completed about 10 % or US$ 2.8 m under budget. The plant expansion increases capacity by almost 50 % from 270 000 t to 400 000 t of ore per year. In Bagassi South, development of the mines commenced, and in October 2018 the first ore was delivered on schedule to the processing line. The mining output continued to rise through the first quarter of 2019 and commercial production is expected to start in the second quarter of 2019. In February 2019, Roxgold also announced its intention to acquire Newcrest Mining‘s Séguéla gold project in Côte d‘Ivoire.
4.6 White Gold Corp.
White Gold Corp. is another Junior Minor with an interesting portfolio engaged in gold exploration. The company owns a portfolio of over 22 000 claims in Yukon‘s White Gold District in Canada, involving 35 real estate properties on 439 000 hectares, corresponding to more than 40 % of the district. Since 2007, gold discoveries of approximately 7 mn ounces (MOz) have been made there, as well as major acquisitions and investments by large companies such as GoldCorp and Kinross Gold. White Gold Corp‘s own exploration strategy (Fig. 14) has produced a number of high-grade gold discoveries. The company‘s gold resources include the flagship Golden Saddle & Arc, which holds nearly 1 MOz. White Gold receives financial support and technical expertise from Agnico Eagle and Kinross Gold. In addition, the company has good connections to the capital market.
The presented profiles demonstrate that most junior mining companies are currently focusing on the gold ore mining sector. However, in the coming years the largest growth rates are to be expected in the so-called battery metals such as cobalt, nickel, zinc and lithium, driven by the prospects for electric vehicles, renewable technologies and similar future technologies. This will change the direction of the industry, and will encourage old and new junior miners to serve this sector wherever possible. There should be no shortage of capital in the next few years, as interest rates remain too low for good return on investments, cryptocurrencies like Bitcoin have crashed, shares are already largely overvalued, and there is a general lack of alternatives in the capital market.