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
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
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.
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.
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.
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.