I recently built a database of lower grade mining projects with the intention of analyzing the economic potential of such mines. So far, the database includes 66 projects from around the world. It is not all-inclusive, as I expect to add more projects over time. The database is heavier in projects from junior and intermediate miners as details are more readily accessible for them, whereas the development projects of major miners are often not disclosed or at least not easily found. Particular emphasis has so far been paid toward lower grade copper and silver projects and more specifically on lower grade, bulk ton operations. In general, to be economic, lower grade projects have to be larger in scale. The end goal was to determine what the common factors are that make some of these projects reasonably attractive from an investment standpoint.
The database includes the following quantitative parameters:
- the type (e.g., copper-silver or silver-gold) and size (i.e., tons) of each mines reserves or resources (Resources are estimates of the amount of metal in the ground whereas Reserves are resources that have been determined to be able to be mined economically. Resources are not necessarily inferior to Reserves. They often just require more infill drilling and other technical work to be completed to officially qualify them as Reserves.)
- the associated grades of silver, gold, lead, zinc, and copper (molybdenum, which is a common by-product of copper mining was not included, because the associated grades are typically very low. In a few cases where they were higher, I manually adjusted the copper equivalent grade to reflect this.)
- the tonnage and grades were used to calculate the total amount of each metal contained in each mine (assuming 100% recoveries)
- overall silver equivalent and copper equivalent grades were calculated using these metal prices: silver - $20/oz., gold - $1,300/oz., lead - $2,000 ton, zinc - $2,800 ton, and copper - $6,000 ton
- the type of mine (e.g., open pit or or undeground block cave) was noted
- the status of each mine (e.g., exploration, development, production) was noted
- the ore processing capacity (tons per day) and mine life were included
- for developmental phase projects where a feasibility study has been completed, the estimates for (1) internal rate of return (IRR) at current metal prices, (2) required initial and sustaining capital expenditures, (3) operating costs per ton, (4) and cash costs per lb. were included (where available)
- for producing mines the cash costs were included in order to provide a parameter for economic comparison and additional cost details were sometimes noted in the comment field
I divided the 66 projects in the database into 3 tiers based upon copper equivalent grade. Here is the breakdown for each (note: 28.35 grams = 1 ounce):
- lowest tier includes 24 projects with copper equivalent (CE) grades ranging from
.21% to .45% or silver equivalent (SE) grades ranging from 17.9 grams per ton (g/t) to 38.7 g/t
- middle tier includes 22 projects with CE grades ranging from .46% to .62% or SE grades ranging from 39 g/t to 52.7 g/t
- highest tier includes 20 projects with CE grades ranging from .78% to 1.7% or SE grades ranging from 66.1 g/t to 144.8 g/t
To facilitate my analysis I assumed that all the projects have the same category of resources. In other words, I did not differentiate between resources or reserves when calculating the amount of contained metals or grade equivalents. A project with a 100 million ton inferred resource was treated the same as a project with with a 100 million ton proven & probable reserve. The investor analyzing specific projects to make a decision on a company would definitely want to give a higher weighting to reserves over resources and measured & indicated resources over inferred resources.
The Lowest Tier
(.21% to .45% CE grades or 18 g/t to 38.7 g/t SE grades)
All but one of the lowest tier mines is an open pit (Taseko’s Florence mine in Arizona is a unique in-situ copper recovery [ISCR] project) because any other method at this grade level is simply uneconomic. Every single mine but one in this tier holds a resource of at least 100 million tons. The outlier here is Imperial Metals’ Huckleberry Mine and its operation was suspended in 2016. To be economic at this grade there is no choice but to be a large, open pit operation that can benefit from economies of scale. Two-thirds of these mines have a clearly defined resource (i.e., not including inferred) of at least 300 million tons.
The Middle Tier
(.46% to .62% CE grades or 39 g/t to 53 g/t SE grades)
As we move into the middle tier there are a few mines that also have an underground operation (typically block cave) planned for later in their development. There is only one producing mine in this category that holds a clearly defined resource of less than 100 million tons. This is is Imperial Metals’ Mount Polley mine in Canada and, not surprisingly, it has the highest cash costs of any producing mine in the database. Three quarters of these mines have a clearly defined resource of at least 300 million tons. There are two sub-300 million ton projects that have somewhat attractive IRR metrics: the 183 million ton Halilaga mine in Turkey, owned by Teck Resources & Liberty Gold, has an estimated after tax IRR of 43% and the 134 million ton Kwanika mine in British Columbia, owned by Serengeti Resources, has an after tax IRR of 21.1%. Both of these mines have upfront capital costs of about $350 million, which at the lower end of the database, and both of these mines have CE grades of about
.60% which is toward the high end of the middle tier. Both of these projects are currently being considered for development. Notably, Halilaga is the only project in the lowest and middle tier that significantly breaches the ~25% IRR threshold. Digging deeper into the preliminary economic assessment (PEA), one can see that the processing of substantially higher grade material first and the lower operating expenses and taxes associated with operating in Turkey are significant factors that push the projected IRR higher.
The Highest Tier
(.78% to 1.7% CE grades or 66 g/t to 145 g/t SE grades)
Less than half of the projects in the highest tier hold a clearly defined resource exceeding 100 million tons. The largest two projects in this category are Oyu Tolgoi in Mongolia and Udokan in Southeastern Siberia. This fact confirms that higher grade projects of considerable scale are increasingly rare and the few that are available are to be found in the more remote regions of the world. Because the size of these highest tier projects drops off fast, it is just as difficult to find higher IRR projects as it is in the middle tier. There are only two development stage projects in this category with IRRs exceeding 25% (Udokan’s probably also does, but it is not publicly available.) These two are Golden Arrow and Silver Standard’s Chinchillas silver-lead-zinc project in Argentina and Minera Alamos’ Los Verdes copper-silver project in Mexico.
Los Verdes’ IRR of 46% is the highest in the database. Given that it is also the smallest mine in the database at only 7.7 million tons and grading a modest .64% copper, .12% molybdenum, .07% tungsten, and 5 g/t silver (1.04% CE / 88 g/t SE) it presents an interesting study for the keys to economic success. Los Verdes benefits from (1) being in a location with excellent infrastructure, (2) being an open pit operation, (3) having low upfront capital costs, and (4) being a polymetallic project. Chinchillas also possesses similar characteristics which helps place it as the 3rd highest IRR development project in the database.
A Key Observation
Almost irregardless of grade, if there is one attribute that I could encourage investors to focus on when assessing the merits of various lower grade projects it would be the initial capital cost. The projects that command a higher projected IRR almost invariably have lower upfront capital requirements. To demonstrate this fact, in Table 1 I listed some key projects that score more favorable IRR projections due to their lower upfront capital costs relative to their overall resource size. (Note: this is not an exact measure because some projects may have additional, lower confidence resources that I did not include.) One of these mines is producing and a few are under development, but the majority are still on the fence as decision makers are still determining whether or not they want to move forward with them. All of these projects are open pit mines (at least initially), except for Florence, and all primary copper projects:
Table 1: Mining Projects with Lower Initial CAPEX to Resource Size
These 10 projects have initial capital expenditures (CAPEX) to resource size ratios ranging from .6 to 3.2 (King-King shows up here at 3.3, however, it is actually lower because the mine plan uses a larger resource size). Note that THEMAC Resources’ Copper Flat mine is the project with the highest inital CAPEX to resource size and also the project with the lowest projected IRR of the group. Overall, there is a general trend that for a lower grade project to achieve an IRR exceeding 20% it needs to have an inital CAPEX to resource size ratio below 3. It is interesting that Caravel Minerals’ Calingiri prjoect has a CE grade of only .34%, yet presents an estimated IRR of 25% mostly due to its lower intial CAPEX requirements.
Now let us have a look at 10 projects in Table 2 with higher initial CAPEX to resource requirements.
Table 2: Mining Projects with Higher Initial CAPEX to Resource Size
These 10 projects have initial CAPEX to resource size ratios ranging from 3.2 to 13.4. Here we see the necessity for projects with very high initial CAPEX to resource ratios to have substantially higher grades to produce a respectable IRR. For example, being a very small copper deposit, Copper North’s Carmacks project has a very high initial CAPEX to resource size ratio, yet is able to generate an estimated IRR of 19% because its CE grade is 1.3%.
Unlike the projects in Table 1, this list in Table 2 includes two silver-lead-zinc projects (Pitarrilla and Corani) and one silver-gold project (La Preciosa). Pitarrilla has the second highest CE grade (140 g/t SE grade) in the entire database, yet still has an estimated IRR of only 8%. Of these three primary silver projects, Bear Creek’s Corani mine poses the best possible IRR and, not surprisingly, it has the lowest inital CAPEX to resource ratio of the three.
Overall, Table 2 shows us that a project with an initial CAPEX to resource size ratio exceeding 3 will most likely have an estimated IRR In the 8% to 19% range, depending upon other factors.
Here is a list of the most important takeaways I derived from this analysis of lower grade mining projects:
- The lowest tier projects have to be open pittable and they have to contain proven & probable reserves of at least 100 million tons to work.
- For the lowest tier projects to be somewhat attractive economically—call it an estimated IRR of 25% or more—they will likely need an initial CAPEX requirement of no more than two times the size of the resource.
- Forget about mining anything low grade underground. There is not one underground project in the entire database that is attractive economically.
- When examining economic assessments for mine plans, focus on the intial CAPEX requirements. For a lower grade project to achieve an IRR exceeding 20% it needs to have an inital CAPEX to resource size ratio below 3.
- Good sized projects that can achieve IRRs exceeding 30% in decent jurisdictions will likely be snatched up by intermediate or major producers. An example of this is Chinchillas. With an initial CAPEX to resource ratio of 1.6 and a projected IRR of 29%, Silver Standard moved to form a joint venture with Golden Arrow to develop the project.
Questions or comments about this analysis? Want to know if a particular project is in the database or where it would fall in if it was? Leave your comment below and let’s start a discussion.
Joshua Hall, ChFC
The True Vine Letter is a publication of True Vine Investments, the investment advisory business of Joshua S. Hall, ChFC, and a Registered Investment Advisor in the U.S.A. The information presented is for educational purposes only and should not be regarded as specific financial or investment advice nor a recommendation to buy or sell securities or other investments. It does not have regard to the investment objectives, financial situation, and the particular needs of any person who may read this Letter. True Vine Investments will not be held responsible for the independent financial or investment actions taken by readers. All data presented by the author is regarded as factual, however, its accuracy is not guaranteed. Investors are encouraged to conduct their own comprehensive evaluation of financial strategies or specific investments and consult a professional before making any decisions.
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