Mining: what companies are actually saying

#1- Our gold production is going to go up over the next few years

Translation:  We are going to waste money on dumb projects and we still won’t be able to increase production.

The conventional wisdom is that miners have to re-invest their capital to maintain or increase production.  This is idiotic.  If you will get poor returns on new mines, then don’t build themThere is no rule in capitalism that says that you have to throw away money.

What happened in the gold industry is that the seniors chased dumb projects and didn’t make as much money as they should have in a bull market.  And because the economics of the new mines were bad, they didn’t even manage to increase ounces produced per share.  In hindsight, gold miners should have returned capital to shareholders and let production drop instead of chasing dumb projects.

#2- We have initiatives underway that will decrease production costs

Translation:  We hope that you are dumb enough to believe us.  Production costs will likely go up slowly.

You always try to mine the most economic ore first.  This means that the mine’s economics will slowly get worse over time.  If the mine engineers did their jobs correctly, then production costs will slowly go up over time (except in the startup phase when they are figuring everything out).

There are only a few cases where production costs will go down:

  • They can’t mine the most economic ore first.  Maybe they have to mine lower-grade ore first to get to the highest grade ore.
  • Mine expansion.  Significantly higher production will bring about small economies of scale.
  • (Unlikely) The company hired the worst mine engineers in the world.  By fixing their mistakes, production costs will go down.  It is extremely rare for mine engineers to make mistakes that can be easily fixed.

There may be a legitimate mine engineering reason why costs should go down.  Otherwise, such a drop is unlikely.

As far as having initiatives to improve a mine’s economics, every miner does this.  The mine engineers will usually keep themselves busy and try to find ways to tweak production to bring costs down.  These projects go on all the time.  But the big picture remains the same.  A mine might take 1-3 years for production to ramp.  Afterwards, they will have figured out most things and the mine’s economics will slowly decline.  Over the life of the mine, the nature of the ore might change so the engineers will keep themselves busy in optimizing the metallurgy for the different ore.  These projects are usually part of the normal operation of a mine.

#3a- We have X million ounces of gold!!!  OMG!
#3b- Our stock is trading at an unbelievably low price of $20 for every ounce of gold!  OMG!

Translation:  We have lots of uneconomic gold that may not even exist.

The nature of mineral exploration is that very few companies will actually find an economic deposit.  Yet 95%+ of exploration companies will try to deceive you into thinking that they have or will find an economic deposit.  So the press releases will never add up.  Or to look at it from a different angle, go add up all the gold that these juniors have.  You will end up with some ridiculous number.  It seems like almost every gold junior has at least 1 million ounces of gold in the ground nowadays.  They are probably lying but won’t go to jail for fraud.

#4 – We have excellent relations with a particular government or First Nations group

Translation:  Political risk is high.  We don’t have excellent relations with all levels of government and all the First Nations groups that are affected.

If political risk for the deposit is low, a junior will likely say something to the effect of “we are in a politically stable jurisdiction”.  If that is true, then they probably won’t talk about politics much because there is no need.  If there is political risk, then they will likely put out promotional press releases that try to put a positive spin on things.

In practice, just do your own research as to the political risks of a potential mine.  You obviously can’t trust the mining company when it comes to those risks.

#5 – We will generate shareholder value

Translation:  We are trying to say the things you want to hear.

#6 – We have announced a share repurchase program

Translation:  We probably aren’t going to buy back shares.

Juniors rarely, rarely buy back shares.  Even if they are truly undervalued, it isn’t a good idea for them to buy back shares.  In most cases, juniors are undercapitalized and need more capital to move their deposit forward into production.

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