While I haven’t spent the time to piece together all of the data points, it is clear that high-risk mineral exploration stocks have found very few profitable mines since 2000. The only reason why junior exploration stocks haven’t been a complete disaster is because senior miners have thrown away money by acquiring uneconomic projects. The majority of “value creation” in high-risk greenfield exploration can be attributed to poor investment decisions from senior miners rather than the meagre cash flows from mines like Arista, Bloom Lake, and Legacy (potash).
Successes and failures
There have only been a few deposits in stable jurisdictions that have turned into profitable mines (that I am aware of). Here are some mines that were first discovered before 2000:
- Voisey’s Bay / Diamond Fields Resources. First assay results from the deposit was in 1994. The ultimate takeover bid for Diamond Fields Resources was announced on March 26, 1996. First production in 2005. The value of this deposit was recognized over 22 years ago, so I would not consider it part of the commodities boom starting in 2000.
- Ekati diamond mine. First production in 1998.
I suspect that Voisey’s Bay accounts for almost all of the industry’s value creation in its pre-2000 cohort. The stock was run by a serial stock promoter, environmental villain, and convicted criminal (Robert Friedland went to jail over LSD trafficking). The exploration plan was arguably dubious: they were looking for diamonds in a region not known to have any diamond mines. Currently, there are still no diamond mines in the region. Nonetheless, they got lucky and stumbled across a multi-billion dollar nickel deposit. To have made money in junior mining, you would have needed to invest in a company with bad management and a bad exploration plan.
Here are some mines discovered after 2000:
- ? Solomon Hub + Chichester Hub / Fortescue. I don’t know too much about this Australian iron ore miner. Management is overly aggressive in expanding the company. However, including Fortescue in the post-2000 cohort would certainly make the dismal cohort look a lot better.
- Arista / Gold Resource Corp (GORO). First production in 2011. The surge in silver prices in 2011 was a huge boon for the company.
- Bloom Lake (first developed by Consolidated Thompson, which was later bought out by Cliffs). Initial ore sales were in May 2010. Production halted in January 2015.
- Kupol / Kinross Gold (which merged with Bema Gold). In H1 2018, Kinross reported that the Russian mine had a production cost of sales (per equivalent ounce sold) of $560, lower than the company’s average of $709. This indicates that this is a higher-margin mine in Kinross’ portfolio. Kupol produced its first gold ore in 2008.
- ??? Legacy [potash] (now called the Bethune project) / K+S (which acquired Potash One. First production was in June 2017. I did not figure out the economics of this mine.
- ??? Rainy River / New Gold (which acquired Rainy River Resources). First gold pour on October 5, 2017. So far it looks like this mine has extremely poor economics, with the company currently guiding AISC well above the gold spot price.
- ??? Aurora gold mine / Guyana Goldfields. First NI 43-101 technical report in 2005. First gold pour on August 4, 2015. I suspect that this mine will not pay off its capex in its lifetime, although it has been cash flow positive so far.
- ??? Borden Gold / Goldcorp (which acquired Probe Mines in 2015). Economics unclear because Goldcorp hasn’t built the mine yet (commercial production expected in the second half of 2019).
The post-2000 cohort has very little to show despite all the money spent on high-risk greenfield mineral exploration. Bloom Lake’s economics fell well short of its projected numbers (projected US$24.18/tonne cash costs; actual costs in the ballpark of $85-95/ton). When the surge in iron ore prices ended, the Bloom Lake mine shut down only after 5 years of operations. I’d have to say that the discoveries since 2000 have been extremely disappointing.
Here is a list of some major projects that didn’t pan out:
- Oyu Tolgoi / Turqoise Hill. I really don’t know why this company’s market cap is CAD$6.5B (working capital is almost $3B). This looks like a cash flow negative miner; Turquoise Hill’s annual report acknowledges that free cash flow has been negative but projects positive FCF. In my opinion, Robert Friedland has struck again. Perhaps he will undo all of Diamond Field Resources’ value creation.
- Eagle’s Nest / Noront. While Noront was once a multi-billion dollar stock, it looks unlikely that this deposit will be exploited anytime soon because the location is extremely remote. Infrastructure costs would render a mine uneconomic.
- Black Thor / KWG Resources + Cliffs. The deposit is somewhat close to Eagle’s Nest, so the remoteness of this deposit is what makes the deposit uneconomic.
- Haile / OceanaGold (which acquired Romarco). While it may be premature to write this mine off, I doubt that this deposit will be economic given that it was never built when gold prices were at all-time highs.
- La Arena / Tahoe Resources (which acquired Rio Alto Mining for $1.12B). I haven’t done a lot of research but this mine’s economics doesn’t look like it will pan out (despite positive cash flow initially).
- RB Energy / Sirocco (which acquired Canada Lithium). RB Energy bought Canada Lithium and went bankrupt. I’ve written about Canada Lithium previously- see “Canada Lithium (CLQ.TO): Why I’d avoid this stock” and tagged posts.
- White Gold / White Gold Corp (which acquired control of the property from Kinross Gold, which acquired Ryan Gold). If Kinross Gold thought that this deposit was economic, they would have built a mine after acquiring Ryan Gold.
- Bruce Channel / Goldcorp (which acquired Gold Eagle). The mine wasn’t built.
- ??? Valley of Kings / Pretium Resources. I’ve written about Pretium extensively on this blog. I don’t believe that this mine will recoup its capex.
- ??? Malartic / Yamana Gold + Agnico Eagle Mines (which acquired the property from Osisko). From what I remember, this mine had very marginal cash flows when Osisko was operating it.
- ??? Hardrock / Greenstone Gold Mines (which acquired the property from Premier Gold). Given that senior miners passed on financing a mine, I suspect that this deposit will be uneconomic.
- Any company that has done a streaming deal with Sandstorm Metals & Energy. If you have a real deposit, you won’t finance your company at credit card interest rates.
How I would handle mineral exploration
I would look for extensions of existing high-margin deposits (e.g. keep following a deposit and see how far it goes). This might sound glib because this exploration strategy is extremely obvious- it is clearly high-reward and low-risk. However, there is no economic force that will punish you for doing something that is obviously a good idea.
Stocks like Nutrien, Vale, BHP Biliton, Kumba Iron Ore, Rio Tinto, and Sociedad Quimica y Minera de Chile (NYSE:SQM) own high-margin deposits. They have accounted for much of the world’s new supply for the minerals that they produce. If you look at iron ore, the existing tier 1 mines have accounted for far more new production than Bloom Lake (which is currently closed because it is uneconomic). Arguably, high-margin mines have been the best “exploration” plays.
However, it’s unclear to me as to whether or not the stocks are good investments. Mining CEOs have a tendency to pursue crazy expansions such as Cliffs losing billions on Bloom Lake, Vale building Supermax ships that can’t dock in Chinese ports, and BHP’s Jansen project. Doing nothing, while it doesn’t impress clueless institutional shareholders, is often better than doing something. And that might be the best investment strategy when it comes to mining stocks: don’t buy any of them. Why bother with black boxes when you can buy companies and assets that you can actually perform due diligence on? It’s no surprise that the physical gold ETF GLD has outperformed the gold miner ETFs GDX and GDXJ.
*Disclosure: Long a very small amount of Northfield Capital, which owns a portfolio of mining stocks. Short PVG. I don’t have a short position in TRQ.TO (Turquoise Hill) or the company trying to restart Bloom Lake (Champion Iron Ore). No position in Altius Minerals.