Turning Rocks Into Money

Transcription

1 Turning Rocks Into Money Academy Finance, Abu Dhabi February

2 Key Factors to Understanding and Profiting in the Junior Exploration Sector Today 1. The Big Picture: Current State of the Mining and Metals Market 2. Production vs. Discovery 3. Exploration and Discovery, Risk and Reward 4. Odds of Success 5. Geology and Junior Explorers 6. The Discovery Price Curve 7. Due Diligence List 8. Some Ideas

3 How Much are we mining? One a Year--Bingham Copper Mine- 19 mil tonnes Development capex >$5 billion Production to mining timeline---10 years plus Permitting and social hurdles---insurmountable

4 16 Aging Copper Mines Account for 41% of Production Most of these deposits are over 20 years old We need to duplicate these 16 over next decade How? Capex over $100 billion Break even cost $2.50/lb

5 Copper Supply Gap Current mine production is ~19 million tonnes Estimated copper demand 2016 is ~26 million tonnes 50% of 7 million tonne gap met by scrap, expansion, in construction Scrap, expansion, in construction Is this 3.5Mt feasible?

6 Current Mine Production vs Demand Top 4 copper producers ~3Mt Top 10 discovered 1860 to 1996

7 One a Year Carlin Trend, ~83 million ounces A dozen major gold deposits discovered over 35 years Timeline discovery to production--- Capex ~$30 billion Gold Quarry

8 Global Gold Production Trend Points out Problems Global gold production declined from 2000 to ~83mil oz 2010 Important trends: 1) Declining 1 st world 2) Slowing rest of world Recent increase due to mining 20% lower grade

9 Metal Supply, as a Function of Time, can no Longer keep up with Metal Demand, as a Function of Time! Infrastructure, Energy and Financial limitations 0.9% projected copper production growth rate 4% projected demand growth: 8,000 tonnes/yr Rio Tinto 2011 production off 23%, Freeport off ~ 10% higher costs Planned Development vs. Capacity

10 Announced Iron Ore Production vs. Completed Not Happening! 2008 to Mt vs 200Mt 2011 to Mt vs 50Mt

11 Cost Escalation and Development Capex Raw Materials, Energy and Skilled Labor Limitations $435 billion capex for Australian Resource Development $300 billion capex for Project Development for top 40 Mining Companies 9,000 Engineering and 1,900 Geology job adds in Australia

12 Majors Gold Miners Need High Margin Deposits and have the Cash to Pay for them Free cash flow accumulating in top miners but Cash costs risen from $340/oz to $620/oz in five years All in costs at $1,200/oz Miners need to own low cost mines---so find them!

13 Good News for Junior Discoveries Major gold producer s only solution is new discoveries They are making good money and valued at a premium They can afford and will pay a premium for quality deposits

14 Gold Production vs Discoveries vs Expenditure Over $5 billion annual expenditure Discoveries falling, production rising = Gold Gap Legitimate discoveries extremely valuable That is the prize! Expenditure Current Production= One Carlin! The Gap Discoveries

15 Very Low Odds of Discovery Success Why? ~10,000 Properties being explored today 1:1,000--Probablility of finding economic gold deposit 1:10,000--Probability of finding gold deposit >4 million ounces 2% of deposits > 500,000oz 62% of deposits < 100,000 oz

16 Every Geologic System Leaves a Record High Sulfidation Gold System Poas Volcano Costa Rica Why is it so tough? Time and Evolution Alteration is Ubiquitous Elevated Geochem the Norm High Sulfidation Model

17 It s Tougher on the Ground than in the Office These are complex mineral systems Subduction Zone You have to know where you are---and aren t

18 The Junior Exploration Business-- No Barrier to Entry TSX-Venture Exchange All you need is a story and a Geo ~1,600 Canadian mining equities 2,110 financings in 2010, 1,619 Q3 140 IPO s in 2011, 185 in 2010 $5.3B in 2010, $5.1B Q3 25 international brokerage firms 80 Canadian brokerage firms Who is your exit strategy? President and CEO; Consolidated Moose Pasture Ltd.

19 Good Rocks Ore Geology 101 (There are only 2 rocks you need to know about!) Bad Rocks Waste

20 Relative Value Know Where You Are on this Graph 95% of stocks that start up this slope end up with nothing of importance EXPLORATION Interpreting News Releases BUY High Risk High Potential Value SELL Speculation Sold to Miner Speculators Leave Orphan Period MINING Full Value Institutional Investment ~4 to 5 years Concept Pre-discovery Discovery Feasibility Development Startup Deplete Time

21 Wealth Creation Thru Discovery Aurelian Resources (TSX: T.ARU) Virginia Gold Mines Inc (TSX: T.VGQ) $10 1,000% 1,500% $1 MAG Silver Corp (TSX: T.MAG) Canplats Resources Corporation (TSX-V : V.CPQ) $16 $5.00 $4.80 1,700% 1,600% $2.40 $1 $0.30 $3.50

22 2011 Sector Underperformance Performance Gold is up ~18% Large Producer Index about flat Junior Miner Index down ~ 30% (50% below gold performance) Why? Risk (global and metal), dumb money, ETF s, share dilution, disappointing financials, socio-political, mining is a difficult business

23 Risk versus Reward Junior Miner Business Models 1. Drilling for Discovery. Most common and highest risk. Advantage is 100% of upside if successful. Disadvantage is 100% downside in a business where failure is the norm. Critical to know property potential and management. 2. Prospect Generator. Uncommon model, lower risk. Uses partner s money to test high risk targets. Advantage is minimal dilution and leveraged technical power. Disadvantage is end up with lower % of deposit. 3. Hybrid Generator. Generally these companies have been successful prospect generators and have lasted long enough to make a discovery. Advantage is that competent connected management often with royalty payments of shares and sufficient cash (Virginia Mines, Altius Minerals, Mirasol Resources, Almaden Minerals)

24 Risk vs Reward Junior Miner Business Models 4. Early Stage Resource. Company has defined resource or enough holes to indicate a resource. Advantage is that as property progresses economic risks are reduced and risk averse investors move in. Disadvantage is can be very costly to reduce project risk (share dilution) and always the chance of identifying fatal flaw (most do have flaws). Critical to have a good handle on economics and select only highmargin deposits 5. Small Miner. Competent and proven mining group that have the skill set and financial connections to define and build a mine. Advantage is cash flow and profits that can be used to buy other deposits and grow company. Disadvantage is that small mines usually only make small money and they are always under capitalized.

25 Due Diligence Check List 1. Start-- Market Cap vs. Cash vs. Spend How long can they survive and what are you paying for that opportunity? 2. Management History Are they focused? Are they financially committed? Are they right for the job? 3. Deposit Type What is the deposit type they are looking for or developing? What are its tonnes, grade, metallurgical and cost characteristics?

26 Due Diligence Check List 4. Target Size Is the prize worth the risk? Is the Exploration/development strategy realistic? Is the exploration/development/financing plan reasonable? 5. Financing and Dilution Do they have a clear idea of costs vs. goals? Will you be diluted out of a success? 6. Who Cares? Get it right from the start Have an exit strategy

27 Lydian International (LYD.TSX) Updated Resource of 3.2 million total ounces grading ~0.95 g/t Assume 2.5 million recoverable and PEA economics Amulsar Armenia Oxide ore w/ good recovery (>80%) Low strip ratio Robust economics* ~$36/t recovered rock value $1,500 gold) ~$13/t production cost (~$500/oz) ~100 mil tonnes Capex ~$240 mil ~Net margin $1,500/oz ~After Tax NPV5% > $1 billion Current Market Cap ~$270 million *my # s

28 Eurasian Minerals (EMX.TSX-V. EMXX-AMEX --$2.50) 51 mil Shares Out/69 fully diluted current Post merger: 69 mil shares out/86 mil fully diluted Market Cap ~$128 million/ $172 million (post merger) ~$35 million cash Leeville gold royalty stream ~$6.5 million annually (paid 7X) 2-Year EMX

29 Intelligent Exploration Business Strategy Prospect Generator Model 73% of exploration expenditures recovered Global high potential property package Haiti, Scandinavia, Turkey, US, Australia ~$20 mil in partner expenditures Royalty properties Koonenberry, Australia 100km trend Gold in outcrop Never drilled District scale potential

30 Reports and Video at ExplorationInsights.com Turning Rocks Into Money