Global Resources Investing Academy & Finance

Transcription

1 Global Resources Investing Academy & Finance Hong Kong - October 15, 2012 Singapore - October 19, 2012 Presented by John Kaiser Geopolitical Implications for Metal Trends

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3 Ways to invest in the Resource Sector Future Metal Price Future Metal Supply Physical Metal, Bullion Producers Futures & Options Near-Producers Exchange Traded Funds Discovery Exploration Royalty Streams Security of Supply

4 Future Price Physical Metal & Bullion Exchange Traded Funds Futures & Options Royalty Streams Pros Possession Security No taxation until sold Privacy No storage cost Paper to physical price matching mechanisms Liquidity Can be held in retirement accounts Leverage Hedging Liquidity Strategic early purchase Pays even when mine unprofitable Dividends Cons Storage Cost Portability Liquidity No Yield Erosion over time due to management fees Cannot take delivery Uncertainty that ETF rules are being followed. Double-edged sword of leverage Volatility Expiry Movement limits No control over mine Geopolitical risk Managerial incompetence risk

5 Mine Exploration & Development Cycle Stage Exploration Cycle Stage Objective Time Required 1 Grassroots Conceptual, land acquisition 1 year 2 Target Generation & Drilling Filtering for drill targets 1-2 years 3 Discovery Delineation Find the limits of a discovery, produce initial resource estimate 1-2 years 4 Infill Drilling Upgrade resource from inferred category 1-2 years 5 Preliminary Economic Assessment (PEA) & Metallurgy Evaluating recoveries and optimal processing method, initial economic analysis with 30%-35% error margin 1 year 6 Prefeasibility (PFS) Produce a mineable reserve, detailed engineering for mining plan and associated costs, 15-20% error margin 1-2 years 7 Permitting, Marketing & Feasibility (FS) Mine approval, negotiate offtake, social license, production decision, 8-12% error margin 1-3 years 8 Construction Financing & building the mine 1-3 years 9 Production Mining cash flow years

6 Future Supply Speculation Types Resource Feasibility speculation on the leveraged impact higher metal prices have on the economics of existing deposits the failures of past exploration waves, focused on advanced part of exploration cycle where cost discovery is key, cash flow based valuation linked to metal price trend & volatility, requires monitoring of macroeconomic & geopolitical trends, goal is buyout, preferred by institutional investors Discovery Exploration speculation about grade & size, focused on early part of exploration cycle before a resource is established, valuation immune to macroeconomic factors & commodity price trends, requires heavy use of imagination, thrives on rumours, offers entertainment, most fail, winners get bought out, preferred by retail investors Security of Supply (Critical Metals) speculation on metal price trends due to disruption of supply chain by geopolitical factors, or disruptive demand growth due to innovation and policy trends, focused on advanced part of exploration cycle where processing is key, small, complex, often opaque metal markets requiring end user offtake agreements, liked by concept momentum investors

7 3 Negative Factors weighing on the market?? China Slowdown leadership transition, falling exports Eurozone possible collapse, austerity fallout US election political gridlock and stuttering economy is key to Republican victory Equities have anticipated a commodities price crash that has not yet happened.

8 Super Cycle Response QE1 & QE2 Austerity

9 ? Gold & Silver plagued by bubble fears Exponential charts do stop rising in the real world, but reversion to a mean is not always the outcome. Too much linkage between gold price and apocalyptic outcomes. Impact of new supply?? Equities are anticipating a precious metals price crash that has not yet happened.

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11 Inverse Correlation between Copper & Gold Trends not present due to the implications of the Super Cycle

12 Despite slowing growth rate China is projected to capture ever larger share of global GDP though this trend now hinges on the near term future of the world s biggest economy, the USA.

13 The Fading Chinese Anomaly Hybrid central command economy with outsourced production now grappling with power ambitions of new economic elite (ie Bo Xilai) as well as local political fiefdoms. Cheap Labor urbanization of 1 billion rural Chinese unleashed by the end of orthodox communism has run its course despite the inland march of factories. There is also the looming demographic problem of China s one-child policy. Urgent need to evolve a more nuanced consumer economy as mature economies such as the USA which offshored production now reshore manufacturing through intensive automation, a politically dangerous route for labor intensive manufacturing in China to adopt. Limited Health & Safety for Workers the period of sacrifice is ending as workers demand better conditions (ie Foxconn) which implies higher costs. Cheating by cost dumpers like Apple which hides its dirty inputs coming under pubic scrutiny.

14 Weak environmental emission controls the crackdown on downstream cost dumping has begun as an emerging middle class shifts the focus from quantity of life to quality of life No Unions to secure medical or pension benefits a growing problem as the difference between haves and have nots becomes more visible. US Dollar Peg: the devil s bargain of maintaining an undervalued renminbi by bankrolling the US trade deficit through the accumulation of US treasury debt China s dependency on exports and the resulting trade imbalances are not sustainable FDI: foreign direct investment and technology transfer wisdom of doing so is being questioned as western companies encounter an uneven playing field in domestic Chinese markets, worsened by growing trade protectionism and nationalistic hostilities (ie Japan) Cyber espionage and intellectual property theft out of control Hyper-surveillance and censorship system Beijing cannot win this battle against its online citizens without pulling the plug on the Internet

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16 Europe & China Need a Recovering US Economy Is the US economy about to break out?

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20 The dampening effect of the reverse wealth effect is ending as banks expand mortgage origination amid low rates and the FED buys $40 billion in mortgage securities each month.

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22 After 5 years of Deleveraging is a Credit Expansion Imminent?

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27 America s Key Problem: the Boomer Bulge Today

28 America s Key Problem: the Boomer Bulge Tomorrow 45% of working population will be minorities

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33 Military Spending outside of USA and China is inconsequential for global power politics.

34 Note flat US oil consumption since 1980 while China grows.

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36 Will the Arab Spring boost the flow of crude oil for the whole world, spawn Islamic agenda driven supply allocation strategies, or provide China with easier access once the petrodollar recycling dictators are gone? Can the global economy sustain an oil shock arising from a decision to neutralize Iran s nuclear ambitions? Does the Shale Oil & Gas Revolution allow a Pivot away from the Middle East?

37 High oil prices will allow US to grow its shale oil production while higher fuel efficiency standards and a shift to hybrid-electric cars keep consumption flat, opening the possibility of US oil self-sufficiency.

38 China s rare earth monopoly will disappear.

39 Why the American Military Pivot to Asia?

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41 Is the gold price a function of global wealth?

42 Or should we look at the price of gold and silver as an anxiety index about the future balance of economic and military power?

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53 Super Cycle Cu & Au Bull Cu Bull Au Bear Cu Bear Au Bull Global Depression

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57 Post-Globalization Economic Zone Fragmentation EurAsia UpForGrabs NoSoMerica AustralAsia

58 Will a Crash or Inflection follow the 2012 Slump as we head into 2013?

59 Kaiser Services Kaiser Research Online Membership US $250 per quarter or $800 per year One time one month KRO Trial at $100 New: KRO Search Engine

60 Global Resources Investing Academy & Finance Hong Kong - October 15, 2012 Singapore - October 19, 2012 Presented by John Kaiser Rational Speculation for Resource Exploration and Development

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63 How do you value a junior like this which has a prefeasibility study stage project as well as bluesky drill targets?

64 Rational Speculation Model A formal system for valuing a spec stock Three Steps Outcome Analysis what is the dream target and the key assumptions behind it? Probability Analysis where in the exploration cycle is the project and what is it worth now? Risk-Reward Analysis is it a good, fair, or poor bet?

65 Mine Supply Speculation focuses on Future Cash Flow from a Depleting Asset: A Mine is an Annuity Discounted Cash Flow Model: What is an orebody worth? m n=1 Annual Cash Flow (1 + Discount Rate) n Less Capital Cost n = year of cash m = mine life (years of mining)

66 Outcome Analysis Step 1 What are the key inputs for mining cash flow? Deposit Parameters Mine Parameters Tax Parameters Market Price Parameters Revenue Inputs Tonnage - deposit Grade - deposit Recovery - mine Production Rate - mine Metal Price - market Cost Inputs Operating Cost - mine Taxes - jurisdiction Capital Cost - mine Annual Gross Revenue less Operating Costs = Operating Profit less Taxes = After Tax Cash Flow

67 Outcome Analysis Step 1 The footprint: how big is the potential outcome? do you have targets or just the right geology? what all defines your target: surface geology, geochemical anomaly, geophysical anomaly, drill defined mineralized zones, or structural geology? what are the tonnage implications of your targets? what are the grade implications?

68 Outcome Analysis Step 1 What could the outcome look like? Orebody Arithmetic Figure out geometry of the target or zone simplify into rectangular blocks Calculate rock volume for each zone (in metres): Volume of rock = length x width x thickness Calculate tonnage = volume x specific gravity (2.6 for ordinary rock, 4.5 for massive sulphides) Assign grade for recoverable metals (g/t or %) Calculate rock value = metal price x grade Deposit s gross value = tonnage x rock value Tonnage Potential: Length x Width x Depth x Specific Gravity

69 Outcome Analysis Step 1 Visualizing the Fundamentals Example: Tepal Project of Geologix

70 Outcome Analysis Step 1 Tepal North-South Resource Feasibility Determination

71 Super Cycle Cu & Au Bull Cu Bull Au Bear Cu Bear Au Bull Global Depression

72 Outcome Analysis Step 1 4 Macroeconomic Dictated Outcomes for North-South Zone at Tepal Copper Bull Gold Bull twinned relationship due to unusual Super Cycle conditions where base and precious metal prices are strong - $415 million after tax NPV or $2.50 per share if gold and copper stay at current spot prices. Copper Bull Gold Bear traditional inverse relationship where a strong global economy generates demand for copper while fear driven demand for gold diminishes - $238 million after tax NPV or $1.43 per share at $3.75 copper and $1,200 gold. Copper Bear Gold Bull traditional inverse relationship where sagging economic demand collides with a time lagged supply glut to create weak copper prices while financial and geopolitical stresses contributing to the weak economy spur demand for gold - $168 million after tax NPV of $1.01 per share at $2 copper and $1,757 gold. Copper Bear Gold Bear catastrophic situation where a global depression kills both gold and base metal demand due to deflationary pressures and liquidity problems negative $40 million after tax NPV at $2 copper and $1,200 gold.

73 Outcome Analysis Step 1 Exploration Targets at Tepal

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76 Outcome Analysis Step 1 4 Outcomes for Target #1 dicated by grade and macroeconomic factors High Grade Copper Bull billion tonne discovery grades 1% copper with an after tax NPV of $11.6 billion or $70 per share at $3.75 copper. Medium Grade Copper Bull billion tonne discovery grades 0.5% copper with an after tax NPV of $4.3 billion or $26 per share at $3.75 copper. High Grade Copper Bear billion tonne discovery grades 1% copper with an after tax NPV of $4.4 billion or $26.46 per share at $2.00 copper Medium Grade Copper Bear billion tonne discovery grades 0.5% copper with an after tax NPV of $686 million or $4.13 per share at $2.00 copper. Note that even if the lesser medium grade outcome is delivered and copper drops to $2/lb the potential gain for Geologix from $0.23 is 1,700%!

77 Risk-Reward Analysis Step 3 For simplicity sake let s assume 3 different scale outcomes: (Potential Outcome Value) $100 million little league $500 million minor league $2 billion major league

78 Probability Analysis Step 2 Probability Analysis Questions What exploration stage is the project at? What are the intrinsic odds of delivering the dream target as a mine? Although we have visualized the value of the potential outcome based on deposit, mine, cost and market price parameters, what value should we assign to a visualization that has not yet been actualized?

79 Mine Exploration & Development Cycle Stage Exploration Cycle Stage Objective Time Required 1 Grassroots Conceptual, land acquisition 1 year 2 Target Generation & Drilling Filtering for drill targets 1-2 years 3 Discovery Delineation Defining the limits of a discovery & producing initial resource estimate 4 Infill Drilling Upgrading resource estimate from inferred category 1-2 years 1-2 years 5 Preliminary Economic Assessment (PEA) & Metallurgy Evaluating recoveries and optimal processing method, initial economic analysis with 30%-35% error margin 1 year 6 Prefeasibility (PFS) Produce a mineable reserve, detailed engineering for mining plan and associated costs, 15-20% error margin 1-2 years 7 Permitting, Marketing & Feasibility (FS) Securing approval, negotiate offtake, production decision, 8-12% error margin 1-3 years 8 Construction Building the mine 1-3 years 9 Production Mining cash flow years

80 Probability Analysis Step 2 The Exploration Cycle is a Risk Reduction and Outcome Visualization Process Exploration Cycle Stages Probability Ladder Chance Leverage Odds 1 Grassroots 0.5-1% :1 2 Target Drilling 1-2.5% :1 3 Delineation Drilling 2.5-5% :1 4 In-fill Drilling 5-10% :1 5 Bulk Sample & Metallurgy 10-25% :1 6 Prefeasibility 25-50% :1 7 Permitting-Feasibility 50-75% :1 8 Construction % :1 9 Production 100% What is the probability of making it from the current stage to a mine?

81 Risk-Reward Analysis Step 3 Risk-Reward Analysis Questions What is your fully diluted? What is your stock price? What is your net project interest? What does the market say the project is worth right now (the Implied Project Value )? How does the implied project value compare to the ultimate project value estimated in step one? Does the current pricing offer good, fair or poor speculative value?

82 Risk-Reward Analysis Step 3 How is the market pricing a project? Geologix s Tepal Calculating Implied Project Value = Fully Diluted Shares X Market Price Net Project Interest = (166,200,000 x $0.23) / 1.0 = $38,226,000

83 Note logarithmic value scale! blank $2 billion outcome $500 million outcome Tepal Target #1 Major League Tepal North-South Minor League In both cases the implied project value of $38 million is the same. Which offers good, fair or poor speculative value? blank

84 Risk-Reward Analysis Step 3 Definition of Speculative Value (borrowed from gambling logic) The degree that the return achieved through actualization of an anticipated but uncertain outcome matches or deviates from the intrinsic odds of achieving that outcome. Fair Bet 10:1 odds, pays 10:1 Poor Bet 10:1 odds, pays 5:1 Good Bet 5:1 odds, pays 10:1

85 Risk-Reward Analysis Step 3 Rational Speculation Model - Probability Ladder for Metal Projects Exploration Cycle Stages Success Probability Dream Target Fair Value Channels ($ Millions) Chance Leverage $100 $500 $2,000 1 Grassroots 0.5-1% <$1 $2.5-5 $ Target Drilling 1-2.5% $1-2.5 $ $ Discovery Delineation 2.5-5% $2.5-5 $ $ Infill Drilling 5-10% $5-10 $25-50 $ Metallurgy 10-25% 4-10 $10-25 $ $ Prefeasibility 25-50% 2-4 $25-50 $ $500-1,000 7 Permitting, Marketing & Feasibility 50-75% $50-75 $ $1,000-1,500 8 Construction % 1 $ $ $1,500-2,000 9 Production 100% $100 $500 $2,000 Note: the fair value range in each exploration stage row for each dream target column is calculated by multiplying the dream target value by the success chance. ie stage 4 dream target $500: 0.05 x $500 = $25, 0.1 x $500 = $50

86 blank Fair Speculative Value for $2 billion outcome, poor value for $500 million outcome Good Speculative Value for $500 million outcome, fair value for $100 million outcome The speculative value depends on the stage of the project, the value implied by the market, and the visualized outcome. blank

87 blank Tepal Target #1 Major League Asia drives the Future Tepal N-S - Minor League China is a Mirage Tepal N-S Little League Discovery Speculation Cash Flow Speculation blank

88 Risk-Reward Analysis Step 3 What would Geologix s stock price be if it achieved the various dream targets without suffering significant additional stock dilution? $100 million = $0.60 $500 million = $2.41 $2 billion = $12.03

89 Risk-Reward Analysis Step 3 When key exploration results are released the market asks 3 questions: What do the results do to the scale and value of the dream target? Is the play ready to move to the next exploration cycle stage and its lower failure odds? What is the new fair speculative value of the project?

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91 Outcome Analysis Questions Visualizing the Fundamentals What deposit style is it? Can you name a deposit similar to your target? What is the analogue worth? What is the physical footprint of your target? How many tonnes does that represent? What grade are you looking for? Are there metallurgical issues that affect recoveries or costs? What are your long term metal price assumptions? What is the rock value at these grades and prices? What scale of mine output would be appropriate for this deposit? What CapEx and OpEx parameters apply to such a mine? What is the tax regime in the location where the deposit resides? Are there infrastructure issues such as transportation, water supply and power? What is such a deposit worth in Discounted Cash Flow Model terms?

92 More Outcome Analysis Questions Who operates the project, for how long, and what is their agenda if it is not you? When do you vest and what ownership related deadlines apply? How are you funding the exploration cycle? What is the timeline for your exploration cycle? What is the size of the market for your metals? Do your target metals require marketing or offtake arrangements? How far downstream will you process non-commodity metals? Are there any title issues? Are there any geopolitical risk issues? Are there any local or aboriginal issues? Are there environmental risk issues? Are there any specific permitting obstacles? What is being done about any of these obstacles?

93 Kaiser Services Kaiser Research Online Membership US $250 per quarter or $800 per year One time one month KRO Trial at $100 New: KRO Search Engine