This essay is an excerpt from my book, The Great Silver Bull.
I think it’s worth a refresher because, without getting overly technical, it’s important to understand the different stages resource companies go through. It also helps you identify the potential pitfalls of investing in a given company depending on its current stage.
So, here we go…
Chapter 43 – The Mining Life Cycle
It’s helpful for you to understand the basics of how silver is discovered and eventually mined. Silver investments at each stage come with their own risks and rewards.
There are five basic stages of a mining project.
As Australian Mining Consultants explain in simplified terms, we naturally start out with exploration to find silver. If there’s enough to make for a deposit that can be mined profitably, the next stage is to design and plan the mine.
The mining company then needs to raise funds and build the mine. Sometimes these steps are instead for a mine expansion. That might still require exploration to find enough additional silver, then plan for and expand the existing facilities to accommodate a higher level of production.
Next is production itself. This is normally the stage when the mining company starts to generate cash flow and ultimately becomes profitable. Most mines operate for at least 6-7 years, with many having expected mine lives up to 10-15 years, and often well beyond. Some of the richest mines enjoy continuous mining for 30 years, and a rare few have produced for over a century.
These five stages of a mining project tie in directly with a concept known as the “mining life cycle.” It’s also referred to as the “Lassonde Curve.” Pierre Lassonde is the mining legend who co-founded Franco-Nevada, the world’s first gold royalty company. Some three decades ago, he created this now well-known chart.
Source: Visual Capitalist
While there are countless variations, they all essentially plot the typical share price trajectory of a company that goes from concept and discovery to production and, ultimately, ore depletion.
Let’s look at each in more detail.
This is the highest risk, highest reward stage. It starts with prospecting. Explorers are out in the field, sometimes in very remote places, looking for rock outcrops or other signs of minerals.
Traditional approaches like taking grab or chip samples, digging trenches, and creating visual maps are still used. But recent technology has vastly expanded the available tools.
Exploration has evolved a whole lot in recent decades.
Back in 2000, mining entrepreneur Rob McEwen was CEO of Goldcorp. Frustrated by ongoing underperformance, McEwen made a bold move. Inspired by the open-source Linux computer operating system, McEwen decided to try crowdsourcing, and make all the geological data from Goldcorp’s Red Lake Gold Mine available online. The Goldcorp Challenge was born.
Many thought it was a risky, even crazy idea to reveal so much proprietary data. But McEwen ignored the critics, and it worked. A cash prize of $575,000 was enough to generate 1,000 submissions. A 3D map of the mine generated 110 deposit sites, half of which Goldcorp didn’t previously know. And that led them to $6 billion of gold, making Goldcorp extremely profitable.
Today geologists can use ground or airborne surveys to better understand what may lie below the surface. Sophisticated equipment measures radiation levels, gravity, electric and magnetic fields. This allows them to detect things otherwise not apparent visually. More recently, satellite imaging tools have become indispensable, especially since the easiest discoveries have been made. There are even firms specializing in artificial intelligence to assess survey data and help make potential discoveries through more accurate drilling targets.
Next is drilling to access material below the surface in areas that have been targeted by survey, historic drilling or mining data. That provides samples of minerals from underground, which are then sent to an assay lab to determine which elements are contained and at what concentration level.
The mining company then publishes its results. If it’s a smaller company and the results are poor, the share price can fall dramatically. If results are strong or even outstanding, revealing what are called “bonanza grades,” a stock can sometimes move by 50% or more in a single day.
If ongoing drilling continues to produce strong results, more speculators get drawn in, bidding up the share price. Eventually, if sufficient drilling demonstrates enough silver to make for a valuable economic deposit, the share price may reach a medium-term peak. Then, as the discovery becomes more widely known, early investors start to sell or take profits. This stage can last several years.
This stage requires a lot of money to put the deposit through detailed studies. These help determine the feasibility of building a mine to extract the minerals. That includes environmental assessments, engineering studies to figure out how the deposit would be mined, the potential layout and design of the mine, the equipment and buildings required, and staffing to run and operate the mine.
At this stage, there is often ongoing drilling to help provide a more accurate model of the deposit. Metallurgical testing determines how much of which metals can be recovered from processing. A lot of effort and resources go into relations with local communities, applying for permits to continue exploring, and even potentially purchasing additional surrounding land.
In some cases, investors and/or speculators lose interest because the excitement factor has dissipated. New drill results, even if very favorable, tend to have a diminishing overall impact on the value of the project. This can be a challenging stage even for an experienced management team.
A lot of fundraising is typically required to pay for costly studies and to keep advancing the project. Sometimes a joint venture partner, like a larger established mining company, acquires a portion of the project. They will often have the deep pockets to help pay for all the advancement work needed. In some cases, it can take up to a decade to reach this stage from initial discovery.
The exploration and development stages may occur during a strong bull market. When that’s the case, and metals prices are rising significantly, this typically adds to rising values. Investors are willing to pay more for the possibility that future mining profits will be even higher.
Deciding to build the mine is a big deal. It takes large investments, often in the hundreds of millions and even into the billions of dollars. A whole lot of effort is needed to eventually reach this point. The mining company continues to engage with stakeholders at the local, municipal, state and federal levels. This also includes ongoing involvement with non-governmental organizations (NGOs) which may be monitoring any risks to people or the environment.
Permitting work continues as the mining company typically needs to deal with multiple governmental agencies. Things like water, power, roads and a host of other infrastructure- related activities require permits to advance while conforming to established laws.
Mines can take different forms. Open-pit is when the ore is extracted right from the surface, forming a large pit. Underground mining is when a tunnel and/or shaft starting from the surface leads miners and equipment all the way to the orebody to be removed and hauled out. Some mines begin as open pits, and as that ore becomes depleted, mining continues underground for several more years.
A fully integrated mine can include buildings to house ore crushing and separating equipment, flotation circuits, refining facilities, storage, equipment repair, and management. If the location is remote, there may even be housing facilities for miners who stay for extended periods.
Timelines and budgets have to be closely tracked and respected to avoid the risks of delays and overspending.
Studies have demonstrated that investing in shares of miners at the point of a construction decision until the first output of metal has a very high success rate. That’s because there’s a sense of clarity and definitive timeline. Investors can see the company’s finish line to becoming a new producer. And as the outlook for cash flow approaches, investors bid up shares as they attribute an increasingly higher value. Larger investors, like fund managers and pension funds, also come into the fray as risk continues to diminish and they seek capital gains and perhaps eventually a steady dividend.
Production is when the mine finally starts to produce metal from the orebody. Pre-production activity may include a good quantity of ore that’s extracted and stockpiled in preparation for the first treatment steps. Actual production startup often begins at a lower rate than the mine is ultimately designed for. A lot of fine-tuning takes place to optimize flow. It may take several months to a full year to go from first production to reach full “nameplate” capacity.
But this is the ultimate prize, when a mine is running at its planned production rate. If all goes well, cash flows become material, and profits flow to the bottom line. But risks still remain.
Metals prices can fluctuate and environmental concerns may surface. Ore extraction can run into an area of the deposit that is of lower or higher grade than expected, throwing off the processing and requiring adjustment.
Naturally, extracting the ore depletes reserves. Many producing mines have ongoing exploration efforts around or near the existing orebody to search for more mineable ore. Ideally, they find enough metal to replace the extracted ore and extend the mine life to several decades and even beyond.
If insufficient additional reserves are found, or if metals prices fall significantly for an extended period, this may lead to eventual closure. Sometimes mines are put on care and maintenance for months or years as the operator awaits higher prices to justify production.
The development of a future mine typically requires large sums of money to be set aside at the outset, in order to eventually reclaim the land. As responsible operators, mining companies will minimize the disturbance of land along the entire process, from exploration through to final closure. When a drill rig finishes operating at a particular spot, workers will often cover the area with earth and grass seeds, making any disturbance invisible within months. Some large open pits, once depleted, become lakes that blend into their surroundings.
Although this stage does involve considerable costs, it’s an integral part of responsible mining. And the resources required to complete this stage are usually set aside well in advance.
Sometimes in a renewed market cycle, an old mine can get a brand new life as unmined ore becomes profitable to mine once again. As well, a fresh look from a new exploration team, perhaps with newer technologies, may lead to further discoveries around the old deposit. This can result in the reopening of an old mine and potentially years or decades of new production.
The quality of our future on this planet depends on how we manage natural resources. And that goes way beyond caring for the environment after a mine has shut down.
Miners who don’t operate responsibly should, and usually do, face serious roadblocks.
That’s why I want you to understand this important aspect of silver investing. If you can assess whether or not a company is being a good corporate citizen, then you’ll make better investment choices…and bigger profits.
So, you need to know these three letters: ESG. They stand for “environment, social, and governance.” And it’s how today’s successful mining companies run their businesses.
Mine managers and professionals are adopting these values. And that means accounting for the environment, local population, and managing responsibly throughout the planning, operating, and post-production stages.
Mines are increasingly deeper, more remote, and located in more challenging places. But thanks to advanced technologies, many are becoming greener. Managers are replacing equipment with electric or battery powered alternatives to achieve carbon-neutral operations.
They’re integrating wireless communications and artificial intelligence to help build and manage lower risk and more efficient production.
Miners are “getting it.”
They know that socially responsible mining means proper and fair treatment of employees and locals – who are often indigenous people. Local and federal governments in most jurisdictions are becoming increasingly strict about consulting and compensating those who live and work around mines.
That’s why the best mining companies involve the locals at the earliest stages and right through the mine’s life. Miners set up long term agreements that prioritize locals when sourcing services and equipment, hiring, and training for skilled positions. That way they establish trust that the mine will provide responsible economic development and positive impacts in the area. And mining companies will often support the local community by contributing resources towards medical, educational, and cultural organizations.
This new approach is not just a trend, it’s becoming part of company charters. That’s the “governance” part. Sound management allocates significant resources to have ESG practices followed and reported to shareholders. Mining companies include regular updates on business conduct and ethics, employees’ health and safety, environmental stewardship and sustainability, energy and climate impact, community relations, and local economic development.
Remember, silver is the single best conductor of heat and electricity. That makes it crucial to a host of green energy applications like solar panels, electric vehicles, and micro-electronics – all meant to lessen our carbon footprint.
Mining silver responsibly is especially relevant to achieving ESG goals. As we evolve towards a low-carbon green economy, we will need increasing amounts of silver.
Now that you understand the mining life cycle and how to mine responsibly, let’s see why investing in silver stocks can be so attractive and profitable.
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