Visualizing the Life Cycle of a Mineral Discovery
Mining legend Pierre Lassonde knows a little bit about mineral exploration, discovery, and development. Drawing from decades of his experience, he created the chart above that has become a staple in the mining industry—the Lassonde Curve.
Today’s chart of the Lassonde Curve outlines the life of mining companies from exploration to production, and highlights the work and market value associated with each stage. This helps speculative investors understand the mining process, and time their investments properly.
Making Cents of Miners: The Stages of a Mineral Discovery
In the life cycle of a mineral deposit, there are seven stages that each offer specific risks and rewards. As a company proves there is a mineable deposit in the ground, more value is created for shareholders along the way.
This stage carries the most risk which accounts for its low value. In the beginning, there is little knowledge of what actually lies beneath the Earth’s surface.
At this stage, geologists are putting to the test a theory about where metal deposits are. They will survey the land using geochemical and sampling techniques to improve the confidence of this theory. Once this is complete, they can move onto more extensive exploration.
There is still plenty of risk, but this is where speculation hype begins. As the drill bit meets the ground, mineral exploration geologists develop their knowledge of what lies beneath the Earth’s crust to assess mineral potential.
Mineral exploration involves retrieving a cross-section (drill core) of the crust, and then analyzing it for mineral content. A drill core containing sufficient amounts of metals can encourage further exploration, which may lead to the discovery of a mineable deposit.
Discovery is the reward stage for early speculators. Exploration has revealed that there is a significant amount of material to be mined, and it warrants further study to prove that mining would be feasible. Most speculators exit here, as the next stage creates a new set of risks, such as profitability, construction, and financing.
This is an important milestone for a mineral discovery. Studies conducted during this stage may demonstrate the deposit’s potential to become a profitable mine.
Institutional and strategic investors can then use these studies to evaluate whether they want to advance this project. Speculators often invest during this time, known as the “Orphan Period”, while uncertainty about the project lingers.
Development is a rare moment, and most mineral deposits never make it to this stage. At this point, the company puts together a production plan for the mine.
First, they must secure funding and build an operational team. If a company can secure funding for development, investors can see the potential of revenue from mining. However, risks still persist in the form of construction, budget, and timelines.
Investors who have held their investment until this point can pat themselves on the back—this is a rare moment for a mineral discovery. The company is now processing ore and generating revenue.
Investment analysts will re-rate this deposit, to help it attract more attention from institutional investors and the general public. Meanwhile, existing investors can choose to exit here or wait for potential increases in revenues and dividends.
Nothing lasts forever, especially scarce mineral resources. Unless, there are more deposits nearby, most mines are eventually depleted. With it, so does the value of the company. Investors should be looking for an exit as operations wind down.
Case Study: The Oyu Tolgoi Copper-Gold Discovery, Mongolia
So now that you know the theoretical value cycle of a mineral discovery, how does it pan out in reality? The Oyu Tolgoi copper deposit is one recent discovery that has gone through this value cycle. It exemplifies some of these events and their effects on the share price of a company.
- Concept: 15+ Years
Prospectors conducted early exploration work in the 1980s near where Oyu Tolgoi would be discovered. It was not until 1996 that Australian miner BHP conducted further exploration.
But after 21 drill holes, the company lost interest and optioned the property to mining entrepreneur Robert Friedland and his company Ivanhoe Mines. At this point in 1999, shares in Ivanhoe were a gamble.
- Pre-Discovery/Discovery: ~3 years
Ivanhoe Mines and BHP entered into an earn-in agreement, in which Ivanhoe gained ownership by completing work to explore Oyu Tolgoi. A year later, the first drill results came out of drill hole 150 with a headline result of 508 meters of 1.1 g/t Au and 0.8%. To get a sense of how large this is, imagine the height a 45-story building, of which a third of story is copper. This was just one intersection of an area that could stretch for miles.
Wild speculation began at this stage, as steadily improving drill results proved a massive copper-gold deposit in Mongolia and drove up the share price of Ivanhoe.
- Feasibility/Orphan Period: ~2 years
In 2004, the drilling results contributed to the development of the first scoping study. This study offered a preliminary understanding of the project’s economics.
Using this study, the company needed to secure enough money to build a mine to extract the valuable ore. It was not until two years later, when Ivanhoe Mines entered into an agreement with major mining company Rio Tinto, that a production decision was finalized.
- Development: 7 years
By 2006, the Oyu Tolgoi mineral deposit was in the development phase with the first shaft headframe, hoisting frame, and associated infrastructure completed. It took another two years for the shaft to reach a depth of 1,385 feet.
Further development work delineated a resource of 1.2 billion pounds of copper, 650,000 ounces of gold, and 3 million ounces of silver. This first stage of development for Oyu Tolgoi made Mongolia the world’s fastest growing economy from 2009 to 2011.
- Startup/Production: Ongoing
On January 31, 2013, the company announced it had produced the first copper-gold concentrate from Oyu Tolgoi. Six months later, the company stated that it was processing up to 70,000 tonnes of ore daily.
- Depletion: Into the Future
The Oyu Tolgoi deposit will last generations, so we have yet to see how this will affect the value of the mine from an investment perspective.
It’s also worth noting there are still other risks ahead. These risks can include labor disruptions, mining method problems, or commodity price movement. Investors will have to consider these additional conditions as they pan out.
- Concept: 15+ Years
The More You Know
Mining is one of the riskiest investments with many risks to consider at every stage.
While most mineral discoveries do not match it perfectly, the Lassonde Curve guides an investor through what to expect at each stage, and empowers them to time their investments right.
The Next Frontier: Mineral Exploration in Saskatchewan
The Next Frontier: Mineral Exploration in Saskatchewan
Lying in the heart of Canada is the next great mineral exploration frontier, Saskatchewan. This humble province lies at the center of one of the greatest mining countries in the world, but despite Canada’s long history with mining, Saskatchewan is still open for discovery.
This infographic from our sponsor SKRR Exploration shows where the next mineral frontier for discovery lies in Saskatchewan.
The Road to Resources: Opening for Business
Saskatchewan covers 588,239 square kilometers, roughly the size of Iran or Mongolia, with a population density of only 1.8 persons per square kilometer. This central province sits on the edge of a vast frontier that is rich with mineral resources that could power and feed the world.
In order to encourage investment, Saskatchewan has several incentive programs for the mining industry.
- The Targeted Mineral Exploration Incentive: 25% rebate on eligible drilling costs in regions of high potential for base metals, precious metals and diamonds.
- The Saskatchewan Mineral Exploration Tax Credit: A non-refundable 10% tax credit to Saskatchewan taxpayers who invest in eligible flow-through shares issued by mining or exploration companies.
- A 10-year royalty holiday for new gold and base metal mines.
- A 5-year incorporation tax rebate for mineral processing.
While the province is encouraging mineral exploration, there are already proven success stories that are just scraping the surface of the opportunities available.
Resources Ready to Go
In 2020, Saskatchewan sold C$7.4 billion worth of metals and minerals, the fourth highest amount in Canada. Saskatchewan’s mining sector provides business opportunities and jobs for over 12,400 individuals across the province, and contributes an additional 25,000 indirect jobs.
- Potash: The province has the largest potash industry in the world, accounting for about 1/3 of annual global production and hosting nearly half of the world’s known reserves.
- Uranium: The world’s richest deposits of uranium lie in Saskatchewan, giving the province the ability to produce more uranium with less land surface disturbance than almost anywhere on Earth.
- Diamonds: In 2004, Shore Gold discovered diamonds near Fort à La Corne in central Saskatchewan. There is a plan to bring the 66-million carat Star-Orion South project into production.
- Base Metals: The Flin Flon mining camp, on the Manitoba-Saskatchewan border, is a large base metal producer region and is estimated to have the highest contained value of ore per square kilometer in Canada for VMS deposits.
- Gold: The province holds two multi-million ounce discoveries to date, the Seabee and MacLellan gold mines in the Trans-Hudson geological formation.
There is more to discovery. Exploration expenditures in 2019 were $264 million, and companies planned to spend $242 million in 2020.
SKRR Exploration: Opening a Frontier
SKRR Exploration is leading mineral exploration into Canada’s final frontier and has secured prime mineral properties to take advantage of the wave of demand for metals. SKRR has six gold and one base metal exploration projects in the heart of one of the most prospective geological belts in North America.
At the helm of SKRR exploration are two leaders who know the geology of Saskatchewan well and have a proven history of discovery, Ron Neolitzky and Ross McElroy. Neolitzky was inducted into the Canadian Mining Hall of Fame for his development of two successful precious metals mines. McElroy was part of the exploration team that discovered Cameco’s McArthur uranium deposit.
SKRR Exploration is bringing together the right elements of Saskatchewan to make the next great discovery.
Visualizing Gold Investment Compared to Global Assets
Gold is an important hedge against inflation and currency depreciation, but how does the precious metal compare against global assets?
How Gold Compares to Global Assets
Gold has been a vital asset for investors and speculators to hedge against uncertainty and currency devaluation, but today it is just a small part of the investment landscape.
While gold investment holdings stand at $1.1T, this figure is dwarfed by various other global assets and funds.
This graphic compares the size of gold investment holdings to global assets, highlighting the difference in dollars invested, and where modern day investors have (or haven’t) been allocating their money.
Gold vs. Global Assets
Despite amounting to over $1 trillion dollars, gold investment holdings are a small fish in the large pond of major global assets.
Largely outsized by private equity funds, hedge funds, and more, gold has taken a backseat for today’s investors when it comes to where they allocate their capital.
|2020 Gold Investment||$90.0B|
|Total Gold Investment Holdings||$1.1T|
|Top 10 Global Private Equity Funds||$1.9T|
|U.S. Hedge Funds||$3.1T|
|Sovereign Wealth Funds||$7.9T|
|10 Largest Investment Banks||$32.3T|
|Global Pension Funds||$49.3T|
|30 Largest U.S. Mutual Funds||$59.0T|
Sources: Mutualfunddirectory.org, Willis Towers, relbanks.com, swfininstitute.org, barclayhedge.com, investopedia.com, CPM, Incrementum AG
Even with 2020’s large inflow of gold investment worth $90 billion, gold investment remains small on the scale of the world’s financial assets.
With its fairly small market, around 90% of gold’s global trading volume flows through three major exchanges, with the remaining volume coming from smaller OTC and secondary markets.
The Major Gold Exchanges Today
Although gold investment has been overtaken by other global assets, it still remains an important investment asset and has one of the most active markets in the world. Gold markets are split among three primary trading hubs which transact millions of dollars in volume every day.
- London Metal Exchange (LME): Established in 1877, the LME offers futures contracts for metals including gold.
- COMEX: A division of the Chicago Mercantile Exchange (CME) COMEX offers physically settled gold futures and options contracts.
- Shanghai Futures Exchange (SHFE) and Shanghai Gold Exchange (SGE): While relatively young, these two exchanges have captured a large amount of gold trading volume, with the SGE being the largest purely physical gold spot exchange in the world.
Gold Exchange Trading Volumes
|Gold Exchange||FY 2020 Trading Volume|
|London Metal Exchange (LME)||$160M|
|Shanghai Futures Exchange (SHFE)||$6.19B|
|Shanghai Gold Exchange (SGE)||$6.22B|
Source: World Gold Council
These three hubs and four exchanges host the majority of the world’s gold trading, and saw ~$67B worth of gold trading volume in the fiscal year of 2020.
ETFs are Making Gold Investment Accessible
While the exchanges mentioned above transact millions of dollars worth of gold a day, gold-backed ETFs have made gold more accessible to the everyday investor. The top 3 U.S.-traded gold ETFs have more than $94B in assets under management between each other.
These ETFs offer investors one of the easiest ways to get gold exposure in their investment accounts, and see billions in flows every year.
Quarterly Gold ETF Flows
|Region||Q1 2020||Q2 2020||Q3 2020||Q4 2020||Q1 2021||Q2 2021|
Source: World Gold Council
Last year saw record inflows into gold ETFs, as investors sought a safe haven for their capital during the COVID-19 pandemic. However, gold ETFs have seen an overall outflow of $6.1B in 2021 so far, with North American gold ETFs seeing $402M in outflows just this July.
At the same time, European gold ETFs have seen a recent rise in inflows, highlighting a divergence in sentiment between the two regions. In the month of July, European gold ETFs saw $999M worth of inflows, with Asian gold ETFs also registering positive inflows of $54M.
Central Banks Still Believe in Gold’s Future
While gold is not attracting immediate investment flow into ETFs, the world’s central banks still maintain large amounts of their reserve assets in gold. While they primarily hold gold to hedge against currency depreciation and to diversify their reserves, gold has proved an incredibly valuable investment for central banks over the decades.
Some central banks like the U.S., Germany, and Italy, have more than 50% of their reserves’ dollar value in gold, showing truly how much they value the precious metal.
With the world’s central banks holding around $1.69T worth of gold in their reserves currently, gold remains an essential investment for both big and small players alike.
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