Mining life cycle: explore, develop, produce
What is the Lassonde Curve and how we differentiate stages in mining life cycle.
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Key points
- The Lassonde Curve is an industry tool devised by mining investor Pierre Lassonde to describe the lifecycle of mining companies from explorer to developer to producer stages and how the value of the company can vary during the life
- Not every company progresses from explorer to developer and neither does every developer succeed in becoming a producer
- There are different risks and reward opportunities at each stage of the lifecycle
- It is not always true that developers and producers are lower risk than explorers
What is the mining life cycle?
In our previous article we discussed and compared the three types of activity that comprise the companies involved in the mining industry, namely:
- Exploration – carried out by explorers
- Development – carried out by developers
- Production – carried out by producers
The companies that follow this evolution are not all successful. In most cases, explorers do not end up identifying a commercially viable deposit. Similarly, in many cases, developers do not end up being able to produce a feasibility report that allows the mine to go into production. Producers are exposed to cyclical commodity prices, which can fall and make the mine uneconomic, and the company will fail. If the producer is ramping up a new mine and it is their only mine, then many technical risks can lead to failure.
Given the inherent risks in the industry, it is worthwhile looking at how such companies evolve and develop and how the risk and reward vary during the evolution. To work rationally with inherent risks, Pierre Lassonde developed the "Lassonde Curve".
What is the Lassonde Curve?
The Lassonde Curve de Curve is a widely discussed model within the mining and finance industries directly linking the life cycle of a resource company to its share price and subsequent company value. The exploration, discovery, feasibility, financing, construction, and production activities that occur in sequence are known to drive company share price, and we show them in the diagram below:
Exploration stage
The exploration stage is the one with the highest potential reward but also the highest risk. The risk is highest because most exploration stage companies fail to identify and define a mineral deposit that will be economic. The greatest risks are exploration and technical risks. Furthermore, the quality of management can make a big difference in the probability of success. We can split exploration companies into three stages which have a different focuses:
Concept
- Market strategy
- Prospecting rights
Pre-Discovery
- Trenching, soil sampling
- Geophysics
- Geochemistry
- Geology
- Metallurgy
- Initial drilling
Post-Discovery
- In-fill drilling
- Step-out drilling
- Maiden (or first) Mineral Resource Estimate (MRE)
- MRE Update
- Metallurgy
Companies at the Concept stage will have a lower market capitalization than if they are at the Pre-Discovery stage or Post-Discovery stage unless there is a failure of the Pre-Discovery or even Post-Discovery phase. Sometimes the company can enjoy multiple stages of discovery, for example, in one year, they may announce a significant discovery at one drilling prospect, and in another year, they may demonstrate a discovery at another drilling prospect.
An example of a company, that is in the Post-Discovery phase is Snowline Gold (listed on the Canadian Stock Exchange with ticker SGD) which aims to identify economic gold deposits in the Canadian Province of Yukon.
The three stages of stock price growth for Snowline Gold seem to be:
- Initial concept stage as the company finances and mobilizes
- An initial discovery at the Einarson project Jupiter zone in 2021
- Further discoveries at Einarson project Jupiter zone in 2021
- An initial discovery at Rogue project Valley zone in 2022
- Further discoveries at Rogue project Valley zone in 2022
Snowline Gold has a "district scale" land package which is considered to be large for a junior explorer. Therefore, because it can demonstrate a discovery in more than one project, the Lassonde curve will be the sum of the Lassonde curves for the individual projects. In this case, the company valuation increased more significantly concerning the discovery at the Rogue project Valley zone much more than the earlier discovery at the Einarson project Jupiter zone. The company is now firmly in the Post-Discovery phase of the Lassonde curve overall. However, it does have several other projects, some at the Pre-Discovery phase like Rogue Project Gracie zone and also some at more concept stage like the Golden Oly project acquired in September 2033 by Snowline Gold from StrikePoint Gold Inc which has 7 targets.
The following stock price chart shows the net impact of all these projects at various stages contributing to the share price growth in Snowline Gold over the past three years:
Out of all the progress made by Snowline Gold, the most significant one in terms of increase in market capitalization was the news from 30th June 2022 of an important discovery at Rogue Project Valley zone with a news release entitled
“Snowline gold encounters widespread mineralization in 340 metre step-out at its valley zone and mobilizes second drill“.
Although we found no assay results in this news release. The market was able to understand the potential grade of the assays from the photos of the drill cores provided. Stock price re-rated higher despite the final assay results not being provided on that date. Subsequently, assay results were in line with expectations and justified most of the increase in market capitalization over the weeks that followed the news.
Snowline Gold can therefore be considered a good example of a company that progresses from Concept to Pre-Discovery to Post-Discovery stage, in the first stages of the Lassonde Curve.
Development stage
The development stage is considered lower risk than exploration. There will be at least a Mineral Resource Estimate (“MRE”) available or a Preliminary Economic Assessment (“PEA”) available or soon to be conducted to confirm the approximate economics of the resource. The types of risk differ for developers. Being less geological and more related to exposure to the commodity price funding for development will be less likely if the commodity price is weak. There are also technical, engineering, and permitting risks.
This period of development usually requires the funding of various technical studies that would satisfy any potential lenders or funder of the project capital expenditure that is required. Usually, these studies start with a PEA, then a Preliminary Feasibility Study (“PFS”), and finally a Definitive Feasibility Study (“DFS”) that can be considered acceptable by banks. These studies are conducted by independent geological and engineering consultants and can take many months or over a year and are a considerable expense to produce.
Additionally, the company will require local and government permits to go from an exploration stage company into a producing company. Associated with this can be environmental protection studies and agreements. The failure of any of these reports or agreements can doom the company to bankruptcy. As such, these companies can still carry considerable risk. However, a mature developer will have all studies complete, and all permits and agreements in place can offer optionality to the underlying commodity price in that as the commodity price rises the ability of the company to fund construction increases.
Most developers will need to go through the following steps to build and complete the mine:
Studies
- Updated Mineral Resource Estimate (“MRE”)
- Preliminary Economic Assessment (“PEA”)
- Preliminary Feasibility Study (“PFS”)
- Definitive Feasibility Study (“DFS”)
- Environmental
- Front End Engineering Design (“FEED”)
Permits & agreements
- Exploitation or Mining Permit
- Water-rights
- Local community agreements
- Royalty agreement with government
- Taxation agreement
Funding
- Equity and debt financing
- Royalty financing
- Streaming agreement
The opportunity for investors in developers is to participate in the share price appreciation as the company raises money for construction and steadily completes all the steps to construct the mine. When each step is completed, the risks for the project reduce while the valuation of the company can increase toward the project NPV as detailed in the PFS or DFS.
An example of a company that is in the development phase is Rio2 Limited (listed on the Toronto Venture Exchange with ticker RIO) which aims to develop and build a gold mine in Chile. Rio2 released an updated PFS on 4th September 2019 and provided the following technical and financial metrics for the project:
- Capital costs of $111 million with LOM sustaining capital costs of $95 million
- After-tax NPV5 of $121 million and an after-tax IRR of 27.4% using a gold price of $1,300/oz
- After-tax NPV5 of $241 million and an after-tax IRR of 44.3% at $1,500/oz gold price
When the company had a stock price of C$0.70, the market capitalization of approximately C$180 million means that there is considerable upside to the potential NPV of the Fenix gold project when recent gold prices of around US$1700/oz are used.
Rio2 had the following key event on 21st July 2021: “RIO2 ARRANGES PROJECT FINANCING TO FULLY FUND ITS FENIX GOLD MINE TO PRODUCTION”. At this time, the project and company can are partially de-risked as they have a non-binding offer of complete funding to build the Fenix gold mine to production. Part of the funding package has BNP Paribas (“BNP”) appointed as mandated lead arranger for a senior project debt facility of US$50 to 60 million.
Another part of the package was a non-binding offer of US$50 million from Wheaton Precious Metals (“WPM”) to advance cash to Rio2 in return for a share of the future refined gold production which is called a Gold Stream. WPM is a highly reputable mine investor with numerous investments in gold and silver mining operations globally and with a current market cap of around US$17 billion. Therefore, to have a financial offer that includes WPM is considered a “stamp of approval” for the project, as they will have conducted extensive technical and financial due diligence on the project. On 16th November 2021, Rio2 announced they had signed the agreement with WPM, and on 29th March 2022, Rio2 announced It had received US$25 million in cash from WPM. At that time the Rio2 stock was still trading at around C$0.70.
However, to emphasize the risks even for advanced developers who have a PFS or DFS and even a package of construction financing in place, there was a shock to investors when on 23rd June 2022, Rio2 announced that the EIA was rejected by the relevant competent authorities as follows:
“Rio2 notes the Environmental Assessment Service (SEA) published last night the “Informe Consolidado de Evaluación” (Consolidated Evaluation Report) with the recommendation to reject the EIA for the Fenix Gold Project.”
As EIA is required for Rio2 to go into production, there was a dramatic fall in the company stock price. The following chart shows the stock price chart and compares with the stage that the company was in over the past year:
This example illustrates the dangers of investing solely based on economic forecasts without regard to practical matters such as the risks of obtaining the relevant required permits to construct or operate a mine and therefore highlights the importance of carefully considering the country and jurisdiction's reputation when it comes to the mining industry. In this case, Chile is a more and more risky investment destination for new mining operations. Rio2 can be considered a company that failed when in the “Development” section of the Lassonde Curve. There remains the possibility that an EIA permit can later be granted, but such an investment now could only be considered speculative (i.e. a gamble).
Producer stage
Some of the key steps for a producer according to the Lassonde Curve are:
- Commissioning
- Start-up
- Ramp-up
- Steady-state production
- Depletion
- Decommissioning
- Rehabilitation
Pure Gold Mining (“PGM”) is an example of a junior gold mining company as it was just ramping up operations for its first and only mine in the excellent mining jurisdiction of Ontario, Canada. If it had multiple mine sites operating for a few years and with more than 500,000 oz production per year, it may be considered a "senior" or more mature producer and less risky. The company went to all stages of the Lassonde curve from explorer to developer and producer.
Unfortunately, we can not say that producing companies are always “lower risk”. In the case of PGM, the bad news was confirmed on 30th March 2022 when the company said that it had experienced “lower-than-expected” gold grades due to shortages of high-grade ore, developmental delays, insufficient geologic information, and other strategic issues.
This was a particular problem for shareholders because part of the mine construction financing was via debt (a credit facility) which has a higher claim on cashflows than shareholders when it comes to repayment of interest and principal on the debt. The result has been that shareholders have been effectively “wiped out” with shares falling from over C$2 or so to less than C$0.02 with more than a 99% loss in value for shareholders from the peak equity market capitalization. The final nail in the coffin for PGM shareholders was the news on 31st October 2022 that PGM applied for an Initial Order for CCAA Protection in Canada (creditor protection) as it could not make the required debt repayments. As a result, shareholders are likely to be completely wiped out.
The following chart shows the progression of the PGM stock price over the past three years. PGM became a producer in August 2021, and before that, was a developer:
We can see the increase in the company equity value as per the last section of the Lassonde Curve as the company went from Developer to Producer and the stock price went from around C$0.50 to almost C$3. However, it is also clear that the equity value of the company declined since it started to commission or “ramp up” the mine in early 2021. After actual gold production started in August 2021, it accelerated with the crash in the stock at the end of March 2022 when they confirmed all the difficulties.
Therefore, there is no guarantee that a producer is without risks in addition to the commodity price risk. This is particularly true for “new” producers with only one mine. A mature producing company that has been producing for many years and has multiple mine sites across the world is a much less risky investment than PGM was.
