This ‘Economic Studies 101’ will guide your stock selection for mining investors [Twitter thread unrolled]

Knowing the difference between the variety of economic studies used in mining and metals is crucial to any investor.

Here’s my ‘Economic Studies 101’, to help you predict how these could impact your investments:

Let’s get classification out of the way. There are 4 buckets:

-Scoping, preliminary economic assessment or PEA
-Preliminary feasibility or Pre-feasibility study
-Feasibility study or DFS
-Detailed design

They share characteristics, but differ in level of detail and accuracy.

Some studies can be undertaken in-house but most are commissioned to engineering firms such as @Ausenco or @SRKConsulting

All use measured & indicated resources as a base (not inferred) and can convert them into reserves.

🤔 Resources vs reserves?

Understanding the difference between mineral resources & reserves is key to investing in mining and metals.

Here's your 'Resources vs Reserves 101' to help you interpret news releases and reports:

— Paola Rojas 🐝 (@paola_rojas) June 24, 2022

1. The first step on this ladder is ‘scoping studies’ or PEAs.

PEA is ‘a study that includes an economic analysis on the potential viability of mineral resources taken at an early stage of the project, prior to the completion of a preliminary feasibility study’.

To complete PEAs, costs are normally $100,000s, take months to develop and their accuracy is low (+-30% or more).

Can be completed by members of the company’s staff, but traditionally only at the scoping level (equivalent to a basic PEA).

Resulting from a full-fledged PEA you can expect to know:

• Mine life & throughput
• CAPEX
• Average production
• Costs

Here’s an example: this is from the 2021 PEA for $ABRA’s Diablillos project, prepared by @MiningPlus_ , which also relies on the 2018 version by RPA.

2. A step higher, pre-feasibility studies add further knowledge & confidence.

PFS is ‘a comprehensive study of the viability of a mineral project that has advanced to a stage where the mining method (underground mining) or pit configuration (open cut) has been established and…

…an effective method of mineral processing has been determined, and includes a financial analysis based on reasonable assumptions of technical, engineering, legal, operating, economic, social, and environmental factors and the evaluation of other relevant factors which are …

…sufficient for a QP acting reasonably to determine if all or part of the mineral resource may be classified as a mineral reserve.

PFSs cost millions, also take months but their accuracy is fair (+-25-30%).

🤔 Who is a qualified or competent person?

All estimates are done by qualified or competent persons. A QP/CP is a geoscientist (geologist or mining engineer) with at least 5 years of relevant experience in exploration or mining, and is a member* in good standing of a professional association such as @TheAusIMM

— Paola Rojas 🐝 (@paola_rojas) June 24, 2022

From a PFS you can expect:

• to confirm if moving forward in current market is feasible (referred to as a ‘positive PFS’)
• resources to be converted into reserves
• increased accuracy from metrics in PEA

Here’s @SayonaMining $SYA NAL in Quebec

.@SayonaMining's PFS for the #NAL project estimates a NPV of around US$708.2 million, a low capex of about $70.82 million and a 27‐year life of mine #NorthAmericanLithium $SYA $PLL @PiedmontLithium @MinesAndMoney #lithium #spodumene https://t.co/trCbs611tl

— RGN Magazine (@RGNonline) May 24, 2022

3. Definitive, final, or bankable feasibility studies are the last step before a financing decision.

DFS/BFS are ‘a comprehensive study of a mineral deposit in which all geological, engineering, legal, operating, economic, social, environmental and other relevant factors are…

…considered in sufficient detail to reasonably serve as basis for a decision by a financial institution to finance the development of the deposit for production’.

Includes general engineering & design, cost tens of millions, take year(s) to complete & good accuracy (+-10%).

When a DFS is in the works, expect

• lots of mentions during the process (see duration)
• potentially more than one version/revision before a decision is made

E.g. @Worley_ECR $WOR completed a DFS for $LPI in 2019, an update expected later this year

Our CEO Cristobal Garcia-Huidobro told the International Lithium Conference in Phoenix today that our Maricunga project in Chile has been substantially derisked. Construction is expected to start by year's end. https://t.co/5bbKpteo8W pic.twitter.com/ujX7BEy7h2

— Lithium Power (@LithiumPowerLPI) June 27, 2022

By the time a project reaches DFS stage, the financial metrics will have been refined, and incorporate more details.

Here’s an example from @LithiumAmericas $LAC Olaroz, a lithium brine project in Argentina, note EBITDA

4. Finally, after the decision to build the mine is made, construction phase, and detailed engineering studies begin.

These will cost anywhere from tens of millions to hundreds of millions, and will take year(s) to complete. Their accuracy, logically, is very good.

At this stage, investment is highly derisked, hence these studies are not as widely discussed as all previous (changes likely not considered ‘material’).

Here’s an example, $PNX hired Como Engineers for detailed work on their Fountain Head gold project

PNX Metals engages Como Engineers to fast-track processing plant development at Fountain Head gold project

Given their differences, impact on the market capitalisation & future potential is varied.

As they play a key role in converting resources into reserves, each study completed gradually de-risks the project, making production typically more likely.

There are 5 different classifications, within these two groups.

Resources can be:
• Inferred, or
• Indicated, or
• Measured

Reserves can be:
• Probable, or
• Proven

📊 by @CIMorg pic.twitter.com/vN7XFbdPb4

— Paola Rojas 🐝 (@paola_rojas) June 24, 2022

Additionally, as they incorporate the ‘modifying factors’ I’ve mentioned before, uncertainty is progressively reduced and accuracy increased with each new study, generally making investments safer.

Now, to move from resources to reserves, the special power is not additional exploration. Enter the 'modifying factors', or mining, metallurgical, economic, marketing, legal, environmental, social, and government factors that may strengthen -or weaken- the project's potential.

— Paola Rojas 🐝 (@paola_rojas) June 24, 2022

Hence, usually, a positive effect will be seen in the valuation of the project owner/s, and reduced volatility.

Note that by PFS and beyond, there may be more than one owner/operator (due to financing, merger, etc), so your exposure may not be to 100% of the asset.

Alas, risk is never zero. There are cases where conditions changed for the worse or financing a particular project became impossible, stalling development.

You may have some war stories to share here. I know I do… You can find some in this thread

There is no decarbonisation without copper, and we've been underinvesting for over a decade. However, there are projects in the pipeline, if we can get past roadblocks…

Here's your list of 10 deposits that could ignite the #energytransition, and bring over 200b lbs in supply

— Paola Rojas 🐝 (@paola_rojas) July 1, 2022

On the other hand, often the markets punish companies holding advanced stage assets with studies (what I call, tongue-in-cheek, the ‘developer’s curse’). News flow becomes somewhat predictable and less prone to massive swings that were common on the way up so volume can dry up.

Or investors may believe that CAPEX (capital expenditure) is too high for the company (e.g. a small cap trying to develop a $1b project), or the jurisdiction too difficult.

In-depth research is needed to assess which is more likely. Luckily, by then detailed info is available.

A lot more can be said, but will leave here for now.

TL;DR
-4 types of studies
-PEAs most basic, to detailed, most comprehensive
-vary in level of detail and accuracy
-from hundreds of thousands to millions
-take months to years
-remove uncertainty progressively for investors

Keen to dive deeper, improve your valuation skills and dissect the studies you come across?

Give Victor Ruduenno’s book a try. I use it constantly.

If you thought this was useful, please retweet the start of the thread.

Follow me @paola_rojas for more threads on investing in metals, markets, and tech.

Knowing the difference between the variety of economic studies used in mining and metals is crucial to any investor.

Here's my 'Economic Studies 101', to help you predict how these could impact your investments:

— Paola Rojas 🐝 (@paola_rojas) July 9, 2022

Originally tweeted by Paola Rojas 🐝 (@paola_rojas) on July 9, 2022.