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Value is in the eye of the beholder. Kind of.
Economic studies are how we put a value on both reserves and resources. From the rough strokes we get from a scoping study, to the added detail in PEAs and beyond, clarity improves and certainty rises.
Here’s the definition of PEA:
‘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’ -CIM
All great things, right? Yes… but studies can be terribly nuanced and potential risks can be hidden in the complexity.
I think all mining investors (or those contemplating the sector) need at least a basic knowledge of the different types of economic studies, and more specifically:
- Their main goals
- Typical timelines for completion
- The expected outputs in each step
- The accuracy we can expect from each study
- The range of costs traditionally associated with completion
This information will help you predict and prepare for positive (and negative) impacts on your portfolio, and form your own idea of value.
Investors will use key outputs to compare various companies and investments, even from other sectors (to make sure we are ‘comparing apples to apples!’). Last week I wrote about mine life which is basically how long the mine is expected to operate given chosen assumptions. I’ll cover other outputs in the near future.
Now, back to studies. It is vastly different to be researching a company that has put out a PEA versus a DFS. When expectations diverge wildly from reality we see so much capital destruction!
For instance, risk-averse investors may prefer to focus on companies that already completed a BFS or DFS (bankable/definite feasibility study), and even zero in on miners that already have financing lined up arising from such studies, as their valuations will be more reliable. Speculators and investors comfortable with higher uncertainty thresholds can also include issuers with PFS and lower (PEA and scoping studies), while noting that discount rates should be appropriate and commensurate with the remaining uncertainty. A practical expansion of this would be to consider whether the company has built a mine before, as this would give an indication of intrinsic corporate know-how and reduced risk. This is of course a simplification but it”s a good place to start.
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That’s it for today.
A popular tweet from last month
Keeping track of what resonates is a great indication of investor sentiment. This one got a lot of attention!
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