So in this week’s issues of Penny Sleuth, I want to reveal what to look for when investing in mining companies and how mining companies grow. For illustrative purposes I am going to use a copper mining company as an example.
1. Acquiring a Licence
- The first priority is to find a promising area. Maps, aerial photographs and knowledge of regional geology give a clue. And there may also be evidence in the form of past surveys.
- The second priority is location. A mine needs services such as road access and power supply. It needs a labour force. And the mine needs access to customers, who should not be too far away.
- Next you need to consider political risk. In any country there will be a set of rules that govern the mining industry. These are designed to ensure that local people and the government get a share of any wealth that is created.
2. Defining the Resource
So you have a licence. You’ve assembled a team. And you’ve raised sufficient funds. The next step is to determine how much copper is present, and of what quality. For this, some drilling equipment will likely be needed.
In the boom years of 2006-2008, a miner either had to wait for this to become available or else pay much more than they expected.
Before drilling starts, though, the miner will identify the most promising spot to sink the drill bit.
Eventually, it must drill for samples. This is a crucial time for investors. It should be noted, though, that there is a divergence here between oil and gas exploration and those for ‘hard’ resources.
If you drill into an oil well, it does not matter much where you pierce it. So long as you have one straw in the bottle you can suck out all the liquid.
But just because a drill encounters copper in one spot, it does not guarantee that another drill 10m away will also encounter copper. So a number of samples must be taken over a wide area.
This allows the miner to publish a resource estimate, under three headings:
a) 'Measured Resource': this means that sufficient data are available to confirm continuity of the mineralisation.
b) ‘Indicated Resource’: there are insufficient data to confirm continuity of the resource, but sufficient to give a reasonable expectation of the mineralisation’s continuity.
c) ‘Inferred Resources’: these are ‘defined’ but there are insufficient data to confirm continuity of the resource.
3. The Importance of Grade
It is one thing to find copper but it is much better if this is a ‘high-grade’ resource. This means that there is a relatively large amount of copper per tonne of rock.
Let’s say you have one mine where the copper grade is 0.5% copper and a second where the copper grade is 4%. The former mine must extract and process eight times as much ore in order to recover the same amount of copper. Clearly this has a major impact on the cost of the operation.
One way in which the economic value can be improved is by recovering secondary metals. It may be possible, for example, to produce platinum, palladium, rhodium, gold and nickel, as well as copper.
Also important to the economic potential of the mine is the distribution of grade. Is it 1% all the way through? Or is it 2% in some places and 0.2% in others?
4. Types of Mine
The closer the ore body lies to the surface, the easier it is to extract. The simplest method of extraction of all is via an ‘open cast’ mine. Here the earth and stone are removed from the surface and the exploration gradually goes deeper and deeper, creating great holes in the ground.
Similar to this is the ‘strip mine’. Such a mine is often used in the coal industry, where huge buckets attached to drag-lines strip the overburden (surface material covering the valuable deposit) from the mineral seam.
Less common are alluvial mines, where the ore deposits have been carried by ancient rivers and waves and now lie on river terraces or beaches. These can be exploited using a dredge that sits on a man-made pond, lifting the sandy material and then allowing it to be sifted by gravity processes.
These are all much simpler and cheaper than underground mining. Aside from the unpleasant and dangerous working conditions, underground mining is a far more expensive process. It requires mining equipment as well as ventilation shafts and pumps to remove water.
5. Mineral Processing
Copper, gold or any other valuable resource does not come out of the ground in pure saleable form. First, the ore must be processed, and much of this will be done at the mine site.
The first phase consists of crushing and grinding the ore, using powerful milling machines and a large amount of electric power.
The second stage is to separate the valuable mineral from the unwanted rock. One method is smelting, where the metal is basically melted away from the waste rock. Smelters and associated refineries are large and expensive and usually away from the mine site.
The miner will have to sell the metal to the smelter some way below its underlying value, and so a more advantageous method is flotation. This can be done at the mine site. Here, a chemical process is used to free up the metal elements which are then gathered together by the process of electrolysis.
We now have an idea of our resource and how we can exploit it.
In 2010, I’ll be looking to mine the junior resources sector for penny share profits. If you’d like to receive my very best, deeply researched penny share recommendations, why not start the year by joining us at Red Hot Penny Shares?
I’m putting together the January issue right now. It includes two exciting junior resource stocks. Put your name down to receive it and get access to my three penny shares to ‘intercept’ now by clicking here.
To continue reading part two of How to Pick a Winning Resource Mining Stock click here
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