Resource World Magazine

22 www.resourceworld.com j u n e / j u l y 2 0 1 4 T hose of us who follow the mining sec- tor are familiar with the all-of-a-sudden deluge of published analyst reports and conferences focusing on a particular commodity or sector. The flavour of the month might be rare earth explorers outside China, or platinum instead of gold compa- nies, or gold due to news about trouble in Ukraine. It could be base metals due to BRIC countries developing infrastructure. Certainly these sorts of fads are famil- iar to readers and it's likely that some have suffered in recent years as their investments have declined markedly as the flavour of a certain sector has soured. Recently, the entire mining sector has been out of favour. For investors seeking long-term value, we must look beyond what is currently in vogue and closely examine the required criteria. Behind each current craze, there are undoubtedly investment criteria worth considering. However, not every company of the current flavour will be a strong investment, whether in the short-, medium- or even long term. Nor should it suggest that this very moment is the time to go into an investment in any company in the particular industry niche, regardless of broader macroeconomic, global market, geopolitical risk and beta factors in the rel- evant stock market. Some investors in flavour of the month mineral companies may enjoy a short-term gain as investors are swept along by the fad but the long-term outlook for such an investment is bleak as interest moves on to the next new hot mineral. These types of investors are not the "strong hands" in the industry that support value creation within metals extraction companies. Long-term supportive investors ensure that their investments line up with the growth and timing profile of companies and in this way ensure their investments support their growth strategies. In the resource industry, there is noth- ing more important than ore grade and metallurgy. Also an important consider- ation is the potential for the company to increase their resources. Location, mine plan, rock quality, infrastructure, political, social and envi- ronmental climates and management capability also play into value creation potential but without a quality ore body with manageable metallurgy, there is no beginning. Is a 0.3 gram/tonne cut-off grade for gold economically viable? What are the costs per ounce of gold produced? At what gold price is the project viable? How will the ore be processed? The sudden awareness of China's control of processing and refining rare earths com- bined with their fluid export policies gave rise to the rare earth flavour of the month. Investors scrambled to educate themselves on real demand for each of the hard to pro- nounce metals. But, of critical relevance was and still is the western company's abil- ity to process and refine their ore. It was the Chinese control of refining that gave rise to the rare earths fad to begin with. Location is important. Where will these processing plants be? Not only is location of the ore body critical. How will the ore be transported to processing and refining plants? Producing a final product and get- ting it to market are critical. Location cost and risk factors must also be considered. While developed countries with low political risks are ideal locations, their costs of operating and other envi- ronmental criteria may be prohibitive or relatively less attractive than other juris- dictions where other risks are higher. How to rate these risk criteria? Investors should ask how a company plans to overcome obstacles to production. Some jurisdictions are routinely consid- ered to be lower cost, lower risk and higher return, an ideal combination. But this is not always obvious. Recent announce- ments by stable governments aimed at earning more from mining their resources in the form of increased royalties and taxes have made some previously desirable loca- tions suddenly less attractive. Other countries, for a long time con- sidered politically stable, can become subject to social unrest. Some experienced company management teams have mistak- enly believed that they could overcome negative sentiment in communities that surround a proposed mine have been driven to conclude that the dissent was too ingrained and abandoned their mining plans. Investors should weigh and consider such risks prior to making an investment. If we look at earlier stage explorers, while their choice of political jurisdiction and ability to fund their activities may be strong, management's premise, prior to exploring and defining resources, that their proximity to known or historic high- grade or producing ore bodies may or may not mean much. This would be a high risk investment with potentially high returns but not one with a high level of assurance of success as would be an investment in Beyond the flavour of the month ArE you A TrAdEr or An InVESTor? by Susan J. Mitchell INVESTMENT

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