Resource World Magazine

j u n e / j u l y 2 0 1 4 www.resourceworld.com 23 a company with a completed feasibility study showing financeable capital costs and positive IRR and NPVs. Of course, should the closeology prem- ise prove to have value, then the property could be acquired by a neighbour or a major. An important source of additional value added is a company's attractive- ness as an acquisition target. Particularly in today's marketplace, investors must be alert to such potential transactions which may be done for any of a number of rea- sons, besides closeology. For near production companies, positive feasibility calculations do not necessar- ily guarantee that a project will be built and operate successfully. There is many an obstacle to being able to deliver on a projected construction plan. For exam- ple, there are the practical aspects of the contractor track record, materials avail- ability and management oversight. Then there is the political will of the governing jurisdictions which may be supportive in word but can be different in action. And then there are the very assumptions used in the feasibility study which lead to the results of the financial analysis, namely the detailed costs and revenues. In the last decade we have seen some extremely high profile projects as well as smaller projects abandoned or postponed as a result of unaccounted for rising material, labour and regulatory costs. On the other side of the profit formula, if assumptions about future prices of the commodity products are not sufficiently conservative within the time frame of the life of the project, then the IRR and NPV may be overly optimistic. One way of allowing for uncertain commodity price forecasting is to analyze whether the proj- ect is or will be amongst the lower cost producers in the industry, that is, the lowest quartile or even lower half of pro- duction costs. In this case, the company building or operating a particular project would be amongst the last standing were commodity prices to fall unexpectedly. And, in this context, the commodity price forecast is often the motivator for the existence of a flavour of the month. Curtailed rare earth exports out of China caused prices to soar. Strong economic growth and increasing quality of life in highly populated developing countries increase the demand for base metals and other additives for infrastructure growth as consumption and building accelerate and better cost effective production tech- niques are sought. The discussion of peak oil and other depleting energy resources, combined with climate concerns, lead to the pros- pect of greater demand for alternatives such as uranium and LNG. Evidence of political instability or lack of hard eco- nomic activity to support a currency has led to discussion of gold as a back-up currency. Rapidly increasing technology in telecommunications, clean energy and electricity generation increase the demand for previously unknown metals which are often used in tiny amounts but are also in relatively short supply. And evidence that food supply will not be adequate to feed regions or entire populations lead to the need for greater productivity in growing techniques and more commodities used in fertilizer and phosphates. It is obviously up to the investor to determine the magni- tude and timing of such trends. As we have all experienced, economic forecasts and the factors noted above, amongst others, do not necessarily provide either an accurate timeframe or magnitude of movements of a commodity's price. There is no way to avoid some kind of risk with any investment; for long-term inves- tors, the idea is to minimize it. While some investors profit from short-term, high-risk/high-reward stock trading, if the mining industry is to expe- rience sustained growth and provide the materials needed to support growing populations and qualities of life, long-term investors must see through the current craze and prevailing fads to the criteria and elements underlying them in order to discern their validity. I suggest keeping a disciplined focus on immediate data and fundamental value while putting the bigger picture trends in proper perspective. n Susan J. Mitchell, BA, MIM, founded S. Mitchell & Associates, LLC in 2004, based in New York, a financial advisory business for mining companies. Susan was initially trained in international economics and finance at McGill University and moved on to Global Banking and Investment, M&A, Project Finance in Natural Resource Industries and Corporate Treasury. Susan was formerly Managing Director, Structured Finance, Metals and Mining for WestLB, New York, NY; and prior that she was Director, Treasury, Cyprus Amax Minerals Company, Denver, CO. One way of allowing for uncertain commodity price forecasting is to analyze whether the project is or will be amongst the lower cost producers in the industry. Subscribe to reSourCe World at: www.resourceworld.com

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