Prime Meridians – Buy The Project, Not The Sector

This week in Pierce Points:

India made mining harder. The major producer of iron ore and alumina is increasing royalties and permitting burdens.

The world’s two largest gold markets changed rules. China will allow more imports, while India is making it harder to ship bullion.

Costs in the petroleum sector dropped 50%. Australian officials said that new projects are being completed much cheaper than a year ago.

Indonesia considered re-allowing bauxite exports. The government may reverse a ban on shipments of unprocessed ore, to help miners raise funds.

Coal markets got a rare piece of good news. Imports into India are still showing double-digit growth.

Buy The Project, Not The Sector

Further to the last item above, it pays to look at the details when it comes to resource projects.

As I discussed in last week’s Prime Meridians, the coal market — on a worldwide basis — is dismal right now. But certain parts of the world like India are still doing a brisk business.

The thing is, resource investors and project developers are too often focused on fundamentals across an entire sector. If gold prices are up, we assume gold projects are a good idea. When coal prices drop, we throw out our entire slate of carbon-focused ideas.

But that’s a mistake. With any project, we need to look at the details.

It’s certainly true that now is a difficult time for many projects in downtrodden sectors — gold, coal, iron ore. Pricing is generally challenging, and exploration and development capital is much harder to come by than it was a few years ago.

But to discard these sectors wholesale puts us at risk of missing some great opportunities. Such as the chance for coal projects capable of feeding an upbeat market like India — which may be available in a developing producer like Kenya, as I outlined last week.

The same is equally true of site-specific opportunities in other sectors. Whether it be geographic opportunities, or geologic ones.

In terms of the latter, the best strategy for the current uneven markets is to focus on only those projects that have the chance to yield top-tier producers. The kind of mines that will be sought after by global mining companies regardless of commodities prices.

This comes down to the right targeting. Researching and designing projects that have a shot at yielding a world-class discovery.

Today, we need to be merciless in filtering out projects that are marginal. Whether that means low grades, small size, constrained infrastructure, or other drawbacks.

The upside is that in today’s subdued markets, competition for projects is waning. Allowing us a wider selection of potential targets.

The difficult part is in the concepting. Making sure that the deposits we’re pursuing have indications of significant scale, such as:

  • Proximity to large deposits (a strategy my associates and I have been employing of late in the open-field exploration terrains of Myanmar) — there’s nothing better than a giant deposit surrounded by miles of virgin ground;
  • Evidence of permissive geology similar to nearby and significant mines — just because a project is physically close to a big deposit, doesn’t mean it has the same rocks;
  • A deposit model that has global analogues of acceptable size, scale and grade — make sure you’re looking for something that’s going to be worthwhile to find;
  • As many data points as possible suggesting good potential — grab samples, geochemical anomalies, and structural and stratigraphic data that match the model we’re looking for.

If we can do those things, we have the makings of an “all-weather project” –the type that is going to be meaningful in market tops and bottoms. We need to be well-considered in our decisions — which includes not being globally pessimistic about entire sectors just because prices are down.

Here’s to keeping an open mind,

dforest@piercepoints.com / @piercepoints / Facebook

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