A Note on the Mining Life Cycle & Valuations

After reading our Beginner's Guide to Mining Stocks, we now know that in order to value a mining company, we must first know what stage of the life cycle that company is in.

So how do we determine this?

The first question we need to ask when trying to figure out what stage of the life cycle the company is in, is this: do they have a resource estimate (NI 43-101) completed?

If the answer is no, then they are still in the exploration stage. If the answer is yes, then we ask this: do they have an economic study completed (PEA, PFS, FS)?

If there has been no economic or desktop study completed, then they are still in post-discovery development-stage. If they have completed an economic study, then they are most likely in development stage but would be classified as a 'near term producer'. If the company is already in production, then would obviously be classified as a producer.

Knowing this we can determine what life-cycle stage a few different mining companies are in.

Here is a summary table of some examples :

1) Unigold (TSXV:UGD): completed NI 43-101 resource estimate, but no economic study yet = post-discovery development stage

2) Fosterville South Exploration (TSXV:FSX): no resource estimate, no economic study = exploration stage

3) Turmalina Metals (TSXV: TBX): no resource estimate, no economic study = exploration stage

4) Pure Gold Mining (TSXV: PGM): completed NI 43-101 resource estimate, completed feasibility study = near-term producer in development-stage

So why are some exploration companies which don’t even have a completed resource estimate valued higher than some advanced-stage developers with completed economic studies?

The reason for this is multi-faceted….

In the world of investing, stocks RARELY ever trade for what they are worth. Stock price is often not a reflection of true value. Stock price is a reflection of the supply and demand for the company's shares at the time. Clearly, there is more demand for these explorers shares .

But why? I am assuming its because of the geological potential which is there, but the full extent of which is yet to be known. For these near-term developers like Pure Gold Mining and Unigold, they have a better grasp on the geological model on their properties so the odds of a new MAJOR discovery are a little lower, since they already know the source of the mineralization. For these other exploration plays, they are still trying to determine the source of the mineralization on their properties which could turn out to be +10 million ounces of high grade, we just don't know.

Reasons for such a high premium on explorers are usually the prospectivity of the geology, the management team, and most importantly, the proximity of the land package to other producing mines or recent discoveries.

In the case of FSX, they are right next to Kirkland Lake's Fosterville mine, which is one of the most successful gold mines in modern history. Prime real estate.

Whether the upcoming drill results will be enough to justify the premium on those shares, is something I prefer not to speculate on. I prefer to watch from the sideline.

- SmallCapInvestor