1. Industry Primer - Metals and Mining
Tuesday, October 4th, 2016
Presented by: Ina Ago

2. McMaster Investment Council
Agenda
Introduction
Business Structure
Valuation Methods
Tuesday, October 4th, 2016
McMaster Investment Council

3. I
Introduction

4. Introduction - What is a metals and mining company?
A metals and mining company is any firm that explores, extracts, produces and sells metals or precious gems for profit.
Tuesday October 4th, 2016
McMaster Investment Council

5. II
Business Structure

6. Business Structure – Profit Model
Ore Deposit
Refining
Final Product
Metal
Mining Company X
Manufacturer X
Money
Tuesday October 4th, 2016
McMaster Investment Council

7. Business Structure - Stages
Stage 1 - Exploration
Stage 2 – Build Out & Development
Stage 3 - Production
Tuesday October 4th, 2016
McMaster Investment Council

8. Business Structure – Stage 1 (Exploration)
Ore Deposits - Intro
Pre - Discovery
Ore deposits are usually lined along faulty lines
Major deposit formation types:
Hydrothermal
Magmatic
Sedimentary
Residual
Methods to explore land for ore deposits
Geo-mapping
Geochemistry
Geophysics
Drill Tests
Grade Criterion + Resource & Reserve
Once an ore deposit’s existence is proven, drill tests occur.
Two types of drill tests take place
Diamond Drilling
Structures can be revealed
Reverse Circulation Drilling
Larger sample sizes, cheaper
Geology harder to differentiate
Grade tests must be done to ore deposits once found
Low grade for gold is <1.5g/t
High grade for gold is >5g/t
Arguably the most important process comes next – resource estimation.
Hydrothermal Ore Deposits – Au, Ag, Pb, Co
Magmatic – Gold , Diamonds, Nickel
Sedimentary –Lead, Zinc, Iron Ore, Diamonds, Titanium
Residual – Nickel, Bauxite
Geomapping – multispectral imaging and thematic mapping allow researches to collect reflection data on soils, rocks and vegetation etc
Diamond Drilling – solid extracted from depth and the examination takes place on the surface
Reverse Circulation Drilling – uses rods with inner and outer tubes to bring samples of rock cuttings rather than the core (used in larger mines)
Tuesday October 4th, 2016
McMaster Investment Council

9. Business Structure – Stage 1 (Exploration) Cont’d
So, what are we looking for?
Junior firms are risky, look for factors that mitigate underlying risk associated with firm
Things to look for:
Brownfield exploration > Greenfield Exploration
Strong management team and proven success
No history of secondary offerings
Surrounding geography has been proven plentiful (not recycled)
Tuesday October 4th, 2016
McMaster Investment Council

10. Business Structure – Stage 2 (Build Out and Development) Cont’d
Once resource calculations are complete, technical studies take place
Reserves can be established by a Preliminary Feasibility study
Based off of economic viability
Preliminary Assessment
Pre – Feasibility Study
Feasibility Study
Inferred
Probable
Design concepts
Environmental issues
Location plan
Mine Planning
Processing Rates
Environmental and social requirements
Sensitivity Analysis
CAPEX/OPEX
Mine Plan & Schedule
Geo, Enviro, Social Studies
Detailed CAPEX/Cost Estimates
Risk/Sensitivity Analysis
Indicated
Economic Feasibility
Proven
Measured
Economic Feasibility
Tuesday October 4th, 2016
McMaster Investment Council

11. Business Structure – Stage 2 (Build Out and Development) Cont’d
The firm must now decide which method to use to extract ore, main decision factors include:
Ore deposit
Cost of extraction
Open – Pit Mine
Underground Mine
Open Pit
(Drill benches, blast, remove ore, transport ore)
Pros:
Large volumes of ore capable of extraction
Cost efficient
Larger equipment provides synergies
Lower labour requirements
Cons
Large amounts of waste
Sensitive to fuel costs
Large waste removal site needed
Prone to weather risks
Underground Mine
Selective (high grade deposits), labour intensive, high cost but good recovery rate
Bulk mining (uniform low grade ore, highly productive)
Less destructive to land
Smaller environmental footprints
More hazardous than open-pit
More expensive
Tuesday October 4th, 2016
McMaster Investment Council

12. Business Structure – Stage 2 (Build Out and Development) Cont’d
Permits and production are vital to the future of a mine.
Permits
Production
Social and environmental are most important factors
Social
Indigenous tribes
Social license
Government (tax, law, mining sentiment)
Environmental
Sustainable mining
Reclamation
Capital and environmental factors most important
Capital
Equity/Joint Venture
Debt
Environmental
Infrastructure (electricity, transportation)
Local material (labour, natural resources)
Tuesday October 4th, 2016
McMaster Investment Council

13. Business Structure – Stage 2 (Build Out and Development) Cont’d
Commissioning is the last step in the Build-out process which then takes the project into the production phase
Production Success Factors
Management Track Record
Production Schedule
Recovery rate is vital
Capital Availability
Tuesday October 4th, 2016
McMaster Investment Council

14. Business Structure – Stage 2 (Build Out and Development) Cont’d
Ore is processed based off of the metal it contains
Gold & Silver use a Heap Leach or CIL/CIP Method
Heap Leach
Ore
Ore
Crushing
Crushing
Heap Leach
Heap Leach
Leaching (CIL/CIP)
Leaching (CIL/CIP)
Elution
Elution
Refining
Refining
Heap Leach – process to extract precious metals and other compounds of ore from a series of chemical reactions that absorb specific minerals and then re-separates them after their division from other earth materials (low capex and opex, less environmental concerns, , quick construction phase, efficient)
CIL/CIP
(carbon in leach) (carbon in pulp)
Gravity circuit ( separates minerals based on differences in specific gravity)
CIL/CIP
Ore
Crushing
Milling
Leaching – Gravity Circuit
Thickener
Refining
Tuesday October 4th, 2016
McMaster Investment Council

15. III
Valuation Methods

16. McMaster Investment Council
Valuation Methods
There are three main ways to value a mining company
In descending order of popularity they are:
NAV Model
Multiples
IRR
Tuesday October 4th, 2016
McMaster Investment Council

17. Valuation Methods – NAV Model
NAV Overview
Functions similar to a DCF but calculates FCF attributable to equity holders
Net Value = Assets – Liabilities
Good for mining since most companies have low leverage
NAV Projections
Projections are based on historical values (historical value per tonne or gram)
Discount rates are based off of industry standards (5% or 10%)
In Sell-Side/Buy-Side research, a high emphasis is placed on the cost of a mine, looked at on an ongoing bases
By-Product vs Co-Product Costs
AISC vs. AIC
By – Product
OPEX/main metal product
Co- Product
OPEX/GEO Production
Co – product is a more useful indicator of cost efficiency
All in Cost is most useful indicator next to AISC as it is a total measure of cost on a per tonne or gram basis for the project
Tuesday October 4th, 2016
McMaster Investment Council

18. Valuation Methods – Multiples
Useful in comparison of mining firms of same development stage, size, and metal production
Precious metal firms usually trade at a premium relative to base metal producers
Common Metrics
P/E – not based off of cash flows, requires earnings
P/CF – not relevant for built-out phase; can capture CAPEX if FCF is used
EV/EBITDA – does not take into account mining specific features
Reserves per Share – not applicable to exploration; doesn’t show operating/mining efficiency
P/NPV – sensitive to NAV; includes a holistic view of the company
Tuesday October 4th, 2016
McMaster Investment Council

19. Valuation Methods – Internal Rate of Return
Discount rate at which the NPV is 0
Higher discount rate = higher quality project
Method can be adjusted for risk
Higher IRR indicates a company is cheap
Low will indicate expensive
Tuesday October 4th, 2016
McMaster Investment Council

20. Thanks!