petejh
Well-Known Member
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- Oct 20, 2008
- Messages
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It's a reasonable question and the answer mostly boils down to risk and to scale.
The major miners - the BHPs, RIOs, Glencores, etc. want to own and operate what are known as tier 1 assets. These are resources of such size that they have a long life of multiple decades and ore bodies of sufficient grade to be economic even during troughs in the cycle. This give these companies a low risk profile which attracts shareholders of a certain risk profile - insto's, pensions, dividend investors, etc.
There are also mid-tier and smaller mining companies - those with tier 2 / 3 assets of smaller scale hence a shorter mine life, or resources at a lower average grade that puts them further up the cost curve towards the margin of unprofitably during troughs in the cycle.
Exploration companies sit in a sweet spot - they're too small to be of any interest to majors, but some of them end up finding what the majors want: typically a junior explorer has a £5 - £50m market cap, and there are literally thousands of junior exploration companies listed on the various markets of N.America, Australia and the UK.
For a major to just buy them all would be unrealistic - very high risk (not what majors do - there'd be a shareholder revolt), v.costly, and unworkable. Imagine the wage bill and the admin. And for 99% of these companies it'd be a lot of cost and effort for nothing found.
So the next thing to think about is when should a major buy-out a junior explorer - if Rio bought 100 juniors at random they'd have blown, say, $500m - $1billion (of shareholder's money - shareholder's who want low risk and dividends), and probably find nothing that's going to repay the cost.
If Rio bought the ten junior explorers with the ten best discoveries each year, then they'd be blowing, say, $5 billion - $10 billion - a lot of capex, even to the majors. Because that's the torque and the power of a significant resource discovery to the market-cap of a junior explorer.
BHP just purchased 50% ownership of Filo (shared 50/50 with Lundin Mining) for C$2.25 billion. The game for a major is balancing waiting long enough to be confident that what you're buying will be worth the price tag plus the large capex required to develop it (in Filo's case, $6-8 billion capex to develop into a mine), versus the longer a major waits the better the resource might get and the higher the price tag.
You're wondering how come Rio's / BHP's etc. don't just take the exploration in-house. They do, they have exploration departments. But the world is still too large a place and too full of unknowns for any one organisation to have it all worked out. That's part of the wonder of resource exploration.
A common in-between approach is 'the farm-in'. This is where a junior has discovered something, not entirely certain how big yet and still far from being de-risked - a resource is only de-risked when it starts producing usually 7-12 years later and even then not entirely risk-free - but something seemingly significant to a major. The major will farm-in usually by paying $x thousands or millions to the junior, or other schemes of payment, and they get a foot in the door - ownership of anywhere from 5% to 75% of the asset. They can offer technical expertise and supply chain assistance and guide the exploration of the junior. Like a parent guiding a teenager.
That's what happened at Filo - BHP bought in a 5% stake following hole 41 because they could see immediately it was v.significant and suggested a major ore body of tier 1 scale. Thing is it only takes one drill hole like hole 41* for all us retail nerd who follow juniors to have high confidence too. And because we knew Filo is owned by a family group renowned for their success in exploration and creating shareholder value over the last 5 decades, we could be confident Filo was going to go the distance, as opposed to a common junior 'shitco' story of management lining their own pockets through endless cap-raises 'for G&A expenses' at the earliest whiff of a speck of copper.
This niche in the market is what I focus on, because I find it fascinating and also because it's what our civilisation is founded on. And I love that most people are willfully ignorant of where their stuff comes from, it's part of what makes for a market where you can do still well for yourself if you're prepared to get into the weeds and accept some risk. The key to doing it profitably isn't having some super-ability to spot the best resources early (although early'ish is quite useful), it's position sizing large when you finally do spot the emerging successes and position sizing small up until that point. In this way you can have 70% failure and make a big profit.
If you ask me about tech I haven't got a clue and my track record on investing in tech is woeful. The market is never fully efficient, but in the large sectors it is a lot more efficient. Resource investing is a tiny sector when you view it on a heat map of the overall market. Full of opportunity and market inefficiency, as I laughed to myself about when I started this thread and was being told by a certain pompous know-it-all that it's impossible to get ahead of the market intelligence.
* NGEX's initial hole into Potro Cliffs (now 'Lunahuasi') is the same thing - suggestive of a v.significant ore body. I suppose this is significant part of doing well at this game - knowing what's a good drill hole and what's just reported by management as a good drill hole. It's not that difficult to learn it just takes time and error, you don't need to be a geologist there are plenty of free learning resources out there.
The major miners - the BHPs, RIOs, Glencores, etc. want to own and operate what are known as tier 1 assets. These are resources of such size that they have a long life of multiple decades and ore bodies of sufficient grade to be economic even during troughs in the cycle. This give these companies a low risk profile which attracts shareholders of a certain risk profile - insto's, pensions, dividend investors, etc.
There are also mid-tier and smaller mining companies - those with tier 2 / 3 assets of smaller scale hence a shorter mine life, or resources at a lower average grade that puts them further up the cost curve towards the margin of unprofitably during troughs in the cycle.
Exploration companies sit in a sweet spot - they're too small to be of any interest to majors, but some of them end up finding what the majors want: typically a junior explorer has a £5 - £50m market cap, and there are literally thousands of junior exploration companies listed on the various markets of N.America, Australia and the UK.
For a major to just buy them all would be unrealistic - very high risk (not what majors do - there'd be a shareholder revolt), v.costly, and unworkable. Imagine the wage bill and the admin. And for 99% of these companies it'd be a lot of cost and effort for nothing found.
So the next thing to think about is when should a major buy-out a junior explorer - if Rio bought 100 juniors at random they'd have blown, say, $500m - $1billion (of shareholder's money - shareholder's who want low risk and dividends), and probably find nothing that's going to repay the cost.
If Rio bought the ten junior explorers with the ten best discoveries each year, then they'd be blowing, say, $5 billion - $10 billion - a lot of capex, even to the majors. Because that's the torque and the power of a significant resource discovery to the market-cap of a junior explorer.
BHP just purchased 50% ownership of Filo (shared 50/50 with Lundin Mining) for C$2.25 billion. The game for a major is balancing waiting long enough to be confident that what you're buying will be worth the price tag plus the large capex required to develop it (in Filo's case, $6-8 billion capex to develop into a mine), versus the longer a major waits the better the resource might get and the higher the price tag.
You're wondering how come Rio's / BHP's etc. don't just take the exploration in-house. They do, they have exploration departments. But the world is still too large a place and too full of unknowns for any one organisation to have it all worked out. That's part of the wonder of resource exploration.
A common in-between approach is 'the farm-in'. This is where a junior has discovered something, not entirely certain how big yet and still far from being de-risked - a resource is only de-risked when it starts producing usually 7-12 years later and even then not entirely risk-free - but something seemingly significant to a major. The major will farm-in usually by paying $x thousands or millions to the junior, or other schemes of payment, and they get a foot in the door - ownership of anywhere from 5% to 75% of the asset. They can offer technical expertise and supply chain assistance and guide the exploration of the junior. Like a parent guiding a teenager.
That's what happened at Filo - BHP bought in a 5% stake following hole 41 because they could see immediately it was v.significant and suggested a major ore body of tier 1 scale. Thing is it only takes one drill hole like hole 41* for all us retail nerd who follow juniors to have high confidence too. And because we knew Filo is owned by a family group renowned for their success in exploration and creating shareholder value over the last 5 decades, we could be confident Filo was going to go the distance, as opposed to a common junior 'shitco' story of management lining their own pockets through endless cap-raises 'for G&A expenses' at the earliest whiff of a speck of copper.
This niche in the market is what I focus on, because I find it fascinating and also because it's what our civilisation is founded on. And I love that most people are willfully ignorant of where their stuff comes from, it's part of what makes for a market where you can do still well for yourself if you're prepared to get into the weeds and accept some risk. The key to doing it profitably isn't having some super-ability to spot the best resources early (although early'ish is quite useful), it's position sizing large when you finally do spot the emerging successes and position sizing small up until that point. In this way you can have 70% failure and make a big profit.
If you ask me about tech I haven't got a clue and my track record on investing in tech is woeful. The market is never fully efficient, but in the large sectors it is a lot more efficient. Resource investing is a tiny sector when you view it on a heat map of the overall market. Full of opportunity and market inefficiency, as I laughed to myself about when I started this thread and was being told by a certain pompous know-it-all that it's impossible to get ahead of the market intelligence.
* NGEX's initial hole into Potro Cliffs (now 'Lunahuasi') is the same thing - suggestive of a v.significant ore body. I suppose this is significant part of doing well at this game - knowing what's a good drill hole and what's just reported by management as a good drill hole. It's not that difficult to learn it just takes time and error, you don't need to be a geologist there are plenty of free learning resources out there.