Introduction
This is my second installment of a monthly article which will cover a variety of mining industry and mineral economic topics. Again, I invite any criticism and much appreciated feedback which I can use to evolve the writing style and topics to be more inline with your needs and interests.
Last month I gave a broad introduction of my background and experience in the mining industry as well as my role as VP Mining at HB Global Advisors. As mentioned previously I’m introduced almost daily to various mineral property opportunities through contacts at HB Global and also our parent and legal firm Heenan Blaikie LLP. For example, here is a sample of some of the projects and mineral properties I was introduced to recently and that I can describe generically:
Prospect #1
A relatively large package of "Large Scale Prospecting Licenses" (+350,000 hectares) located throughout Zambia. These properties are essential Greenfields stage with no exploration work preformed since reconnaissance surveys during the 1980's. There are historical descriptions of surface discoveries and mineral occurrences worth following up as described in the Geological Survey of Zambia reports provided. However, I did not see any indication of any operating mines neighboring any of the properties. This means a vender would have to target investors which specialize and only have interest in advancing early exploration stage properties. Zambia in my view is the best and most mining friendly country in Africa but timing for promoting opportunities like this has to be good and in sync with the mining cycle. Currently it is difficult for exploration properties without solid prospects (at least history of a decent drill hole or mineral resource etc.)
To interest a potential investor, the property owner (vendor) could not expect much in the way of a cash option payment, and would be lucky to be offered a phased JV earn-in with the investor assuming all costs associated with keeping the property in good standing during the term of the agreement. This often clashes with the venders high expectations that they should be entitled to receive large and early cash payments.
Prospect #2
A relatively large Cu-Mo porphyry located in Columbia which has had considerable historical and current work performed on it and containing a historical mineral resource of +300Mt grading 0.37% Cu and 0.061% Mo. I like this project and the management behind it and hope to find the right party interested in taking this large scale project to the next level.
Prospect #3
Two early stage copper occurrences located in Colombia.
Copper Occurrence No 1.
- At least 3 exposures along a historic artisan mining operation into a single steeply dipping vein.
- The vein approximately 1.2 to 2m in width at the exposures and consists of quartz and zones of highly oxidized minerals including pyrite, chalcopyrite, azurite, malachite, cuprite and limonite indicative of a significant copper carrying system.
- Access to the area was extremely difficult and consisted of a 1.5hr walk through steep topography approaching slopes of 45 degrees.
- 10 chip samples taken in and across the vein.
Copper Occurrence No. 2
- Exposure created by stream erosion and consisted of high oxidized minerals from pyrite and chalcopyrite.
- Exposure consists of a few mineralized veins of 10 to 30cm width, plus an oxidized and mineral bearing alteration zone which runs 70m in width in the up slope direction and unknown in the downslope.
- Terrain modest slope (relative) and is accessible by road within 100m.
The grab samples were sent to a laboratory in Canada and analyzed by a multielement scan (32 Element ICP Analysis) for base metals, trace and lithological elements using aqua regia digestion. The results (for only 5 elements) are shown below in Figure 1 for the 10 grab samples. These results can be considered to be a very positive showing abundant metal content including copper grades of greater than 1 percent (limit of the analysis). As expected, the samples were predominantly iron bearing but also had very high gold and arsenic values. This has implications with respect to metallurgical recovery methods, environmental impact and capital costs if a sufficient tonnage is later proven on the property. Follow-up drilling and delineation would require more precise assaying methods to achieve accuracy.
Figure 1
Grab Sample Results (Copper Occurrences)
32 Element ICP Analysis
| Sample |
Ag ppm |
Au ppm |
As ppm |
Cu ppm |
Fe % |
| 1 |
<0.5 |
<5 |
18 |
367 |
0.57 |
| 2 |
<0.5 |
<5 |
709 |
>10000 |
15.11 |
| 3 |
<0.5 |
<5 |
266 |
>10000 |
19.99 |
| 4 |
<0.5 |
34 |
563 |
>10000 |
29.13 |
| 5 |
<0.5 |
11 |
87 |
3580 |
2.53 |
| 6 |
<0.5 |
19 |
4250 |
>10000 |
40.52 |
| 7 |
<0.5 |
<5 |
389 |
>10000 |
29.31 |
| 8 |
<0.5 |
13 |
98 |
3170 |
31.06 |
| 9 |
<0.5 |
<5 |
119 |
1760 |
41.61 |
| 10 |
<0.5 |
<5 |
23 |
407 |
0.67 |
This is a very early stage property but the mineral indications are interesting and warrant a follow up program which could consist of the following:
- Ensure title (license to the prospective areas) is clear and defendable.
- Determine the type of deal structure the owner requires.
- If an agreement is reached to option or purchase the property etc., hire local geologists and labour to prospect and map the areas around the known exposures with mandate to find additional oxidized exposures that can be sampled and analyzed.
- Create a “fresh” or un-oxidized surface from within the vein and also altered zones by drilling and blasting (1 meter depth). Sample the entire width of the prospective zone by chip or channel sampling at 1m increments.
- Get an understanding of the size extent of mineralization in two dimensions.
- If results positive, proceed to next phase including possible diamond drilling.
Technical
This is the technical portion of the article in which I again explore the importance of economic analysis of mineral deposits. Again, in my experience, the economic analysis of mineral deposits is required for the following three primary purposes;
Purpose #1 Giving Context to Exploration Programs
Purpose #2 Identifying Acquisition Targets
Purpose #3 Due Diligence Evaluations for Mergers and Acquisitions
Last month I explained Purpose #1 – Giving Context to Exploration programs. This month I will explain in some detail Purpose #2 – Identify Acquisition Targets.
Purpose #2 – Identify Acquisition Targets
Successful mineral exploration and mining companies have clear corporate development criteria in targeting potential acquisitions to management. Company Board of Directors must define high level strategy in terms of their preferences of industry (commodity), geographic region, stage of development, size of targets and business culture. To meet these requirements management must be prepared to rapidly perform economic analysis on many potential mineral deposits and mining companies as part of the process of determining a short list of potential targets. Therefore, access to public “on-line” information, “in-house” databases, and a extensive professional networking is key to success. In addition, it is also often necessary to apply various “short cuts” in this high level screen process of targeting acquisitions.
Identifying acquisition targets is “out of the box” idea based, and is largely done alone without the aid of a corporate development team (too early!). Therefore the Corporate Development VP or Business Development Manager must be creative and draw from a variety of information sources. For TSX listed companies the best public information source is SEDAR (www.sedar.com) which stands for the System for Electronic Document Analysis and Retrieval and is an official filing system developed for the Canadian Securities Administrators. This site is the best public source for information such as company technical documents (NI 43-101 reports), financial statements and press releases. The US equivalent is EDGAR however very few exploration and mining companies have listings on US exchanges. I’m also not aware of an equivalent or comparable electric database system for AIM which is the London Stock Exchange’s international market for junior companies. However, AIM has really not recovered from the collapse of the financial markets of late 2008 to early 2009, with very few new venture exploration companies listing since that terrible time.
Another excellent online public information source is TSXconnect (provided through the TMX Group and the TSX). TSXconnect is a complimentary service to all Toronto Stock Exchange issuers and can also be purchased for a fee by those who do not have a listing (think about $1,500 annually). TSXconnect provides information such as:
- Streaming quotes and index information
- Institutional ownership data
- Charting capabilities
- Trades and quotes
- Broker summaries
- Price history
- Total return information
- Short interest reports
- News
- Corporate actions
- Analyst mean earnings estimates
One of the primary reasons I like to have access to TSXconnect is to tap into information as to who the major shareholders are of public companies as well as insider holdings. This information is important from a corporate development perspective in term of understanding who you might know or have to deal with regarding a possible corporate transaction. More current share ownership information can be accessed through your preferred financial advisor but isn’t required until after you have zeroed in on a target and might need some M&A advice.
At the identifying stage of analysis you can sometimes also utilize internal “In-house” information sources such as any previous corporate development performed and held by the corporation. While working for INCO I was very excited to be invited to participate in the evaluation and possible merger with Falconbridge in early 2006 (under code name “Project Bird”) but was surprised to learn that this was at least the third formal attempt in relatively recent times and that there was already a large database available!
It is also very helpful to have an extensive and diverse network of industry contacts that you may be able to call on in confidence to get an inside perspective on the targeted company or asset. I also keep a copy of all feasibility and engineering studies that I have been involved with over the years as well as due diligence trip reports. Even if this information isn’t specific to the target and is outdated in terms of cost estimates, it may be useful in developing a rough economic model for the mineral asset of interest.
Once you have identified an interesting target which meets the criteria defined by your BOD, the next step is to build a technical and economic model which will define and test the opportunity. This model will depend upon whether the targeted mineral asset is Brownfields (i.e. existing or historically operation, or mining camp) or is Greenfields (without history of development and mining impacts). If the property is Greenfields it may mean that the process of exploring and developing the property will be much more time consuming given the likely lack of understanding and exposure of the local stakeholders to exploration and mining. A Brownfields project will likely be much simpler to plan and strategize given the likely access to local infrastructure, supply-chain support as well as availability to skilled labour. However, the downside may be liability issues associated with previous and unresolved mining impacts.
Next you need to check if there is an applicable model and database on file which can be used as a template which might include information such as:
- Similar deposits or neighboring publically owned mines?
- Historical costs? (which can be revised by indexing to present!)
- Historical feasibility studies? Technical reports?
- In-house project knowledge of the target (former employees!)
Building the Model – Example 1
This is a simple but actual example of a quick analysis and economic model of a underground base metal mine which had been in operation for seven years but is currently dormant. The owners wished to put the mine back in production but required a partner to provide the necessary capital to repair and replace mining and milling equipment. I was given access to all of the historical cost and production records (manager’s monthly reports) for the mine. Having access to actual historical cost data is not common but very helpful if handled correctly. The new plan for the mine was to operate at about the same production rate using the same mining and milling methods. The owners also had a production plan and schedule defining where the remaining mineral resources were located and would be mined, which enabled a rough estimate of the haulage distances required for trucking of the ore. Column A in Table 1 below shows a summary of actual historical costs for the operation, totaling $10.40/t ore mined. An estimate of revenue generated per ton of ore mined was also made assuming historical mill recoveries, resource grades and current smelter terms and metal prices. An operating margin of $1.78 was calculated per ton of ore mined. However this margin was not a realistic forecast of the future profitability of the operation since the historical cost data did not reflect current industry costs (were more than tens years old!). To correct this with minimal time and effort the approach was to modify these costs to reflect any expected variation in the mining and milling conditions and also to put the costs into current or “dollars of the day”. Column B in Table 1 below shows the new cost estimates for mining and milling which totaled $14.56/t or about 40% more than the historical costs. Each of the historical cost categories was factored using the best available cost index and also taking into consideration any operational differences. For example, the cost of hauling was increased in proportion to the average increase in haulage distance historically from where mining was now planned. Using the same revenue value (both were based on the same metal price forecast) an operating margin in the red of $2.38/ton of ore mined was calculation for the proposed mine restart.
Table 1
BUILDING A MODEL
Using Historical Operating Costs
| |
Column A |
Column B |
| Revenue (Payable in Current $) |
$12.18 |
$12.18 |
| Mining Costs |
Historical Costs (1985-92)
$/t Mined
|
Costs Indexed to Present
$/t Mined
|
|
Drilling & Blasting
Load,Haul & Dump
Ground Support
Misc. & Mining Indirects
Total Mining
|
$1.60
$1.33
$0.53
$1.12
$4.59
|
$2.23
$1.85
$0.74
$1.57
$6.38
|
| Milling Costs |
$2.96 |
$4.11 |
| Indirect Costs |
$2.85 |
$4.07 |
| Total Operating |
$10.40 |
$14.56 |
| Operating Margin |
$1.78 |
($2.38) |
These results gave reasonable proof that the reactivation of this dormant mine was not viable for the proposed operating assumptions, mineral resource grades and current metal price forecasts. The example above took in total about a week to complete including the site visit for a cost of less than $15,000. Typically a feasibility study for this project applying “basic principals” (detailed engineering design, planning and cost estimates) could take several months and also an expense of up to several hundred thousand dollars just to arrive at the same conclusions.
One key element which must be mentioned with regard to this quick and dirty factoring approach is the reliance on a relevant cost index. In this case, the project was located in the US, and the US government provides (online) very detailed cost and price indexes for mining and construction industries located in the US and also going back several decades. This information can be accessed for free and is sufficient if detail is not required and if time and budgets are limited. One of the best sources of mining cost information is through CostMine, (formerly Western Mine Engineering, Inc. and now a division of InfoMine). This is the type of information that a professional cost estimator requires in order to quickly generate costs for a variety of mining and milling operations (type and scale) and also considering impact of geographical location.
Feature Commodity – Iodine
Last month I wrote a brief note on lithium. This month will follow with Iodine which is another brine based and relatively unknown element which is becoming increasingly sought after. The following report on Iodine was researched and written by Noah Arshinoff, an articling student at Heenan Blaikie LLP in Toronto.
Introduction
Iodine is used in products ranging from optical polarising film (OPF) and liquid crystal display (LCD) screens to numerous human health products. Due to its varied uses and the particular industries that rely on it, it is predicted that demand and consumption of iodine will continue to increase in the coming years. This demand forecast has made iodine a very profitable mineral for mining companies.
The following provides a brief background on the global iodine market including its uses, predicted future economical trends, some of its important chemical properties, the geographic locations where iodine is “abundant”, and a list of companies that are active in extracting iodine.
Background and Summary
The global market for iodine is largely driven by products beneficial for human health and industrial applications. The consumption of iodine over the past decade has increased considerably. This increase is largely because iodine is an essential element in optical polarising film (OPF) as well as liquid crystal display (LCD) screens. It has been estimated that the demand for iodine will continue to increase by between 3.5 and 7 per cent[1] per year over the next 5 years.
The driving factor behind increased demand in the health industry for iodine is its unparalleled ability to kill germs. Iodine is therefore used in many antiseptic products as well as germicides and other medical applications.
Iodine is not abundant in nature and is therefore considered a rare element. Other than in sea water, iodine is only found in a few pockets of the globe. Global iodine production is dominated by Chile and Japan, which produce 60 per cent and 29 per cent respectively. The reason for these locations containing high concentrations lies in the sources of iodine. Iodine is often found as a by-product with nitrate minerals associated with caliche deposits. These deposits are found in the Atacama Desert of Northern Chile. Iodine is also found in underground brines which are associated with natural gas and oil deposits. These deposits are where most of the iodine in Japan is extracted from.
Because iodine is only found in a small number of countries, supply has been tightly controlled and has contributed to an increase in price.
Iodine is unique due to the fact that it sublimes and does not melt (it turns directly from a solid into a gas). This transformation process is very useful for extraction purposes. When a mixture of substances is heated, only the iodine will sublime and it can then be collected and purified.[2]
There are only a handful of companies that control about two-thirds of iodine production globally. Below is a list of a handful of iodine extraction and production companies along with some background information. The list is divided by companies that operate in Chile and companies that operate in Japan.
- a. Chile:
Sociedad Quimeca y Minera de Chile (SQM)
- SQM holds the largest reserves of iodine in the world..
- For more information visit http://www.sqm.com/aspx/iodine/Default.aspx
Atacama Minerals (AAM)
- Atacama is a Canadian company based in Vancouver. Their iodine extraction and production operations are in the Atacama desert of Northern Chile. They are listed on the TSX Venture Exchange (AAM).
- For more information visit http://www.atacama.com/s/Home.asp
Algorta Norte S.A.
- Toyota Tsusho Corporation in partnership with ACF Minera S.A. injected money into Algorta Norte in early 2010. Construction on a plant commenced in May 2010 in the state of Antofagasta in Chile which is slated to commence extracting iodine.
- Toyota Tsusho invests in manufacturing companies that produce iodine in Japan and sells about 2 million tons of iodine annually. This venture was an opportunity for Toyota Tsusho to get into the Chilean manufacturing market and increase the company’s global share through securing an important supply of iodine through Algorta Norte.
- b. Japan:
ISE Chemicals
- ISE Chemicals is traded on the Tokyo Stock exchange. For more information visit http://www.isechem.co.jp/english/
Godo Shigen Sangyo Co., Ltd.
- Godo Shigen produces iodine and natural gas. Iodine is manufactured using a sublimation method. They also manufacture a wide variety of Iodine compounds.
- For more information visit http://www.godoshigen.co.jp/english/iodine/index.html
Nippoh Chemicals Co., Ltd.
- Nippoh Chemicals is a Japanese producer of iodine compounds headquartered in Tokyo.
- For more information visit http://www.npckk.co.jp/english/company/gaiyou.html
- 2. Extraction Process
- a. Caliche
Caliche is a mineral that contains high concentrations of nitrate and iodine. These concentrations are often found in two to three metre thick layers, two meters or so under the desert surface in Chile.
Caliche is mined from the shallow surfaces (usually requiring blasting). It is crushed and then leached to recover the iodine and sodium nitrate contained within. There are a number of steps involved in this process.
- First, an iodate solution is recovered.
- This iodate solution is sent to an iodide plant which converts iodide into iodine.
- This conversion produces prilled iodine which can be further sent to an iodine derivatives plant.
** This information is based on the system used to extract iodine by SQM. Other companies may employ different techniques.
- b. Brine and the Blowing-out Method
Extracting iodine in this method essentially starts with a gas well. This well contains a layer of underground water with high concentrations of salt and natural gas. This water layer is often referred to as a brine. These brines are thought to have been formed over millions of years and form an ancient sea floor where nutrients accumulated. Over time, iodine concentrated in these brines and they are now thought to contain almost 2,000 times the concentration of iodine found in seawater.
Iodine is extracted using a blowing-out method, or a sublimation technique. When heated, iodine turns directly into a gas from a solid and can therefore be easily separated from other substances. This is the method used to extract iodine in most of Japan and differs from the method used in Chile to purify caliche deposits.
** This is the technique as described by Nippoh Chemicals. There may be slight variations among other companies in Japan.
- 3. Future Outlook
In 2009, the global economic downturn contributed to a 10% reduction in the global consumption of iodine. However, the price for iodine continued to rise reaching US$30/kg in 2009, despite the fall in demand.
[3] Iodine may be subject to the variances of the economic market when it comes to LCD screens and OPF, however it seems fairly well isolated from economic instability in the health products market.