COMMENT
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DON’T RED-FLAG
EXPLORATION
COMPANIES
I
nvesting in a greenfields exploration project in a
remote region of Africa is a long-term play and a
high-risk undertaking. Financial institutions and
individuals who have the capital to pour money into
such ventures, are fully aware (or, at least, should be) of
the risks involved, and that debt would be a constant
companion on the balance sheet for at least the first three
to five years of operation. Volatility is inextricably linked
to mining, and companies plan for peaks and
troughs, so it shouldn’t be a major risk.
I find it fascinating that certain
‘analysts’ and websites warn
investors about projects that are
‘unprofitable’ and ‘does not have
enough runway’ in the first
year of operation. Remember,
for between five and ten
years, from the moment
an ore body is discovered,
to bringing the mine into
production, an exploration
company will naturally burn
through cash reserves and
the costs will head north as
there is nothing to sell. It is
not like setting up a shop and
immediately start paying back
the initial capex. Once the mine
starts running at full tilt, it normally
takes another three years to settle the
debt. Is it fair to expect a remote mine
in a remote part of Africa to be profitable in
its first year of operation? Yes, the balance sheet
doesn’t look good and there is a possibility that shareholders
will get diluted, but hell, they knew what they were in for
when they signed up, didn’t they?
discovery and then building a mine from scratch, especially in
Africa. There are only a handful of companies that have done
so successfully.
Financial institutions are risk-averse and getting funded for
a greenfield project, especially in high-risk jurisdictions, is
near impossible. Once a company has managed to raise the
necessary funds it needs to prove, beyond reasonable
doubt, that the project is viable.
Even then, the ore body remains a
big unknown and it takes several
years before the mine can
start shipping out product,
pay off all its debt and
become profitable.
During development, the
company naturally starts
accumulating debt, often
raising more funds to
cover its operational
costs and in the process
diluting its shareholders.
"There are scant examples of
junior mining companies making
a great discovery and then building
a mine from scratch, especially in
Africa.
To advance a mining project from early stage exploration
to full production is the exception rather than the rule.
Most junior mining companies hope to prove up a large
reserve and then offload the project to a major with the
necessary capital to back up further development. There are
scant examples of junior mining companies making a great
www. africanmining.co.za
African Mining Publication
Existing investors are
well-aware of these risks.
The ability to construct a
mine in extremely difficult
circumstances should at
least say something about
management’s ability, resilience and
determination. Moreover, the mine’s
ability to create jobs and its positive impact
on community development, should also be
considered. To dismiss ‘unprofitable’ projects in the first year
of full production is unfair to brave exploration companies,
who have to ward off a deluge of challenges every day.
Exploration companies that develop new mines should be
celebrated, not red flagged. They wouldn’t do so if they didn’t
believe in the ore body.
Leon
African Mining
African Mining April 2020
1