The Deities Speak

By Nancy E. Roth

Over the weekend FCW blew into wintry Toronto with the snow to catch up with friends and colleagues at the 2008 convention of the Prospectors and Developers Association of Canada. We came in a day early, however, lured by a pre-convention short course with the long title "Understanding mineral exploration & resource development: The relationship to company stock prices."

In other words, the course promised to unlock the recondite secrets of the financial wizards who evaluate and rate for their investor clients every conceivable kind of resource exploration and mining project. Here was a rare chance to sit at the feet of the demigods whose prognostications have sealed the fate of many an under-funded uranium junior. How could FCW resist?

Indeed, we emerged from the course impressed at the speakers’ superior intellect, their highly evolved and specialized language and the wide range of techniques they have crafted to advise the walleted ones whether a given exploration and mining project might be worthy of attention, even calculating specific buy and sell price points for listed enterprises.

Equally awe-inspiring were the diverse and contradictory conclusions these evaluation methods spawned.

One speaker outlined six valuation methods for three kinds of properties: development, marginal development and exploration. Each of these valuation schemes had its merits and shortcomings for each category of property.

Another described stock market valuation schemes for early exploration properties without mineral resources; with defined mineral resources but no scoping or feasibility data present; and with defined mineral resources before any feasibility data had become available.

Cash flow valuations were the topic of a particularly scintillating discussion on how analysts (or are they sorcerers?) predict whether a mining project in late-stage development will flourish. Against the background of project and commodities market cycles, they must gin up the project cash flow and then apply cash flow metrics to unveil the internal rate of return, the net profit value, and the initial investment payback period (i.e., the ability of the project to generate cash flow).

The speaker also pointed out the advantages and cautions of each method of analysis. For example, should a valuation focus solely on the project reserves (economically minable portion of the deposit) or on the resource (total amount of the mineral in the deposit)? The answer: it depends on who is doing the analysis and why.

Bankers making financing decisions and consultants preparing NI 43-101 technical reports work only with reserves. Miners may need reserves and resources for mine planning, acquisitions and sales. But for determining their eventual production rate, they use formulae that require the most likely eventual reserves.

All of which serves to warn the rest of us mere mortals that we are doomed to perpetual cluelessness. Even if we were privy to the methods of the analysts who release their various conclusions to the public which we are generally not we would not be able to compare the analytical results fairly in order to judge the merits of a project in question, let alone compare two or more projects.

Therefore, beware the words of the analysts who claim to know the truth about a uranium project. They may seem to enlighten the unwitting, but they may in fact mislead.

Greetings from the Big Show

By Andrea Jennetta

I am in Toronto, Ontario, Canada, for one of the largest mining conferences in the world. The Prospectors and Developers Association of Canada hosts an annual meeting attended by 20,000 people from all over the globe. Participating are actual miners, would-be miners, mining exploration companies, investment firms, market makers, venture capitalists, banks, consultants, geologists, and government officials.

Two days into the conference, I have reached the following conclusions:

1. The valuation of exploration properties and their stock market price is an art, not a science. So is commodity price forecasting and supply-demand prognostication. All are based on data. But conclusions are subjective, made by those with (hopefully) a tonne of buying, selling, producing and financing experience with the specific metal, whether precious or base.

Having said that, the experts here believe that commodity prices across the board will stay high for some time to come. Today we are seeing an unprecedented super-cycle for base metals because of the seemingly insatiable demand from China. Besides China, the markets of several other emerging economies will sustain this demand, because production across the entire sector is lagging. India tops this list, followed by (in no particular order) Vietnam, Malaysia, Brazil and even Eastern Europe and Russia.

All of which means the mining sector will continue to enjoy high levels of market capitalization, financing and interest from investors.

2. Start up problems, production snafus, equipment shortages, inexperienced personnel, cost overruns and longer-than-anticipated project development are the norm across the industry, regardless of the mineral.

3. Uranium continues to be the international mining industry’s ugly stepchild.

Although it is classified as a base metal, uranium is really an energy mineral, just like oil, coal and natural gas. But unlike those three commodities and the other base metals, uranium is not traded daily, is barely commoditized, and has just the one application: nuclear power.

No one knows what to do with it.

Most of the actual miners, would-be miners, mining exploration companies, investment firms, market makers, venture capitalists, banks, consultants, geologists, and government officials do not seem to care one whit about uranium. It gets mentioned, but only in passing and often as an afterthought.

Does that mean money is not available for those exploration companies prospecting for uranium? Not at all. But the initial wave of excitement seems to have crashed on shore. I think the investors and banks will take a much more cautious approach to uranium investment, if for no other reason than the spectacular fall of Uranium One. They might look a little closer and take their due diligence responsibilities more seriously as a result.

4. Unless the base mineral in question is a byproduct, grade matters. A lot. In short, what the miners say again and again about the projects is, it’s the grade, stupid.