SMART DOG MININGTM

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Some General Thoughts on Mining

Mining companies come in a wide range of sizes, from 1 to 2 people running small operations on weekends and vacations, to mega corporations with several billion dollar + operations around the world.

There are many very small operations, often working 3 to 4 months a year particularly in gold mining, or in tropical area the year round.  These (often called artisanal) miners are very small often mining and processing under a 100 tons per hour, and lucky to operate 8 to 10 hours a day 5 to 6 days per week.  As a general guide, these are people to stay away from because of the potential for legal issues involving environmental concerns or even land and mineral ownership.

Land and mineral ownership

In many cases (especially in North America) land ownership does not immediately mean that you own or have the right to mine the minerals found there.

For some general info see: https://www.nolo.com/legal-encyclopedia/who-owns-the-minerals-under-your-property.html#:~:text=Mineral%20rights%20are%20automatically%20included,point%20by%20an%20owner%2Fseller.

And: https://en.wikipedia.org/wiki/Mineral_rights

Company size

For an investor the mining sector (and by derivation the oil and gas sector) is made up of three major tiers (with a huge gray area in between each tier) Juniors, Mid-tier, and Mega.

The mega companies (Rio Tinto, BHP, Freeport-McMoran being three examples) have large projects often in many different minerals, in many different companies.  Investment opportunities with them are handled by major stock markets and are generally considered safe havens.  Deciding on them is a little like deciding between Coca-Cola and Anheuser-Busch InBev.

The mid-tier miners are more active and general (exceptions being many) concentrate on one mineral and or one region (though maybe several countries) at a time.  Some are traded on the major markets, but also on the lesser markets (TSX and such).  They usually acquire properties from the juniors either as joint ventures or out right purchases.  If the property/project really looks good or can become a mega project they will team with (and usually sell out to) a major.

For an example of this see: https://en.wikipedia.org/wiki/Pebble_Mine

Often when dealing with a mining project you will be dealing with several different companies.  There is usually a “company” who owns the mine, but that company is usually a local entity to comply with local laws.  It is often owned by 1 or more other companies with headquarters in other states or even countries, who may be owned by other entities in addition.   In fact the mine operator maybe a separate company who is hired to do the actual mining. 

I once dealt with a project that had an operation in Washington State, with offices in Reno, NV and was actually run out of Zurich.

Much of the “action” in mining is with the juniors, who are often exploration companies, they are constantly in search of new projects primarily in gold and silver, but with the recent surge of interest in electrical vehicles in battery minerals.  This also includes rare earths and specialty metals (more info on this is available on my website under Topics (https://www.smartdogmining.com/topics/default.html).

The junior sector is also the area of greatest risk and also greatest reward.  Finding the right project (at the right time) can lead to huge returns.  But it is also the area where it is sometimes difficult to tell the legitimate company from the outright scam artist.  Tthe Bre-X case is the perfect example. In fact this has lead to the development of certain guidelines for describing a mining project.  Following the Bre-X scandal (http://en.wikipedia.org/wiki/Bre-X) several countries (Canada being a leading example, also South Africa and Australia) came up with new regulations for technical reporting to raise funds on their stock exchanges.  For us the most important is National Instruments 43-101 by the Canadian Securities Administrators.

For a general discussion of NI 43-101 See: http://en.wikipedia.org/wiki/National_Instrument_43-101

Capitalization

Juniors are typically small-cap, with a low market capitalization (usually under $500 million).  Mid-tier mining companies are generally in the $500 million to $2 billion range, with majors starting from there on up.

Economics of mining

Many look at the potential value of the product, in this case gold (and their eyes light up) especially at almost $2,000 an ounce.  It would not take many ounces to make some decent money.  And this is true.   But what does it take to get those ounces.  That is where the point begins.

First off, a high grade gold deposit would run about 0.25 ounces per ton of ore. And these are few and far between.  A more realistic expectation would be around 0.05 ounces per ton of ore.  So to get 1 ounce of gold you will need to mine and process about 20 tons of ore.  But even that is misleading because your processing is not 100% efficient, you would be luck to recovery 85% of the gold, more realistically 75% (and many are happy to get 50%).  So we are now at about 27 tons of ore for 1 ounce. 

But even that is not the whole picture.  To mine 1 ton of ore you will have to uncover and reach the ore, which normally takes moving at least ½ to 1 ton of waste. So optimistically you are now at about 35 tons of material mined for 1 ounce. 

If you have a very well designed mine and process plant (mill) you can expect your operating and capital costs to be around $20 to $25 per ton or $700 to $850 per ounce.

That ounce you have is not 0.999 (99.9%) pure, it more likely will be 0.9 (90%) pure, or probably closer to 0.85 (85%). The remaining might be silver or copper which also does have value.  As a nugget (if it is a nugget) it might have more value.  But you now need to get it to a refiner who will buy it from you at the gold content level plus refining charges.  You will probably net around $200 per ounce (many get even less).  This works out to be around $6 per ton of material mined and processed.

To make serious money you need to mine and process a lot of material, and most successful operations do.

An interesting side note, this profit level of $5 to $10 per ton of material holds true for almost all mining operations, whether they are producing gold or crushed aggregate.   The people who make the most profit on gold, have the gold as a by-product with the bulk of the costs covered by the main material that they are mining.  One of the most profitable gold producers in the US (in California actually) is an aggregate operation.  They do not advertise this and actually down play it.

 

MIke Albrecht, P.E.

o   40+ years’ experience in the mining industry with strong mineral processing experience in precious metals, copper, industrial minerals, coal, and phosphate

o   Operational experience in precious metals, coal, and phosphate plus in petrochemicals.

o   Extensive experience performing studies and determining feasibility in the US and international (United States, Canada, Mexico, Ecuador, Columbia, Venezuela, Chile, China, India, Indonesia, and Greece).

o    E-mail:  info@smartdogmining.com