If you’re keen on trying your hand at mining and potentially striking it rich with a high-value commodity, whether gold, silver, copper, lithium, or some other precious or base metal, but would rather prospect from the comfort of home instead of in the Australian Outback, the British Columbian wilderness, or a remote Chilean mountainside, it’s important that you pick up basic terms every investor should know before adding mining stocks to your portfolio.
This article is a journalistic opinion piece which has been written based on independent research. It is intended to inform investors and should not be taken as a recommendation or financial advice.
We’ll divide our survey between the exploration, development and production stages of the mining lifecycle, careful to focus on terms that play key roles in identifying a company’s ability to create value today and into the future.
Here’s the list, in brief:
- Mineral exploration:
- Assay.
- Mineral resources.
- Mineral reserves.
- Mine development:
- Preliminary economic assessment.
- Pre-feasibility study.
- Feasibility study.
- Mineral production:
- All-in sustaining costs.
- Cash costs.
- Strip ratio.
Let’s dive in.
9 essential terms for the mining stock investor
Mineral exploration
Mineral exploration companies, or junior miners, are, in essence, geological detectives after data in support of continuous mineralization, whether that’s sampling, magnetic surveys, drilling or historical reports, making it paramount for investors to be able to decipher these results and recognize their potential to generate shareholder value.
1. Assays
An assay is a chemical or metallurgical test to determine the specific amount of target substances within a given sample. Mining companies conduct assays on their sampling or drilling results to create an accurate picture of the quality of their mineral projects. If a report on an ongoing exploration program states that “assays are pending,” investors should know that results are preliminary and subject to change.
Anglo American, a top global miner focused on platinum, copper, iron and nickel, among others, in the process of merging with fellow mining giant, Teck Resources, offers a straightforward account of assays on its official website, delineating how they provide a measure of certainty for junior mining investors.
2. Mineral resources
Mineral resources refer to occurrences of solid material of economic interest with reasonable expectations for extraction based on evidence for grade, location, quantity and continuity.
They are subdivided into three categories of ascending confidence, with inferred resources implying the presence of commodities, indicated resources allowing for initial mine planning and economic studies – beginning with a pre-feasibility study discussed below – and measured resources allowing for a high-conviction economic assessment of commodities in the ground.
3. Mineral reserves
Mineral reserves refer to economically mineable resources. They are divided into probable reserves, tied to the indicated resource category, and proven reserves, tied to the measured category, each of which can be relied upon to produce a definitive valuation for commodities in the ground.
Yamana Gold, a global gold and silver producer acquired by Pan American Silver in 2023, offers a robust account of resources and reserves apt for any mining stock investor’s checklist.
Mine development
When a mining company successfully delineates resources or reserves, it can opt to either begin extraction straightaway, once facilities are in place, believing that available historical data is sufficient to back up production, or it can engage in any among a number of economic studies designed to substantiate project value with an increasing degree of certainty.
4. Preliminary economic assessment
A preliminary economic assessment (PEA), or scoping study, offers mining companies the earliest certifiable sense of project potential in terms of costs to reach production, method of production and how much revenue and cash flow it can be expected to yield over its operating life. Though nothing is ascertained within a PEA, it does speak to initial economic viability, granting a company something to show as it pursues inferred resource upgrades, permitting and community approval.
Silver Mountain Resources (TSXV:AGMR), a Canadian miner exploring and developing silver projects in Peru, goes in depth on PEAs in a recent article.
5. Pre-feasibility study
A pre-feasibility study (PFS), based on reserves and measured and indicated resources only, features more detailed engineering, geological analysis and environmental assessments than a PEA, collectively painting a clearer picture of mining and processing methods, as well as capital and operating costs, serving as a solid foundation for a final production decision, supposing the study’s economics are particularly attractive.
6. Feasibility study
A feasibility study, logically a step above the PFS in terms of technical and economic comprehensiveness, affords a project a thorough basis on which to seek construction financing and build a mine, accounting for all potential modifying factors spanning mining, processing, metallurgy, infrastructure, marketing, legal, environmental liability, community and governmental support.
Cassels, one of Canada’s largest business-focused law firms, provides a useful overview of economic mining studies well worth your review.
Mineral production
Upon reaching production, a mining company shifts from being a speculative investment, where drilling results and/or resource estimates represent the only means of building a valuation, to a traditionally fundamentals-based investment, where revenue and cash flow create a clearer-cut line between operations and shareholder value. For the purposes of better identifying that line, investors should familiarize themselves with certain measures of mining efficiency.
7. All-in sustaining costs
All-in sustaining costs (AISC) capture the total costs of producing a unit of minerals. The formula behind it reads as follows:
AISC = (Direct production costs + Corporate general and administrative (G&A) expenses + Exploration and evaluation costs + Capital expenditures for sustaining operations) / Total ounces/lbs produced.
Here’s a breakdown:
- Direct production costs are all the direct costs associated with mining, including labor, fuel, energy and materials.
- Corporate G&A expenses encompass all indirect expenses essential to running the business, such as salaries and legal fees.
- Exploration and evaluation costs refer to costs associated with exploring and results validation.
- Capital expenditures for sustaining operations capture expenditures required to maintain existing mining operations, including equipment, site restoration and waste management.
The result is a comprehensive measure for what it costs to produce a given commodity, enabling comparisons between operators in similar regions and of similar sizes for the purposes of due diligence.
8. Cash costs
Cash costs, a more focused look at operational efficiency than AISC, refers to production costs at the mine site level per unit of mineral output. This includes transportation, refining, permitting, community outreach, royalties and administration, among others, but excludes non-cash items like depreciation and amortization, and off-site costs like running a head office.
Expressed on a per-ounce or per-pound basis, the metric allows investors to identify a margin of safety against current spot prices, revealing potential relative undervaluation among producing miners.
Hecla Mining (NYSE:HL), North America’s top silver producer, provided a succinct definition of cash costs in its 2021 financial statements.
9. Strip ratio
The strip ratio, our 9th and final mining term, speaks to project quality by highlighting the amount of waste material crews need to remove before isolating one unit of ore. Expressed as a ratio between waste thickness and ore thickness, a lower figure suggests abundant, high-grade mineralization, while a higher figure suggests a mine may struggle to reach profitability.
Key takeaway
While you now have a firmer foundation to search for prospective mining stocks, it’s worth remembering that companies active in the space are unavoidably tied to the prices of their target commodities.
Gold companies, for example, are in the midst of a triumphant return to market awareness, thanks to the metal recently rising to an all-time-high, standing in stark contrast to companies in the lithium space, which have been hampered in recent years because of price declines stemming from decelerating electric vehicle adoption and the slow pace of global electrification.
The differentiating factor here, possessed by both lithium and gold, is a strong case for long-term demand, which should be the first box you check before looking at individual stocks for the mining sleeve of your portfolio.
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