Edison Investment Research Limited
Edison issues report_Gold Stars and Black Holes Analysing the Discount from Resource to Sanction
22-Jan-2019 / 12:50 GMT/BST
Equity markets generally improving for exploration stage mining companies; early-stage developers finding it tougher
The key findings for the latest mining report from Edison Investment Research are:
Many commodities show in-situ value accretion when moving projects from inferred through to measured resources, including gold, vanadium and lithium.
Equity markets' tendency to ascribe value to companies they expect to increase resources appears to be growing - another positive for early-stage exploration companies seeking capital.
Australia continues to offer the greatest recognition for pre-development resources, with Canada favouring early-stage inferred resources whereas London favours more mature opportunities.
Equity markets remain tough for mining companies looking to develop projects through to sanction; value destruction continues at the pre-feasibility stage.
22 January 2019 - Edison Investment Research, the investment research and advisory company, publishes its latest mining report - Gold Stars and Black Holes - Analysing the Discount: from Resource to Sanction, which analyses the differentiated in-situ values for resources across all the major equity markets, and how equity valuations then increase as projects are developed.
Explorers benefit from forward-looking investors
Based on an analysis of 19 metals and minerals across three exchanges, Edison has concluded that an increasing number of commodities show in-situ value accretion when moving projects from inferred through to measured resources. This includes gold, a number of the in-vogue battery metals - vanadium, lithium - and also, slightly unusually, bulk commodities such as coal (thermal and met).
However, commodities such as uranium, copper and zinc, where Edison sees there is uncertainty around demand, may experience valuation pressures as projects reach the measured resource stage but then potentially struggle to attract funding. Companies need to bear these trends in mind when considering deploying additional expenditure to upgrade resources ahead of feasibility studies.
Edison also finds that equity markets' tendency to ascribe value to companies they expect to increase resources appears to be increasing - another positive for early-stage exploration companies seeking capital. The markets also appear to be less concerned by political risk than they have previously, although there is strong evidence, this becomes more important ahead of project sanction.
Finally, breaking the markets down, it appears that Australia continues to offer the greatest recognition for pre-development resources ahead of London, particularly in the case for gold at the inferred and indicated stages. In the meantime, the Canadian market continues to be a sensible home for early stage companies, although valuations struggle versus other markets as resources are matured.
Developers need to target BFS as a priority
In keeping with previous years, Edison has investigated the key criteria that affect equity valuations for development mining companies. The intention of the analysis was to investigate the relationship between seven project variables (net present value (NPV), grade, IRR, size, jurisdiction, discount rate and product) on the valuations of their host operating companies.
Key findings show that equity markets remain tough overall for mining companies looking to develop projects through to sanction and Edison continues to see value destruction at the pre-feasibility study (PFS) stage. While there are always exceptions it appears prudent for companies to focus on getting to bankable feasibility studies (BFS) stage as expeditiously as possible as it is only at BFS that the equity markets offer valuations that reflect anything like the NPV of the underlying projects.
As projects progress towards BFS, companies should also consider the key factors that will influence equity valuations. Markets seem to increasingly reward projects of scale and in low sovereign risk regions as they approach sanction, while overall project economics (IRR) becomes less important. Perhaps surprisingly grade appears to be less important than we had previously thought. Ultimately the right projects should be sanctioned, although it is important for companies not to get bogged down in equity market "black holes" and focus on moving resources through to feasibility stage as expediently as possible.
Scope of the report
Further to the Edison's most recent global mining overview in 2017, Gold Stars and Black Holes - Analysing the Discount: from Resource to Sanction updates the differentiated values for measured, indicated and inferred gold resource ounces listed in London Canada and Australia and extends the methodology to other metals and minerals. In addition to its traditional in-situ analysis, in 2018, Edison conducted multiple regression analyses over 12 of the 19 metals/minerals across three markets that were the subject of the in-situ analysis in order to corroborate (or not) the findings of the in-situ study.
For only the second time, Edison has also performed an EV to project NPV analysis. In this case however, rather than being conducted over a limited sample of 63 companies and five metals and minerals, the study has been conducted over a sample of 102 companies, 13 metals and minerals and three distinct stages of development: PEAs, PFSs and BFSs.
Charles Gibson, report author and analyst at Edison Investment Research, commented: "In Gold Stars and Black Holes - Analysing the Discount: from Resource to Sanction, we have significantly extended the scope of the report to encompass metals and minerals and have investigated the relationship between seven project variables - NPV, grade, IRR, size, jurisdiction, discount rate and product - and their impact on the valuations of their host operating companies. In contrast to 2017, investors last year appear to regard grade as much less important in contributing towards a company's valuation, which could be regarded as evidence that investors are moving away from the erstwhile mantra of "grade, grade, grade". From a statistical perspective, it certainly remains the case that there is an extremely poor relationship between grade and IRR and this is perhaps also evidence that investors are becoming more nuanced in their appreciation of the contribution of grade, within the context of other factors, towards overall investment returns to equity holders."
Ian McLelland, Managing Director - Resources at Edison Investment Research, commented: "Gold Stars and Black Holes - Analysing the Discount: from Resource to Sanction - is an opportunity for investors and mining companies alike to understand the evolving issues driving global equity valuations for exploration and development miners. This 113-page report gets beneath the headline valuation metrics that most market commentators use and represents a comprehensive dataset that can assist investors and companies in understanding what equity markets will recognise, and what they will discount when evaluating exploration and development mining opportunities. This research should prove invaluable to a wide range of mining professionals, including listed companies, their advisors and brokers, private mining companies considering coming to a public market, private equity investors assessing the expected equity valuation of mining assets, and equity investors considering investing in listed mining companies. We would be delighted to discuss the report in more depth with all marketing participants."
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