On Ramp or Off Ramp

One of the investment strategies we like is Pre-Production Sweet Spot where you more or less buy at construction decision (after financing and permitting are in place) and sell at first pour.  

Default:

• Buy at fully permitted and fully funded
• Sell at First Pour

I offhandedly mentioned you could also hold until declaration of commercial production if you wanted a little more gain with a little more risk.  But what if you wanted to hold even longer? What if you wanted to hold until the project is fully ramped to capacity?

Wayne Lam has compiled a data set and corresponding reports on mine construction and ramp and corresponding reports for RBC Capital Markets. I'd encourage readers to go download and read them if you have access to RBC Capital Markets stuff.

Let's talk about the implications for investing.

Pre-Production Sweet Spot (PPSS)

In their data set the average construction period is 20 months. The re-rate going into first gold is about 15% and is in the last 6 months of construction. This is much less of an effect than the Lobo Tigre data set that saw closer to 100% increase. I'll also say the variance of when this re-rate occurs means you might not want to wait too long.  However, the data does say that you don't necessarily need to be in a huge rush to buy right at start of construction.

It's always better to avoid the bad projects and pick the good projects, but historically this stage has been one where if you throw enough darts at this stage the winners will cover the losers and it can give good returns on average. It bears repeating because most stages of most miners on average produce terrible returns.

First Pour To Declaration Of Commercial Production

This period is basically on average a wash, so if you don't have a strong opinion your default should be to sell at first pour and not hold during this period.  However...

There is no single definition of Commercial production, though it is often 60% capacity over a 30 day period. Ramping from first pour to commercial production usually lasts 3-5 months, with 4 months being average.  Companies that have stronger ramps, meaning their recoveries and production throughput are closer to the mine plan, not surprisingly have stocks that outperform. It's not huge, we are talking 10-20% gains as a group on the fast rampers.  Normal ramp-ups are flat and weaker ramp-ups are down 10-20%.

The data indicates investing in this stage means taking a bet on the relative out-performance of a particular company's execution. It's not a buy the basket and it works on average strategy; on average it is flat.  

The out-performance/under-performance carries into the next stage. If you have the ability to handicap odds on the ramp performance of the company it might be worth sticking around for the ones you identify as likely to ramp well.

Declaration of Commercial Production to 90% Capacity

Moving from that roughly 60% of capacity to 90% of capacity can take from 9 months for smaller operations to 18 months for larger operations. That's in addition to the time it took to ramp from first pour to declaration of commercial production. During that time you might see another 15% gain for outperformers and on average flat.

This stage is especially squishy. It's typically the case that the successful companies here got to first pour on time and declaration of commerical production with relatively few complications. They already hit their head grade and recoveries or pretty close at declaration of commercial production. What the successful ones are mainly doing here is getting their throughput up largely through increasing uptime and de-bottlenecking.

Summary

Sell at First Pour continues to be good advice on average. However if you can do better than a coin flip separating companies likely to have smooth ramps from those likely to have ramp-up difficulties you might hold to declaration of commercial production or even all the way to 90% of capacity. But the longer you hold past first pour the more skill you need to have picking winners from losers and the smaller the return for correctly picking.