It's confession time. I owned Great Bear Resources stock and I sold it before the acquisition was announced. I thought the project was fairly valued and recycled my money elsewhere. Barrick also apparently tried to buy them without paying a premium to the market price.
What I missed is that there are a limited number of world class assets and majors want to own them and will bid competitively for them. This brings more of the value of the eventual mine to shareholders earlier than they would normally have given the stage of the project. In the case of Great Bear shareholders probably got the value of where Great Bear would have been in five years, but they got it all at once now.
So, how do we identify the next Great Bear or the next Voisey's Bay? Here's my checklist for potential acquisition targets by a major.
Size is the single biggest factor on is this a potential Tier-1 project.
Great Bear's definition for a Tier 1 gold mine size was a mine that could produce 500,000 oz per year for a mine life exceeding 10 years. Multiply that out and it is 5 million oz. Great Bear sold before they even did a maiden resource, but I saw estimates that they had discovered 8-12 million oz.
The size needs to be large enough that the annual production is meaningful to a major. It has to move the needle. It also has to have mine life that will last.
Wood Mackenzie defined Tier-1 for copper mine size as greater than twice the average production size and twice the average copper resource. There were 15 mines that made the list (including cost criteria, more on that below).
So one way to look at if your project is Tier-1 would compare to the biggest mines in the world. Your project should be there.
Both Great Bear and Wood Mackenzie defined Tier 1 criteria as bottom half of the cost curve. I think that's about right. Bonus points if it is in the bottom quartile of the cost curve.
The goal is that your mine will continue to make money at all points in the commodity cycle. For rapidly changing markets like Lithium or Nickel this may be a subjective cost target. But for established markets like Gold, Copper, or Iron you can just look at the cost curve of the current mines.
Is this a jurisdiction that majors are comfortable investing in? Canada, Nevada, Western Australia are easy answers.
What about the Democratic Republic of Congo? Can a project there be Tier 1? We can see a very successful copper mine there now and have heard some majors talk that they would invest there.
Jurisdiction is subjective. I would say at present Peru rules out a project from being considered Tier-1 despite large mines being in operation, because with the current political climate I don't see majors as willing to invest a billion dollars on a new mine there.
Clear Path To Production
This overlaps a bit with jurisdiction. In some jurisdictions you really need to be fully permitted to have a clear path to production.
Look at the Bluestone's Cerro Blanco project. It's not quite Tier-1 size, but if it was it's not a tier 1 project until it gets its EIA (Environmental Impact Assesment) permit because Guatamala has less permitting process certaintly than say Nevada.
Pebble would clearly be a Tier-1 project but can't get permitted, even through Alaska is often a good jurisdiction.
In order for shareholders to get the best return the project has to be desirable to all the majors without any having an inside track.
If you have an iron project in a district where Vale own all the other mines and the rail and the port it doesn't make sense for BHP to come in and buy the project. Sometimes there is just one natural bidder for reasons like control of intrastructure.
More commonly a major may have already established a minority position in a project that gives it an inside track to acquisition and discourages rival bidding.
An example of this is Rio Tinto and Western Copper and Gold's Casino project. Rio owns 8% of the shares, has an observer on the board, a member of the technical committe, and people on the ground at the project. Western structured this so that a competitor could still bid, but it's pretty obvious Rio has the inside track and a competior like BHP would be disadvantaged.
If we look at Sabina Gold their size is large enough to clear the Tier 1 hurdle. Their $775/oz cost should put them in the bottom half of the cost curve. They aren't getting acquired by a major, why? Some would say because they are able to self fund and build it themselves. I would argue it's because majors don't want to operate a fly-in mine in the artic where diesel has to be delivered to a self-built port and then transported to site on a winter only road.
Some of the infrastructure shows up in the costs. But infrastructre is more than cost, it's logistics and risk. There are just more risks of delays or problems in the middle of nowhere. Mining executives are also human and may not want to buy a project that they will have to fly to the middle of nowhere to visit.
Iron, Copper, Gold. These are timeless and there will always be demand for majors to acquire them.
Lithium seems to have a very big growth runway ahead of it and big companies are buying in.
Nickel/Cobalt/Manganese have traditionally been used for steel alloys but are finding new life in batteries.
Those 7 are what I think majors are currently looking at. Iron, Copper, Gold, Lithium, Nickel, Cobalt, Manganese.
Lead/Zinc/Aluminum/Uranium seem to be cyclical in the demand for majors to acquire. There are big markets but are the majors looking to grow or decrease their exposure to these commodities?
Rare Earth's aren't that rare and China seems to be the only buyer intent on controlling the supply and processing. I haven't seen majors invseting heavily.
Chromium/Vanadium/Moly are primarily used in steel alloys, Platinum Group Metals (PGMs) are used in catalytic converters and jewlry, Titanium is used for its high strength to weight ratio and as a primary ingredient in white paint/plastic, tin is used a lot in lead-free solder for electronics. I don't know much about these markets or if the majors are investing in them.
Silver is in demand but its price flucuates and it often is a by-product of other metals like gold or Lead/Zinc mining. I have never seen a primary silver mine acquired by a major, but majors certainly don't mind if a mine has silver as a by-product kicker.
Thermal coal, met coal. Let's face it, ESG is putting major pressure on majors to divest their current coal assets of all types. Some majors are letting these assets run off naturally as they deplete resources, others are selling. But no major is out there looking to buy new thermal or met coal.
Majors don't like to buy projects that already have an excessive royalty/stream in place. If there is a 1% NSR a major wouldn't blink, but if it was a 5% NSR it probably would be enough on its own to keep a major from acquiring the project.
If you've gone through your checklist and ticked all the boxes hold on tight to shares in the company beyond your normal reasonable valuation.