Producers Expanding Production

I like to stay humble as an investor and there no better way for me to do that than starting off with a chart of Ivanhoe Mines, a company I looked at and liked and didn't invest in.  Oh look, a 10 bagger I watched go by.

Ivanhoe is two of my target strategies in one. They started production of phase 1 concentrate in May 2021. If you had gone in 12 months earlier that alone would have been a 3x in a year. I call that the pre-production sweet spot.

After that they kept going, entering what I call the producers expanding production strategy. April 2022 they commissioned the Phase 2 concentrator which doubled capacity.  Phase 3 is supposed to have first production in May 2024 (now give or take).  They are adding a smelter in Q4 2024. Kipushi in June.  Phase 1 of Patfreef mid 2025.

Why It Works

Cost Of Capital

Mining is a capital intensive business. From a simplified perspective the returns are the rate of return from invested capital minus the cost of that capital. The cheapest source of capital is from free cash flow sitting in your bank account. Fund the new mine or the mine expansion with the profit from your current mine(s).

Companies with existing projects can often fund the entire new project with debt against their current operations at reasonable interest rates and cash they already have.  

On debt financing you get a much lower interest rate and more favorable terms if you have a future profitable cashflow from an existing operation to pay back the debt. Project debt that relies on cashflow from the new project is much riskier and carries often loanshark level interest rates.

Equity financing (selling more stock) is very expensive because the new equity purchasers will want a discount to the current stock price and/or options/warrants.

Royalty financing is crazy expensive, there's a reason royalty companies outperform the miners. But often the capital for new projects is so high that new companies without an existing project have to do some royalty with equity and project development debt.

Now instead of just being a fixed linear cashflow stream where you the investor have to go find the next place to compound those dollars they are a compounding machine that can re-cycle returns into other projects with good returns.

Market Not Very Forward Looking

In the required reading section of this blog are two Paul Gait presentations. In one of them he lays out well that the market doesn't give credit for a new mine coming online until 2 months after it has already come online and is reflected in the basket revenue.  He gives the example of the Las Bambas mine and also the correlation chart between basket revenue and stock price of the entire coverage universe. It's pretty convincing.

I've looked at a number of other examples and seen a similar pattern, the stock doesn't re-rate until at least near to the new mine or expanion coming online and often well after the new mine or expansion has ramped up.

A scarier implication of that work is that because metal price impacts basket revenue directly changes in metal price will affect the stock price very quickly. These commodity price changes can often overwhelm your being right about a company execution. It helps to get a little luckly on the commodity price changes.  An ideal world would be to get a production expansion combined with a commodity price increase.

Changes In NPV

Imagine a project has an NPV in their feasability study of $100m and an Enterprise Value of $100m. If you make that invsetment and they earn their NPV because things go to plan you have now broken even on your money.

Now imagine that same company is trading at an Enterprise Value of $80m, and let's assume it has a 10 year mine life. You can say it is trading at 0.8x NPV.  If you invest it will earn discounted to present value under 3% a year to close that discount over a decade.

Imagine instead that mine added a second mine or another phase of expansion. Their NPV goes from their current $100m to $150m. Before and after they trade at 1x NPV. Well, you get 50% returns if that re-rate for the new mine happens in a single year.


There are several potential entry points and exit points for this strategy.

The long term patient may want to get in early as soon as the expansion project is identified and sell after the company has a full quarter at full nameplate capacity without new expansion lined up.  Maybe you are in a taxable account and like long holding periods where you don't have to pay capital gains. This also gives the company more opportunities to add additional expansions and further increase the long term holding period. Or maybe you like the valuation on the existing operations and the expansion is just a kicker.

The quick flip is to buy at first pour (or first concentrate depending on commodity) and then sell 2+- months after declaration of commercial production when the increased revenue hits a financial statement.

Examples Today

These first two are classic producer expanding production and good timing for a potential short term re-rate.  The next 3 I'm in for the valuation of their current operations with a longer dated expansion kicker.  The final 2 are ones on my radar.

Alphamin $AFM.V

Mpama South construction is basically complete and commissioning is underway.  Production is expected to increase from 12,500tpa to 20,000tpa.

ERO Copper $ERO

Tucumã production expected in Q3 2024. It will take a quarter or two to ramp. That makes now likely a pretty good entry timing for the production re-rate. I am now looking at exit timing, which for the strategy would be 1-3 quarters from now.

The new mine shaft at Pilar is too far out and too small incremental production to really have a large impact.

Sigma Lithium $SGML

Phase 2 will double production and is funded by a combination of cash on hand and subsidized government debt for green projects. Aiming for 1Q25 production, so it's a little early to buy in for the re-rate. However the existing operations are in my estimation undervalued by the market and there is potential for the company to be acquired. They also have a phase 3 and potential vertical integration to lithium sulfate for future upside after phase 2.  I'm happy to sit on this for a year and re-evaluate after phase 2.

The downsides here are unconvetional company communication and high turnover of senior staff.

Warrior Met Coal $HCC

Blue Creek mine expects continuous miner units to start Q3 2024 and longwall in Q2 2026. The longwall is the real volume. It's early to invset on the production re-rate, however the existing operations are world class and trading inexpensive relative to my estimate of their value. I'm happy to sit on this for 3 years.

Jupiter Mines $JMS.AX

This one may be a bit of a stretch for this strategy as their HPMSM project has just an initial scoping study and still needs a PFS this year and a DFS next year and then wouldn't likely to be in production until 2028.  They have a stated goal of growing production by 300% in the next 5 years, though they plan to do that through M&A by acquiring other nearby mines in the region more than growing production from existing projects they own.

Mining is typically 8-10% of cost of production while rail and road land logistics is typically 35% of costs.  Electricity in South Africa is notoriously expensive and unreliable so they have to back up with diesel generators today. If they move to more rail and less trucks (South Africa is trying to reform their rail) and install solar (likely with battery backup to buffer the solar) they could reduce their use of expensive grid electricity and expensive diesel generator electricity.

So while not classic discrete expansion event they do have several avenues to deploy capital with potentially good rates of return. They also are likely to have a lot of capital to deploy as the largest Manganese mine in the world is estimated to be offline for a year or more, potentialy driving up commodity prices.

Ivanhoe Mines $IVN.TO

Sure it's already 10x in 3 years, but they are still expanding.  One of the best construction teams in the business.

Aura Minerals $ORA.TO

2023 production was 236,000 gold equivalent ounces, 2025/2026 target is 450,000 gold equivalent ounces. One I'm looking at more closely.

Full Disclosure

As of this writing I am long $AFM.V, $ERO, $SGML, $HCC, $JMS.AX, & $LAAC.
As of this writing I don't have positions in $IVN.TO or $ORA.TO