Mining Stocks And Feasibility Studies: What You Need To Know

By: Discover Mining Staff

One thing that makes owning a mining stock different from almost every other kind of stock is the fact that the business is based on using up its assets. Simply put, a mining company stakes a claim or files a permit, does a feasibility study of any deposit, then digs it all up and sells it on the market. Most of the action in a mining company's stock occurs between feasibility studies and the actual start of the mining. For this reason, it is important for mining investors to understand the feasibility study and how it can affect the stock. (Find out more in The 5 Make Or Break Factors For Mining Stocks.)

Feasibility = Are We Going To Make Money On This?

At a very basic level, every mining project must pay back the money that is put into developing it - and it must do so within a reasonable period of time. This is because of a financial concept call the time value of money. An investor must see a decent rate of return for investing his money or he will simply invest in something else. The feasibility study tells the mining company and its investors whether or not a certain mine is going to be worth the cost of digging up the deposit. (Feasibility is just part of the story. Learn more in The 6 Biggest Risks Junior Mining Stocks Face.)

What Goes Into A Feasibility Study

Overall, the feasibility study is a measure of the operating costs of the mine versus the likely return. So it is created by making estimates based on a number of factors.

Capital Costs

Mining companies need to pay for machinery, labor, consultants, fuel, shipping, taxes and so on, just like any other company. These costs vary company to company, deposit to deposit, and country to country.

Geological Challenges

Mineral deposits are rarely laid out in a nice even deposit. More often than not, the ore body that miners want has been twisted, crushed and stretched by the earth. This leads to many awkward angles and difficult orientations that can require more expertise and more cost to extract properly. Complexity often means higher costs, meaning that the return must be higher to make the mine economically viable.

Mining Rate

You can save money in mining by going large scale. However, not all mineral deposits can be mined in a way that creates economies of scale. It is the job of the mining engineer to figure how "big" the operation can be and how fast the orebody can be pulled out.

Orientation, Shape, Width, And Daily Tonnage

There is a lot to consider here. With a vertical mine, meaning a mine that has to be dug down, it is very likely that the mining rate will be slower. A nice wide horizontal deposit can be taken out at much lower costs and much faster than a narrow, vertical one. Moreover, vertical deposits mean that some ore may never be mined because it is in areas needed to provide structural support - not an issue in most horizontal deposits and never an issue in near surface deposits.

A related risk is that the deposit isn't of the quality or quantity described. Underground deposits can be very hard to model correctly even with extensive drilling. Independent audits have helped reduce this risk, but all that extra testing costs money.

Dilution

The amount of dilution also feeds into the feasibility. Dilution is the rock that must be mined and taken away in order to get to the minerals that the company wants. More rocks to go through means more costs per ton. Mining engineers can sometimes get around dilution by using strategies to minimize the waste rock being pulled up and closely following the deposit to maximize the return per ton transported to the surface.

Processing

The rock that comes out of the orebody may need to be crushed down into fine sand to extract minerals and precious metals. The amount of processing required can usually be extrapolated from the drill samples, so this information is added in on the cost side of the feasibility study.

Market Prices

All deposits are affected by the market value of the minerals they contain. However, market price affects untapped mines much more than working mines (mines already operating). A rise of a couple of dollars an ounce for a commodity can turn a costly and difficult deposit into a profitable project. For this reason, the feasibility study also looks at the market price of the materials that will be mined and what they are likely to be at the time of production.

Conclusion: Now Or Later?

The feasibility study cover all the above factors as well as any risks specific to the deposit and the area it is in. A promising feasibility study can send a mining stock skyrocketing, particularly if it is a junior. A bad result can have the opposite effect. However, it is important to remember that a feasibility study is a snapshot of the economics of the time. As the price of the metals and minerals in a mine move up and down over time, feasibility shifts. So too does the cost of mining as technologies improve. Some patient investors follow deposits over time and invest in stocks as their previously not-feasible deposits see economic changes due to market demand, technological advancement, reduced geo-political risk or any of a host of other factors.