Contributed by Daniel McConvey, Rossport Investments LLC
One of our core investment strengths is determining whether a new mining project is likely to be permitted, constructed, and commissioned at or near plan. Thorough due diligence in that determination requires a project/mine site visit.
What I look for during a site visit
Unlike factories, mines are products of nature. Each mine will differ from another in many of the following: social issues, climate, altitude, environmental sensitivity, geology, mining method, metallurgy and, of course, management.
Social issues can be significant especially in the developing world. A site visit can often be the best way to get a good sense of these issues and how they are being handled. Below are two of my experiences:
1) Riding in a bus on the way from the airport to a large Peruvian gold mine I was taken by how close numerous mine supply trucks came to the sidewalks and homes of villages. Community relations later became a material problem for this operation. A dedicated road was eventually built but material damage was probably already done.
2) I once visited a new mine in Bolivia part-owned by a US company. We had lunch with the leaders of the local mining cooperative which was also a part-owner of the mine. Bolivian politics, then as now, was not conducive to foreign mining investment. However, when one cooperative leader said that he would protect the US Company with his life, we realized political risk was mitigated! The company went on to operate in Bolivia for a decade.
Climate and altitude
Trying to get your breath at 4,000 meters of altitude in the Peruvian or Chilean Andes makes one appreciate some of the challenges of altitude. Similarly, visiting a Zambian copper mine during rainy season can make one appreciate just how tough open pit mining can be in monsoon rain.
Company reports are unlikely to help one get a sense of environmental and permitting risks. Many years ago, we went on a trip to Montana to visit the proposed site of an open pit gold mining project near a river made famous by a movie. Driving along and looking at the beauty of the valley and the fishing signs at road stops along the river was enough to convince me that the project should not be permitted. It never was.
It is important in site visits to get management to take you to areas that are not on the beaten path. Seeing nearby waterways and the tailings dam (the dammed area where process waste is stored) is critical. We have recently come back from a mine site visit in the Western United States where our primary focus was to analyze the impact of the proposed mine on the local waterways.
A lot of due diligence on geology will come from company reports. However, getting a sense of the regional geology is usually best done on site. There you can inspect drilled rock (“core”) samples of the ore as well as the ore in the mine itself.
We owned shares in a junior mining company which was building anew underground platinum mine in South Africa. Management of the more mature neighboring mine owned by a different company agreed to take us underground to the mined out areas nearest the new mine’s orebody. The geological consistency of the reef there was poor. The reef was broken up and ground conditions, which had caused material mining and grade dilution issues when it was mined, were poor. We sold our investment. The mine is now closed.
A well run open pit is one which is dry, where almost all of the equipment is moving, where trucks with full beds for ore and waste are climbing out of the pit consistently spaced and where there are no signs of material pit wall slides.
A good underground mine will have, good dry roads and drifts, busy equipment, good ground support with, comfortable temperatures, and increasingly, remote automation.
My best story on metallurgy is from when I started as an analyst at Goldman in 1997. The Mt. Todd mine in Australia was commissioning a large new process plant. Recovery of gold from that ore was very sensitive to getting the ore crushed and ground to a fine size. The problem was that this ore was extremely hard.
I arrived at a site that looked like a war zone. The whole process circuit was idle and every one of the dozen or so third and fourth stage “Barmac” crushers (which resembled airline jet engines standing upright) were scattered sideways on the ground opened up for repairs. I realized then that the parent company was likely doomed. It went bankrupt six months later.
Management and workers
These are some of the questions we ask: How impressive is management? Is there a Harry Michael (see below) leading the charge? Do managers have a handle on the issues? What are they? Can the managers articulate those issues and the solutions they are pursuing? What is the employee turnover?
Tanzania’s two very different mines, Harry Michael and an Investment Winner
I went on a group analyst mining trip to Tanzania to see two mines that were being commissioned by different companies. Geita was a new open pit mine half owned by a company in financial distress. Bulyanhulu was a sizeable deep new underground mine being commissioned by Barrick, a large gold company.
After visiting both sites, it was easy to see that Geita was being built efficiently on a shoestring budget and was likely to generate strong ROE. As an example of the frugality, Expat management led by a young GM, Harry Michael, was living on site at a camp. Harry was clearly a “no nonsense”, “get it done” guy. He gave our investor group a tour to remember getting the 20 or so of us to almost march in military unison. We left knowing Harry was going to get Geita built and commissioned successfully.
In contrast Bulyanhulu was being built on a big budget. Expats had houses for their families in a nice suburb of Dar es Salaam and were being flown back and forth from site frequently. This attitude of high spending was pervasive at the mine site and in the mine design. In the 17 years since that mine is still far in the hole despite a generous tax situation.
Fast forward five years. We had an investment in a junior copper development company called Equinox. The company was struggling with the herculean task of trying to finance and build a large copper mine in Zambia. Then they hired Harry! I knew then that both were likely to happen. We bought more shares and made over five times our investment. The story would not have ended as well if we had not met Harry on the Geita site visit years before.
Rossport Metals & Mining Fund is a long term focused, fundamentally driven Fund that invests in global mining equities. For more information, please contact Daniel McConvey, Managing Member at (646) 722 4119 or by email at email@example.com.