We explore the resources project lifecycle as a framework for understanding the value potential, and risks, which underpin investment decisions in connection with resources projects.
Historically, ‘traditional’ private equity investors and other financial sponsors with mandates to invest in companies with exit timelines of 3 to 7 years and a stable growth platform have not sought to “dig into” mining and resources projects.
For those looking to invest in resources projects, it is important to understand the lifecycle of a project to be in a better position to determine at what stage to invest. The inherent lifecycle of resources projects also provides opportunities for investors to develop strategies to create value and minimise risk at each project stage.
The value of a resources project or its corporate owner varies over time, based not only on usual metrics for financial investments such as revenue, profitability and cash flow, but on licencing, construction and development requirements and, in the case of a mining project, geological and mining metrics such as the size and grade of mineral resources and ore reserves and expected life of mine.
The lifecycle of a mining project can be broken down into the following key stages:
- Exploration and Discovery: exploration rights are granted to enable initial surface exploration and drilling with the intention of proving a geological concept. Exploration success translates to an increase in value which may attract initial investment, albeit on a speculatory basis. This value tends to peak at the point of a proven discovery – where exploration results are sufficient to enable the resource body to be defined by reference to global standards.
- Feasibility and Development: studies are undertaken to determine the scope and feasibility of actual mining, including calculating the mineral resources and ore reserves by reference to global standards and capex and opex estimates. At this stage, the project may experience an “orphan period” – initial speculators may look to cash in on their discovery, but there is often a delay before the feasibility study results attract larger scale investment required to develop the mine and related infrastructure which requires significant capital expenditure before the mine commences operations and is profitable.
- Mining and Extraction: mining operations and extraction results in the generation of cash flow, increasing value. However, this value will vary over time depending on fluctuations in commodity prices and other risks.
- Closure and Site Rehabilitation: at the end of the life of mine, costs are incurred in winding down operations, closure and site rehabilitation. Such costs will have been provided for in the life of mine plan. However, investors will typically have given financial assurance to government authorities in support of their rehabilitation obligations as a requirement of securing the relevant mining tenements and project approvals, which will only be returned upon satisfaction of those obligations.
Financial sponsors tend to invest in the later stages of development, providing the capex required to bring a mining project into operation and cash generation. This period tends to align with the typical 3 to 7 year fund lifecycle.
However, financial sponsors may invest at an earlier stage, particularly where they have an open-ended fund or other funding with a longer investment horizon or where methods are available to flatten the curve and move more quickly to the operating and cash generation phase. These methods may include:
- utilising alternative investment models, such as metals streaming or private royalties, where an upfront cash payment is made to secure future deliveries of metals or future cash payments once operations have commenced or reached a certain milestone. These alternative investment models can reduce the funding risk associated with the orphan period before operations commence, or any other period during mining and extraction where significant capex outlay is required before the project realises returns from that outlay (ie. mining through a section of rock before another section of minerals is reached),
- investing in an existing project, to reduce the exploration or development phases,
- providing capital shortly after discovery, to reduce the orphan period (and associated funding risk) during which management efforts are often diverted to secure institutional investment, or
- pursuing further exploration and expansion of existing projects or pursuing acquisitions of new projects, to reduce the impact of the lifecycle on a single project and prolong the period before mine closure.