Failed mining projects offer critical analytical keys to avoid future disappointment

TORONTO (miningweekly.com) – The capital structures of failed or faltered mines offer important insights when it comes to assessing the potential of future projects, according to Exploration Insights economic geologist and analyst Joe Mazumdar.

Mazumdar highlighted an assessment of 15 companies conducted during the newsletter writers’ day at the recent 2016 Prospectors and Developers Association of Canada conference. Each of the 15 comprised a single-asset, non-cash-flow gold project that was either openpit or underground, with a range of jurisdictions represented.

“And all of the companies I tabulated had overcome the hurdle of finance,” he added.

Of those that faltered, most were either overfinanced or underfinanced. They included Rubicon Minerals, Colossus, Midway Gold and Allied Nevada. Of the successes, the best had debt loads for project financing of around 40% and no higher than 60%.

“A debt burden that’s too high is problematic,” Mazumdar said. “That's because you suddenly have debt servicing that can kill a project when you’re trying to get into commercial production.”

A debt load of less than 20% indicated a project might not have faced enough due diligence, with a company increasing its risk of having to return to the market and seek further financing, especially if unwelcome and unexpected developments had arisen.

“You undertake a feasibility study or a scoping study and execute it. And then you discover it’s not turning out the way you thought, which is what happened with Colossus and their water issues,” said Mazumdar.

Colossus’ Serra Pelada project, in Brazil, suffered water inflow that, along with several other problems, made the project nonviable.

Overspending on capital expenditure during project execution phases was another signal for scope changes and possible flaws.

By way of contrast, Mazumdar highlighted how private-equity investors subjected mining projects to their own comprehensive due diligence, often covering the same ground multiple times in their research.

“Why’s that the case?” he asked. “Because they need the project work – they need a project to generate the cash flow to pay them back.”

Other long-term strategic investors taking a position with a company was a positive sign; it signalled further due diligence and, through this, greater de-risking of planning and strategy.

Traditional streaming deals on by-products that accounted for less than 10% of a project’s gross revenue had been a “win-win” for the industry. This type of deal secured capital for a company on a resource that was not their primary focus.

But recent years had witnessed a greater number of streaming deals related to a mine’s main product. Mazumdar noted that some of the faltered or failed projects made streaming a large proportion of the total capital structure.

“It would seem a project with streaming as a high proportion of project financing is probably something less favourable than one that doesn’t have it,” he noted.

“You want to look for companies with assets that can assume the best debt structures, with equity and maybe a little bit of a streaming, but nothing takes over the entire capital structure,” he added.