Hi MrB,
I should have shared this information with you guys a gazillion years ago, but hopefully better late than never. Here are some thoughts to consider regarding the timing of investments in the junior mineral sector.
THE LASSONDE CURVE
In the history of the mining sector, no research or historical models have made more investors more money than what is known as “The Lassonde Curve”. It’s based on the concept that in the mining sector, the various participating junior explorers/developers go through a VERY PREDICTABLE pattern of development and share price change once a discovery is made. The “PREDICTABILITY” is the key for this investment approach.
Below is a link to a much better explanation than I could ever provide:
The “Lassonde Curve” was derived from studying the share price history of hundreds of junior mining corporations tied to the various stages of development achieved by that junior explorer/developer after making a legitimate discovery.
The share price is on the vertical (“Y”) axis of the curve and time is on the horizontal (“X”) axis. The curve takes the shape of a “forward-leaning” capital “N”. The left-hand portion of the 2 vertical parts of the “N” describes the share price appreciation typically associated with the “discovery” of a mineral deposit. This is often associated with a drill hole (the “discovery hole”) that hit a nice intersection. A NOTE: Always evaluate diamond drill hole intersections in terms of “gram-meters”. (For example: In a 400-meter-deep drill hole, if you have a 50-meter-long drill intercept that averaged 4 gpt gold within that 50-meters, then this represents a “200 gram-meter" intersection, which is a decent intersection.)
After this “Discovery” phase the share price often PREDICTABLY retraces to a lower level during the boring “Feasibility phase” which is symbolized by the downward sloping part of the “N” that links the 2 vertical members of the “N”. Smart investors often take profit after the “Discovery” phase knowing that the mining company probably now needs to raise a lot of money to do a variety of studies on the deposit (PEA, PFS, and BFS) and hopefully get the project permitted, financed, built and put into production.
Because of the massive expenses associated with this phase, and the typical need to sell shares to fund them, the share structure is likely to undergo significant “dilution” during this phase, which, of course, will drive the share price downwards, since the “market cap” has no reason to continue improving after the “discovery” has been made public. This phase is sometimes referred to as the “orphan phase” wherein the smart investors, aware of the pending dilution, fly the coop partly just in case the company is unsuccessful in raising the necessary funds or partly because the company might dilute itself to death in the process.
The right-hand side of the vertical component of the “N” is where things get interesting and the big money is made. It involves the company successfully getting funding, permitting, putting together an operations team, doing the engineering, procuring equipment, commencing construction (collectively referred to as “EPCM”), and being put into production. This is the “sweet spot” where the PREDICTABLE money can be made AS LONG AS THE SPECULATOR/INVESTOR CAN CONFIRM THAT THE JUNIOR EXPLORER/DEVELOPER IS INDEED GOING INTO PRODUCTION. If the price of gold just happens to be at or near all-time highs, then the effect can be greatly exaggerated. This is because, in this sector, incremental additions to the price of gold tend to drop straight to the bottom line.
As noted, this is known as the “sweet spot” for a mining investment. Why do so many “5- and 10-baggers" occur around this sweet spot? It’s because of 2 statistical realities. The first is that roughly 1-in-1,000 discoveries ever becomes a mine. Since RISK and REWARD are nearly always in balance in any investment sector, when a RISK that overwhelming has been successfully mitigated, then the expected REWARD can be significant. Otherwise, nobody would invest in this sector.
The second statistical reality is that even for that lucky 1-in-1,000 with a legitimate discovery, the average timeframe from the commencement of exploration until the first day of production is 24 to 27 years. It’s no wonder why smart speculators/investors sell after the “Discovery” phase. On the graph at the link given, keep in mind that the left-hand vertical part of the “N” will tend to be separated by a long period of time from the right-hand vertical line.
It’s critical to trust these seemingly incredible 2 statistics from the World Gold Council (WGC). These 2 statistics dictate the obvious sweet spot for investments in this sector. You need to patiently wait for PROOF that the company you are studying an investment in is indeed about to commence production. The biggest mistake that speculators/investors make is that they are too early. Wait for the CONSTRUCTION phase to commence.
Part of the problem in investing in this sector is the fact that there are currently about 3,000 juniors in this sector but there is a limited amount of money out there seeking investment opportunities at any given point in time. Attracting one-3-thousandth of the capital available for investment is not going to do anybody any good. The herd first needs to be thinned.
You need to keep your powder dry until AFTER a junior explorer/developer distinguishes itself from the others. How best to do this? Prove to the available investors that you really are about to commence production, and that you have already proven yourself to be one of the 1-in-1,000 and you’ve already put in the inordinate amount of time needed to transition into construction and then production. That pooling of 3,000 junior explorers/developers will whittle its way down to a handful rapidly.
With these 2 statistics being a reality, the question then arises as to why any of us would buy the shares of a junior explorer/developer post-discovery UNTIL IT BECAME OBVIOUS THAT THEY WERE ABOUT TO TRANSITION INTO PRODUCTION.
The well-respected mining analyst known as “Lobo Tigre” calls this buying of shares at the commencement of the “Construction” phase the “golden highway”. The key is the PREDICTABILITY. Junior explorer/developers can’t raise the money needed to go into production UNLESS VERY, VERY SMART MINING PEOPLE MAKE THAT MONEY AVAILABLE TO THEM. Note on the graph where it states that “INSTITUTIONAL INVESTORS” arrive at the time of “Construction”. In Auryn’s case, institutional investors funded CONSTRUCTION but interestingly, they still don’t own any shares. Maurizio kept the pledge he made back at the “informational meeting” held in Las Vegas wherein he stated that the 70 million shares outstanding figure was not likely to change, and it hasn’t.
I’ve learned that investors in this sector need to take on a sense of humility and realize just how specialized this sector is and just how little they really know about the geosciences. Investors need to follow the lead of the “SMART MONEY” that provides the financings for these junior “about to become producers”. Eric Sprott and his team would be a good example of the “smart money”. So too would be Rick Rule.
The left-hand vertical component of the “N” is also a potential place to make a 5- to a “10-bagger” but the problem is that, for most of us non-geoscientists, a significant drill intersection is not PREDICTABLE like the right-hand vertical component is when going into Construction. How are you going to successfully guess that a miner will hit a big drill hole during a drill campaign? You can’t unless you’re a professional geoscientist that has studied the project to death and even then, it would take a lot of luck.
A non-geoscientist can, however, read the tea leaves and confirm that a miner is indeed about to commence Construction and start heading into production. The “about to become producers” are going to have to check off on a series of boxes en route to going into the “Construction” phase and then production.
Auryn, for example, just completed the CONSTRUCTION of a work camp that houses the 50 workers needed to do all of the intra-adit mining and the running of the froth flotation plant. That’s a significant box to check off on because you just don’t do that unless you know you’re going into production. They also just purchased a froth flotation plant, a new ball mill, a new gyratory crusher, and they just built a new on-site lab facility.
They just hired a world-class mine operator known as Ashmore-Stracon-Dumas to run operations. They run 51 mining operations in Chile, Peru, Colombia, and Mexico. More and more juniors with a discovery will find it more economical to “outsource” mining “operations” to the pros. Stracon-Dumas is owned by “The Ashmore Group” which is a London-based group of funds that manages $65 billion worth of investments in the “emerging markets” sector. Auryn just got “adopted” by a very powerful mining conglomerate.
The question then arises as to whether or not this group can be counted on to fund the ramping up process that Auryn will probably want accelerated because gold is trading at or near all-time highs. There is a concept known as “LEVERAGE BETA” in the mining industry. When the price of gold is at or near all-time highs, a small amount of borrowed money can be significantly LEVERAGED. I don’t know the answer to this question. The free cash flow that Auryn is likely to start generating could serve to fund the ramping up process by itself, but Maurizio is a bit of an overachiever and I sense that this project is going to be fast-tracked.
Do you remember a while back when Dan Dumas was named as the new V.P. of Engineering for Auryn? This appointment should have hinted to us that Auryn was considering “outsourcing” their mining operations. “Dumas Contracting” is the “Dumas” in “Ashmore-Stracon-Dumas". Ashmore bought out Dan Dumas’ very successful mining operations firm, specializing in underground mining operations like that of Auryn/Medinah, over the last several years.
Recall that we were told that the fund that cut the $4 million “construction loan” check to Auryn was an “affiliate” of our new mine operator “Stracon”. Maurizio has been in bed with these guys for many years. Maurizio and Stracon just took over the second largest underground gold mine in Colombia in the “Antioquia” region of Colombia. What did they just do there? They just commenced production via putting in a froth flotation system. I’m hoping that the ramp up in production at this Colombian mine will serve as a template for us Auryn/Medinah shareholders to study. It would be very helpful to study the typical timing involved in the ramping up of the production process.
HOW CONVINCED SHOULD WE BE THAT AURYN/MEDINAH JUST ENTERED INTO THIS “SWEET SPOT” INVESTMENT ZONE?
In addition to the above accomplishments, Auryn just hired a specialty contractor that specializes in “sub level stoping” projects. They also just retained Robert Mayne-Nichols, who has run several different world class deposits including Los Pelambres and Collahuasi in Chile. “Sub level stoping” is the mining method that the big boys use to attack big projects.
Below is a link to a short video on SUB LEVEL STOPING:
Junior explorers rarely can land a debt financing with institutional investors, let alone, a $4 million one with favorable terms like “SOFR plus 4%”. “SOFR” is the new “LIBOR”.
How often does a junior explorer/developer land a debt financing with a “smart money” institutional lender? Not very often. The very favorable terms given to Auryn i.e. “SOFR plus 4%” (which amounts to a little over 8%), should send a message about the actual merits of this project which we non-geoscientists might not appreciate. The terms of any funding should serve as a yardstick for the merits of the mining operation.
I mentioned the name “Rick Rule” earlier. He used to run Sprott Capital, and he also provides funding to promising junior miners. He is currently fetching approximately 17% per annum on similar financings. The landing of a debt financing like this at a time in which the junior explorers/developers as a group are having an historically difficult time in getting projects funded, should not be overlooked.
Note on the graph of the Lassonde Curve that the lowest spot for the share price in that trough in between the 2 vertical legs of the “N” is where the “Construction” phase begins. This is precisely where Auryn is right now in its development.
DISCLAIMER: Do not make buy/sell decisions based on this information. This is one of the most incredibly RISKY sectors in the entire investment arena but as I mentioned RISK and REWARD must always be in balance otherwise there would be no investment sector dealing with the junior mineral explorers/developers.