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IM September 2018: Pipeline activity up as significant drill results increase


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IM September 2018: Pipeline activity up as significant drill results increase

The exploration sector remained relatively stable in August, with S&P Global Market Intelligence's Pipeline Activity Index rising slightly to 80 in August from 78 in July. Driven higher by increases in significant drill results and positive project milestones, the index was offset by fewer initial resources, while the number of significant gold and base metals financings was unchanged. By target, the gold PAI rose to 109 from 104, while the base metals PAI increased to 55 from 52.

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The PAI measures the level and direction of overall activity in the supply pipeline by incorporating significant drill results, initial resource announcements, significant financings and positive project development milestones into a single comparable index.

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Detailed data on the PAI metrics is available in the accompanying Excel spreadsheet.

Significant financings hold steady

The number of financings by junior and intermediate companies fell to 143 in August from 165 in July, although the US$462 million total raised was up 23% from the US$377 million garnered in the previous month. Significant gold and base metals financings, which are used in calculating the PAI, were unchanged from July at 27, although the emphasis switched to base metals from gold.

In the month's largest financing, Nickel Mines Ltd. completed a US$145.6 million, or A$200 million, IPO on the ASX, which values the company at about A$485 million and is one of the largest offerings on the exchange over the past year. Nickel Mines has an 80% interest in PT Hengyaya Mineralinda, which wholly owns its flagship Hengjaya nickel mine in Indonesia.

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Companies listed on the ASX accounted for 58%, or US$267 million, of the raisings, while companies on the London Stock Exchange contributed a further 25%, or US$113 million, of the total.

Although companies listed on the Toronto Stock Exchange typically account for a large share of junior and intermediate financings, the US$75 million they raised in August was a 32-month low and represented only 16% of the total funds raised.

Detailed information on junior and intermediate financings in August is available in the September financings article in this series.

A good month for exploration deals

Although the amount raised has been weaker in recent months, August was a somewhat active month in terms of mining deals and acquisitions. Denver-based gold producer Newmont Mining Corp. ventured further into Colombia for prospecting, agreeing to earn up to a 70% interest in Miranda Gold Corp.'s Lyra project in the Antioquia department. The major will fund a US$600,000 prospecting program, operated by Miranda, over the next 18 months. If it decides to proceed, Newmont can earn an initial 51% interest in the project by spending US$3 million on exploration over four years. In May 2017, Newmont acquired a 19.9% interest in another Canadian junior, TSX-listed Continental Gold Inc., gaining exposure to Continental's Buritica gold project in Antioquia.

Going the other way, from major to junior, Toronto-based IAMGOLD Corp. farmed out its Maripa gold project in French Guiana to TSX-listed Columbus Gold Corp., which agreed to earn an initial 50% interest by spending US$5 million over five years. Columbus can choose to earn an additional 20% interest if Iamgold elects not to form a 50/50 joint venture after the initial stake-in period. Gold has been mined in the area for more than a century; the past-producing Changement mine within the Maripa project area produced about 40,000 ounces per year of gold from 1985 to 1996.

Shares in Great Bear Resources Ltd. jumped 64% on August 22 after the company announced a new, high-grade gold discovery in the Hinge zone of its Dixie Lake project in the prolific Red Lake district of Ontario. In September, Great Bear raised C$10.1 million for exploration and drilling at the project. Notable gold explorer and entrepreneur Rob McEwen took C$4.6 million of the financing, while his gold exploration play, McEwen Mining Inc., took C$1.1 million; together they collectively own 16.3% of Great Bear.

Also in Canada, TSX-listed Osisko Mining Inc. agreed to acquire Beaufield Resources Inc. by way of a statutory plan of arrangement. Osisko owns the high-grade Windfall Lake gold deposit located between Val-d'Or and Chibougamau in Quebec along with a number of other properties in Quebec and Ontario.

Late in the month, ASX-listed Northern Star Resources Ltd. agreed to acquire Sumitomo Metal Mining Co. Ltd.'s 4.1 million-ounce Pogo underground gold mine in Alaska for US$260 million. Northern Star will fund the acquisition from existing cash and a fully underwritten A$175 million institutional placement. Pogo has produced 3.8 Moz of gold at 13.6 g/t gold over the past 12 years at an average output rate of 300,000 oz/y.

More recently, in early September, diversified commodities miner BHP Billiton Group struck a deal with TSX-listed Guyana Goldfields Inc. to acquire its 6.1% interest in SolGold PLC, the majority owner and operator of the Cascabel copper-gold porphyry project in Ecuador, for £27.4 million. By doing so, BHP has positioned itself for a battle with Australian gold producer Newcrest Mining Ltd., which holds a 14.5% interest in SolGold.

Significant drill results increase, but overall drilling contracts

Although overall drilling activity contracted in August, significant gold and base metals results, which are used in calculating the PAI, rose to 152 from 145 in July, with the increase coming entirely from base/other metals projects. The number of early stage projects with significant drill results was at its highest level since January and was up for the second consecutive month. These projects will warrant the most continuing exploration, and their success rate highlights the continuing potential of the exploration sector.

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Australia had the most drill announcements in August, with 83 projects reporting assays. Canada was next with 53 projects reporting. Hecla Mining Co. reported the most drillholes, 210, in August, followed by Kingston Resources Ltd. with 167 drillholes.

The month's best assay was reported by Osisko Mining Inc. from its Windfall Lake gold project in Quebec, where infill drilling at the Lynx deposit, which is adjacent to the main Windfall deposit, returned 5.2 meters grading 510.0 g/t gold. Osisko is working on a preliminary economic assessment, scheduled for the September quarter, which combines the Windfall and Osborne-Bell deposits in a blended mining scenario.

Detailed information on all drilling activity in July is available in the September drill results article in this series.

Number, size of new orebodies decline

The number of initial resource announcements dropped from four to three in August after holding steady for the previous three months. All three resources were reported by Australian explorers for their gold projects in Australia.

Although the pace of new resource definition surged in the early part of the year, the number and value of new discoveries have been plunging steadily since March.

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The largest new resource for the month was at Dacian Gold Ltd.'s Mt Morgans gold project in Western Australia, where indicated and inferred resources at the Cameron Well deposit total 6.3 million tonnes grading 1.2 g/t gold containing 245,000 ounces of gold. Total measured and indicated resources at Mt Morgans increased by 11% to 40.1 Mt grading 1.9 g/t gold containing 2.5 Moz of gold.

ASX-listed Dacian is set to embark on an accelerated, multipronged exploration campaign at Mt Morgans, with an emphasis on the Cameron Well and Westralia prospects, funded by the proceeds of a recently completed A$48 million capital raising.

Milestone activity improves slightly

Positive project milestone activity improved slightly in August, with the number of milestones rising to two, from one in July.

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In the month's largest milestone, Nevada Copper Corp. announced the start of construction at its wholly owned Pumpkin Hollow underground copper project in Nevada. The company gave the go-ahead after completing preconstruction activities and a C$108.5 million public offering of common shares. Construction CapEx is estimated at US$197 million, with the first concentrate expected in the December 2019 quarter.

In September, Nevada Copper delivered a preliminary economic assessment for a stand-alone open pit development, which showed strong project economics, including a pretax net present value of US$1.17 billion and an internal rate of return of 21%. The open pit development would comprise two phases: an initial US$592 million mine and plant with a capacity of 37,000 tonnes per day, followed by a US$447 million second phase that would increase capacity to 70,000 t/d in the eighth year of operation.

August's other positive milestone was the start of production at Coolgardie Minerals Ltd.'s Geko gold mine in Western Australia. Geko hosts 92,000 ounces of gold in proven and probable reserves within total resources of 136,000 ounces.

Metals prices continue to slide

As ongoing trade tensions between the United States and China continue to keep metal prices in the red, Market Intelligence's Exploration Price Index, or EPI, formerly called the Indexed Metals Price, dropped to 114 in August from 118 in July, its lowest value since January 2017. The indexed price fell for seven of the eight constituents of the index; molybdenum was unchanged. Cobalt and zinc prices fell the most, by more than 10% and 5%, respectively.

The EPI measures the relative change of precious and base metals prices, weighted by the percentage of overall exploration spending for each metal as a proxy of the relative importance of each in the industry at a given time.

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Equities drop to 14-month low

In line with the drop in the EPI, mining equities retreated in August as Market Intelligence's aggregate market value of the industry's listed companies, based on 2,403 companies, dropped to a 14-month low of US$1.34 trillion, off 18% from an almost five-year high of US$1.64 trillion in January. The aggregate market cap of the industry's top 100 companies also decreased in August to US$1.11 trillion, down from a 41-month high of US$1.35 trillion in January.

Is exploration recovery sputtering?

It seems the exploration sector's recovery has slowed in recent months. While significant drill results from prospective greenfields projects remain strong, the number of junior and intermediate financings is at a 30-month low, and the pace of new resource definition and positive development milestones has definitely slowed. It remains to be seen whether the recent drop in the value of mining equities presages a return to the extreme fiscal restraint seen over the past several years or is just an understandable reaction to an exceptionally volatile economic outlook of late.

Exploration is a long-term affair, however, one that is not easily stopped and started. Until mining companies see definite signs of stability in global growth and demand, they may continue to avoid risky grassroots programs and instead pursue incremental growth and expansion at existing operations.