Arlington Group has found a unique leading indicator to value post-discovery mining projects
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For resources investors, backing a junior explorer that unearths a high-grade mineral discovery is the equivalent of living the dream — but it’s only the first part of a successful long-term investment.
In that context, recent research from the UK-based Arlington Asset Management provides an interesting framework for investors to appraise the post-discovery phase.
The research highlights a unique leading indicator — drill rig orders (more on that later).
But the baseline for Arlington’s research is the mineral discovery life cycle laid out by global mining luminary Pierre Lassade.
Some readers might be familiar with Lassade’s five-step framework. But for those that aren’t, it looks like this:
– Pre-discovery phase: Flat or incremental growth
– Discovery phase: Explosive growth off a low base
– Study phase: Confirm feasibility, de-risk project — potential value erosion
– Development phase: Material re-rating as path to production is clarified.
– Operation: Cash-flow generation, eventual depletion of asset.
For ASX investors, a good example of a company that’s moved successfully from the Discovery to the Development phase is Chalice Mining (ASX:CHN).
Shares in the company jumped sharply after CHN unveiled its spectacular Julimar discovery (palladium-nickel-copper) in March last year. However, it’s the ongoing drill-work and success in proving out the mineral resource that has seen CHN shares climb from pre-discovery levels of 16c to over $8 — a gain of more than 5,000 per cent.
Speaking with Stockhead, Arlington director Simon Catt contrasted CHN’s post-discovery surge and the longer-term development gains.
“After they announced Julimar, the price went from around 20c to $1 in a pretty short period of time,” Catt said.
Too late to get in?
Not if “you’d been quick and you knew (Chalice chairman) Tim Goyder and his reputation, as well as some of the great geologists CHN has on its team”, Catt said.
In addition, Chalice proved to be a prototype for Arlington’s drill-rig analysis as a leading indicator in the development phase.
“If you bought CHN stock post-discovery, and observed the fact they then raised money to do a bunch of drilling and plotted an increase in drill rigs as they gained confidence, it still would’ve been a very profitable investment,” Catt said.
“Sure you would’ve made 50x from the beginning, but even after discovery you can still make over 10x on a company like that by watching the quality of the people involved, their experience, the location and scale of the project, and the drill rigs.”
“As a company increases expenditure on drill rigs, that normally is a good sign for discovery,” Catt said.
While the 50x gains on Chalice are the stuff investors dream of, Catt applied the framework to another Arlington holding — Lefroy Exploration (ASX:LEX).
Lefroy is up by around 5x since a big copper-gold strike of its own back in February this year.
And in that context, “retail investors might find that ‘rig count’ metric useful”, Arlington says:
“We think Lefroy is today where Chalice was at the early stages of Julimar a year or so ago,” Catt said.
Like Chalice, Catt puts on a focus on who’s in charge.
“If you at the people running that, it’s a team led by Wade Johnson who used to run exploration at Newmont Australia,” he said.
“And it’s an interesting project. The property has had multiple owners over years with lots of copper and gold at-surface, but nobody could find the source.”
“There’s lots of info going back 20-30 years that suggests these guys are a chance of developing a big project here,” Catt said.
“So even though the share price up by a 5x multiple since the initial discovery, like Chalice we think there’s a decent chance it goes up 10x from here.’
With the global commodities boom in full swing, the stage is set for junior explorers to post outsized gains in the event of any discoveries.
And while Lassade’s framework shows the journey from discovery to production is usually a long one, Arlington’s research provides a good yardstick for investors to assess projects once the initial deposits have been found.
“The acceleration of drilling on a new discovery appears to be a lead indicator to value creation,” Arlington concluded.
Arlington is hosting the Discovery: Exploration Masterclass commencing online at 5pm today (May 25).
Featuring six successful exploration companies, a billion dollar asset manager, two renowned geologists and one of Australia’s highest profile and most successful explorers, the Discovery Exploration Masterclass will uncover how and where to look for the big score.
Registration is free and is open to all investors looking to learn more about the strategy of exploration. Click here to find out more.