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The world's best mines
Once upon a time, the British Isles’ abundance of lead, copper, tin, iron and silver was enough to spark a Roman invasion. Two millennia later, mining is not a major force in the UK economy. Apart from some dwindling coal output, and a sprinkling of potash, tin and tungsten production, most of what we now dig out of the ground is construction aggregate.
But in another sense, the UK is home to one of the world’s major mining centres. That’s because London has long been a hub for natural resources investment; the location to which companies from all around the world flock for project financing and a trusted and stable legal system.
London gives UK investors with the appetite to buy and sell natural resources stocks a near-unparalleled access to disparate geographies and prospects
As we pointed out in last year's feature on the world's most exciting oil and gasfields, London gives UK investors with the appetite to buy and sell natural resources stocks a near-unparalleled access to disparate geographies and prospects. This pool isn’t confined to small start-up projects on the Alternative Investment Market (Aim). A mere glance at the constituents of the FTSE 100 shows the plethora of gigantic extractive companies with stakes in some of the biggest and highest-quality mines on the planet.
Of course, bigger does not mean better. The investor return on any mining project is dependent on myriad factors including but not limited to commodity price, ore grade, political stability, local inflation, cost management and mechanisation, as well as the level of anticipation or bearishness attached to a miner’s market price. Added to that shortlist of disclaimers is China, where double-digit annual demand growth for metals is a thing of the past, and where a relative slowdown has brought the industry to heel since the start of the decade. Acknowledging the inherent volatility of resource supply and demand, we have tried in the following piece to identify producing and explorational projects with the cost profiles to survive another short-term downturn.
In several cases, these projects form just one part of a huge portfolio of a company’s assets. Nevertheless, we’ve tried to highlight those that are central to those larger miners’ fortunes, or could be considered among the top projects in their portfolios. Elsewhere, we’ve tried to pick out mines we think are highly profitable, could be highly profitable or are undervalued. Our exclusion of coal mines from the list reflects our belief that over the long term coal will cease to be an investable commodity.
1. With its larger peers BHP Billiton (BLT), Freeport-McMoRan and Rio Tinto (RIO) hamstrung by strikes at two of the three largest copper mines in the world, Kaz Minerals (KAZ) must be feeling pretty smug. Last March it made its first shipment of copper concentrate to China from the enormous Bozshakol development – by the company’s estimation the largest single mine in the CIS by scope and volume. Once an adjoining clay plant is complete, Kaz will have spent $2.15bn (£1.72bn) on the project, although with gross cash costs of below 140¢ per pound, it is on the first quartile of the global cost curve. Ramp-up has so far gone smoothly, and at capacity will be able to process 30m tonnes of ore a year, generating much-needed cash to reduce the company’s staggering – although addressable – debt pile.
2.Griffin Mining (GFM) is the sort of company that institutional investors tend to shy away from. The Aim-traded group has scant analyst coverage and operates in a jurisdiction that carries risks. But Griffin’s 89 per cent-owned Caijiaying mine in China is able to generate good secondary revenue from gold, silver and lead, in addition to zinc concentrate. This year, Cantor Fitzgerald expects higher lead and gold production to reduce the net cost of zinc concentrate production to just 29¢ per pound. The mine’s future should also be supported by Griffin’s control of 27.5 square km of exploration licences immediately surrounding Caijiaying. Commodities: zinc, gold, silver, lead.
3.Cullinan, the source of the two largest diamonds in the British Crown Jewels, is a mine set for a revamp. This month, operator Petra Diamonds (PDL) will cease to produce carats from its old plant, and start the complex process of adapting the mine's infrastructure for a new plant which should be producing at full capacity by the end of this year. The timing of that ramp-up is partly dependent on the resolution of what Petra has termed “labour-related disruptions” involving contractors, which might reduce the run-of-mine output in the second half of the year to as little as 1Mt, down from an earlier forecast of 1.6Mt. Given diamond production in the six months to December 2016 was a whopping 419,754 carats, Petra will be eager to limit any dip in output.*
4. The Devon-based Drakelands mine, previously known as the Hemerdon Ball, has one of the western world’s largest tungsten and tin resources. Despite that accolade, production under the stewardship of Wolf Minerals (WLFE) is still fairly slight, although this could greatly increase – and at lower unit costs – following the approval of two regulatory changes towards the end of 2016. The first was planning permission to extend the mine from 2021 to 2036; the second the implementation of a permanent seven-day working week. This, together with recent offtake agreements above spot prices, could help the mine return to its former profitability.
5. The titular mine operated by FTSE 100 precious metals giant Fresnillo (FRES) may no longer be the company’s biggest producer of silver, or even boast much of a future. In fact the Zacatecas-based underground project, one of the world’s oldest continually operating mines, only has about eight years of life left. But it nonetheless remains a prodigious source of metals, and should still be a strong cash generator. Silver grades of 227g per tonne in 2016 should rise over that period, as the average ore grade left in reserves is 30 per cent higher. If that requires some additional costs, the mine can also lean on its not insubstantial gold, lead and zinc by-products.
6. The Gahcho Kué diamond mine in northern Canada is so remote that its employees have to fly to work. The project, majority-owned by Anglo American's (AAL) De Beers company, began to ramp up production last summer, and aims to recover around 4.5m carats a year. This will be done by mining three kimberlite pipes, one after the other, over a period of 12 years. Contrary to some industry nerves about the sustainability of diamond demand, Anglo has made gemstones a cornerstone of its future strategy, and Gahcho Kué – the largest new diamond mine to open since 2003 – is at the centre of those plans.
7. There are lots of gold projects represented on Aim, but Mariana Resources (MARL) can lay claim to a stake – through its 30 per cent holding in the Hot Maden asset in Eastern Turkey – to the highest grades. Although a pre-feasibility study is not expected until the third quarter of 2017, drilling to date has consistently revealed some of the highest ore grades seen in years. A pre-economic assessment published in January stated that Mariana and senior partner Lidya Madencilik are working to a base case of 11 grammes per tonne of gold and 1.9 per cent copper, both of which are well below grades seen in a string of bonanza strikes – including a 69.6m interval of 62.7 grammes per tonne of gold and 2.68 per cent copper. It is only right that Mariana pushes ahead with a mining plan, but we think the cashed-up gold majors are bound to be interested at the current valuation.
Commodity: gold, copper.
8.South32's (S32) status as the world’s largest producer of manganese has not been something to cheer about for several years. The metal’s principle use as a steel and aluminium alloy has been battered by declining Chinese infrastructure needs and stockpiling, halving prices over the past five years. But now, with buying momentum returning, the BHP Billiton spin-off is starting to increase ore production from its South African manganese mines. Hotazel, located in the mineral-rich Kalahari Basin in the Northern Cape, has two producing projects – one higher-grade underground operation and a lower-grade open-cut site – which together are expected to have operating unit costs of $1.71 per dry metric unit (dmtu) of ore, assuming an average price of $3.23.
9. The speed and execution of the operational turnaround witnessed at Glencore (GLEN) last year was impressive on many fronts, but the commodity group’s management of its zinc portfolio was perhaps the highlight. Preliminary results for 2016 showed that the increase in the value of its gold credits had effectively paid for its zinc production, which even after excluding by-products still cost just 18¢ per pound in the period. Key to this unique cost profile has been Glencore’s stake in the Kazzinc operations, which mine, leach and smelt a larger range of metals alongside zinc, including precious metals, lead, aluminium and copper.
Commodities: zinc, gold, silver, copper, lead.
10. For single-mine operators, extremely low costs can sometimes be a frustration. The Kounrad copper resource ‘dump’ owned and operated by Central Asia Metals (CAML) is a case in point. A relic of Soviet mining, the Kazakhstan plant recovers low-grade ore mined from an open pit between 1936 and 2005 through leaching and a process known as solvent extraction-electrowinning (SX-EW). This unusual set-up has made Kounrad copper cathode so cheap to produce – unit costs were just 97¢ per pound in the first half of 2016 – that finding a comparable project is only likely to dilute margins. For now, Central Asia remains an unparalleled cash generator, much of which the company looks to pass on to shareholders.
11.Amur Minerals' (AMC) Kun-Manie prospect, located in the snow-covered Amur Oblast region in the far east of Russia, is about as geographically isolated as it gets. But the early-stage nickel sulphide project is also in a region where the Kremlin wants to see job growth, and mining has long been the country’s economic panacea of choice. Construction of an open pit and underground mine at Kun-Manie remains a long way off, as do definitive cost expectations, but what is increasingly clear is that Amur is sitting on an enormous asset. This month, the Aim-traded company upgraded its resource estimate for the project to 1.04m tonnes of nickel equivalent, which based on current prices has an in-situ value of $10.5bn. Extracting that will be no easy feat, but if achieved it would make Amur a top 10 nickel producer.
Commodity: nickel sulphide.
12.Firestone Diamonds' (FDI) 75 per cent-owned Liqhobong project in Lesotho has not always been well-handled. In fact, the first iteration of the recovery plant destroyed the largest, most lucrative stones on whose sales the diamond miner is reliant. But with a new management team and plant now in place, Firestone is on its way to hitting a target to treat between 1.8m and 2m tonnes of ore by June. And while Gem Diamonds’ (GEMD) neighbouring Letseng mine has recently been struggling to recover large stones, the early signs from Liqhobong are stronger; in the last quarter of 2016, 20 special stones larger than 10.8 carats were recovered, including a 37-carat white diamond.
13. Seven years after the Luksic family – by most accounts the wealthiest family in Chile – took control of Antofagasta (ANTO) in 1979, it acquired ARCO’s Los Pelambres mining concession for $6m. That deal has paid for itself many times over since the site started producing in 2000, given that the flagship mine’s historically excellent copper grades last year accounted for around 65 per cent of cash profit. Despite being in operation for nearly two decades, Los Pelambres has at least that amount of time ahead of it, and although grades and production have been declining, the presence of gold and molybdenum by-products in the orebody provides a safeguard against thinner profit margins.
Commodities: copper, molybdenum, gold.
14. The Minas de Rio Tinto, after which the diversified giant is named, was long thought to be a mere footnote in Spain’s mining industry. That was until Atalaya Mining (ATYM) brought in a new chief executive, Alberto Lavandeira, to get the plant back up and running on a shoestring. This was completed last year, with a ramp-up to nameplate capacity of 9.5Mtpa arriving just in time for a rally in copper prices above $2.50 per pound. That’s been especially handy for Atalaya’s share price, which owing to the company’s cash costs of $2 per lb of payable copper has been more leveraged than most producers of the metal.
15. When Dublin-based Kenmare Resources (KMR) raised $275m last year – a figure many multiples of its market capitalisation – it did so on the promise of capitalising on a looming deficit in ilmenite, the titanium oxide mineral used to make pigment in paints. Its mine, located in Moma on the coast of Mozambique, is expected to meet this deficit with an increase in production volumes in the year ahead, while bringing down total cash operating costs to $120-$132 per tonne, which was below analyst expectations. While mineral sands are a somewhat opaque market to track, Kenmare’s recent observation of price increases among major producers in the current financial quarter bodes well.
16. The steady drop in nickel prices over much of the past decade posed a particular headache for BHP Billiton (BLT), one of the biggest single producers of the metal. In fact, the mining giant’s chief executive, Andrew Mackenzie, singled out the Nickel West complex as the BHP business “that has led the charge on making things more efficient, despite a very difficult market”. A steady focus on costs in the past few years means that an eventual recovery in prices – supported by demand from lithium ion battery manufacturers – should be very profitable for mines such as Mount Keith in Western Australia.
17. Why is Acacia Mining (ACA) a potential merger target for Canada’s Endeavour mine? First, it won’t have escaped Endeavour’s notice that Acacia’s owner, Barrick Gold, may be looking to cash out and focus on the Americas. The second reason is that Acacia has excellent producing assets that are currently throwing off cash. Its biggest source of output, North Mara, may only have nine years left on its current plan, but that matters little when all-in sustaining costs are just $733 per ounce, as they were in 2016. This figure wasn’t just achieved by more digging; the amount of ore milled last year was broadly flat on 2015. But industry-leading head grades of 4.5 grammes per tonne led to the production of 90,000 more ounces.
18. Any Sirius Minerals' (SXX) investors disappointed by the terms of November’s equity and bond placing would do well to remember the North Yorkshire potash development is now actually going to happen. It even has takers. And while the shares’ decline below the 20p underwriting price might irk shareholders wowed by the momentum seen in early 2016, there will be catalysts for a rise in the share price ahead if Sirius can bring the initial stages of its infrastructure spend under budget or ahead of schedule. The prize is to be a leading global producer and supplier of multi-nutrient fertiliser from 2021. And with initial unit operating costs of just $32.6 a tonne, against a forecast per-tonne price of $158 in the first decade of production, it’s not hard to see why many people are big believers in the project.
19. Everybody – from the sellside to the buyside, the miners themselves and even the Australian government – expects that iron ore prices are going to fall from the current $80 a tonne. But the Pilbara mines owned by Rio Tinto (RIO) are somewhat exceptional, and are designed to survive almost any price environment. For example, Pilbara generated a cash profit margin of 63 per cent last year, despite iron ore prices averaging just $58 a tonne. Key to keeping unit cash costs below $14 is the mine’s state-of-the-art design, which makes use of autonomous haulage system trucks, automated drilling and a Perth-based operations centre, which coordinates Pilbara’s mines, ports and rail systems from one location.
Commodity: iron ore.
20. Things looked perilous for Ferrexpo (FXPO) at the beginning of 2016. Not only were iron prices in the doldrums, but the Ukrainian iron ore miner and pellet producer had just given up hope of recovering the $175m held by its freshly liquidated banker. Fortunately, the ore that comes out of the company’s 350m-deep Poltava mining pit is not only highly competitive on the global cost curve, but is converted into high-grade pellet products that sell at a premium to the more generic ore product. Last year, pellet costs fell to just $25.70 a tonne, in turn helping Ferrexpo to book a huge increase in cash on hand, bring down debts ahead of an anticipated drop in iron ore prices and thinner pellet premiums and iron this year.
Commodity: iron ore.
21. Barring a Fukushima-style disaster, there are good reasons to be bullish about uranium prices. Between now and 2020, dwindling stockpiles and growing Chinese and Indian reliance on nuclear power generation are projected to lead to a 40 per cent increase in demand, a dynamic that can only push prices off their floor. For those without the central Asian mafia connections to acquire yellowcake directly, the Salamanca project currently being developed by Berkeley Energia (BKY) is a good way of playing the market. Not only is the Spain-based venture set to benefit from excellent grades, low-cost open-pit mining, a stable permitting regime and offtake arrangements at more than double the current uranium price, but Berkeley has the market support to plug the last remaining gap in its external funding requirements.
Silver, the runner-up precious metal, often gets unfairly overlooked despite its wider industrial application than gold and the fact that its price correlation to the yellow metal makes it a similarly strong store of value
22. Silver, the runner-up precious metal, often gets unfairly overlooked despite its wider industrial application than gold and the fact that its price correlation to the yellow metal makes it a similarly strong store of value. Fortunately for investors ambivalent about the distinction, Hochschild Mining's (HOC) San José mine in the Santa Cruz province of Argentina has an abundance of both. Last year, the operation produced 6.7m ounces of silver and 95,000 ounces of gold, which is less than half of Hochschild’s mega Inmaculada project in Peru. But what it lacks in scale, San José makes up for in grades and low all-in sustaining costs, which are expected to fall between $12.80 and $13.30 per silver ounce equivalent in 2017. That’s a decent margin on the current silver price of $18 an ounce.
Commodities: silver, gold.
23. Pre-production resources projects are sometimes subject to investor hype and unsustainable valuations. Tie in one of the most wildly celebrated business stories in the world – Tesla’s siege on the American car market – and you would suspect Bacanora Minerals' (BCN) Sonora Lithium project to be completely overbought. As it is, the company has spent much of the past two years trading well below Canaccord Genuity’s 97p risked net present value. That’s despite Sonora’s proximity to Tesla’s lithium battery Gigafactory in Nevada, an anticipated offtake agreement with an Asian partner, and plans to build a mine capable of producing 17,500 tonnes of battery-grade lithium carbonate from 2019, doubling two years later to 35,000 tonnes.
24. Although Sukari is the only operating gold mine in Egypt, Centamin's (CEY) project has been an unqualified success since first production in 2010. Working on a base case rate of 500,000 ounces of output a year, it should be around for 20 years, although Sukari’s large reserve and resource is likely to expand with further exploration of Sukari hill and on the huge tenement area that surrounds the mine. In 2016, the company thinks all-in sustaining cash costs will rise 14 per cent to $790 an ounce, along with a slight decline in production. However, Centamin is building a reputation as a company that underpromises and overdelivers, a trend that enabled management to recommend an enormous full-year dividend of $178m for the last financial year.
25. South Africa’s platinum industry has been an unhappy place for some years now. Tharisa (THS), whose namesake project is located just a few miles from Lonmin’s bloodstained Marikana project, knows this more than most. But unlike similar projects in the Bushveld, the Tharisa mine has stable labour relations, low platinum group metal costs, low debt and an excellent source of secondary income in the shape of chrome concentrate – the stainless steel ingredient whose price spiked wildly at the end of 2016. Increasingly, Tharisa produces speciality chrome concentrate, which helped to boost the gross profit margin from the metal to 21.9 per cent last year, when prices averaged $120 a tonne. Those prices have since more than doubled.
Commodities: chrome and platinum group metals.
*The section on Cullinan has been updated to emphasise that production from the mine will continue as Petra switches plants.