Mining Due Diligence: Reducing Risk as an Investor

Written by Burgex Inc., November 20, 2015.


Mineral exploration is an investment, and like any investment, due diligence is the key to reducing risk. With so much hype and focus on potential returns in the millions or even billions of dollars it is easy for investors and potential investors to lose their grip on reality and the basic economics that are a driving force behind any mining project. There are certainly many great projects and opportunities out there to make a great return in the mineral exploration arena, but there are also great risks and pitfalls that we have seen investors fall into time and time again.

Here are some basic tips that you can apply to a project you are currently investigating or have already invested in. Whether you are seeking a project or have already sunk millions into your exploration project, you may still find these applicable.

Know the players.

What is the reputation of the people who control the project or are offering the project to you? Have they successfully made a profit with any mineral exploration or mining projects in the past? Are they generally reliable and honest? These are all important questions to ask yourself before getting involved with any promoters or project generators in the mining industry. Keep in mind that the more the market is booming, the more promoters and, unfortunately, scammers will come out of the woodwork looking to make a quick buck.

Expect a longer timeline.

There are rarely quick returns in the mining industry at the ground level. Permitting times, weather, funding delays, and other unforeseen circumstances almost always extend the timeline of any project far beyond the boundaries of what was initially anticipated. The smaller and more inexperienced the operators, the more likely they have miscalculated the timing of getting a project under permit and operation. In most cases if you are investing in a small-medium sized project you should expect it to take about twice as long to do everything as than planned. Make sure you understand this before investing!

Be wary of new or novel extraction technologies.

There are many projects out there that are promising very aggressive returns based on extraction/recovery methods that are new and haven’t been applied before. We have heard this pitch many times. It usually involves someone who is an inventor and has discovered a brand new method to extract gold/platinum/silver/etc. that is low cost and highly effective. Unfortunately while these projects sound great and often look very enticing on paper, they don’t usually hold up in field application and especially fall apart at full scale. Sometimes they involve hefty fees up front to build pilot plants and set up these ‘magic machines’. Of course the industry is full of new innovations and it is possible that there are new technologies out there, but make sure you do your due diligence before investing! Ask to see a pilot plant or model. Have someone who understands the process explain it to you and research the methodology they are applying. Research the background of the inventor – have they had verifiable success in the past? Mining is hard, expensive, and risky; adding a whole new component of risk through untested technology greatly reduces your chances of ever recouping your investment.

Mining is expensive.

Are you ready to invest more money than you have initially committed to investing? Always take financial projections with a grain of salt. Be ready to have to spend more capital down the road to keep the lights on during market cycles, permitting delays, and other unforeseen costs. If you don’t personally have the funds to keep the project going, be prepared to have your equity diluted in order to raise necessary capital.

Take a close look at the exploration/mining plan.

Where did the numbers on reserves and resources come from? Do you know the difference between reserves and resources? Make sure you fully understand the terminology and the methods used to calculate the project value before you get involved. If the project is in early stages, what is the plan to prove the project up? Do the operators plan on performing the work themselves or do they plan on hiring an outside firm? Are the exploration methods used commonplace or are they unusual and based on untested theories? It is not uncommon to find projects that have been generated based on pseudoscience and unreliable methods. Always double check figures on production costs and make sure that contingencies and delays have been calculated into the plan. Money spent on good exploration is better than money lost on a project that isn’t viable.

Commodities are cyclical.

While the economics of your project may make sense now, they may not in six months. Make sure that the grades of the commodity that you plan on exploring for/mining are still viable if prices drop. You may have to shelve a project while prices recover, sometimes this may take a long time, be prepared ahead of time.

Hire an expert to perform mining due diligence.

For every dollar you spend up front on mining due diligence you could be saving a hundred or even a thousand dollars down the road. You, as the investor, should have a solid grip on understanding the mineral exploration or mining project. It is realistic that you will not know everything about the project or have the experience to make decisions about its merits and risks. In this case it is best to hire an expert to perform your due diligence. A mining consultant will have the experience to quickly identify the pros and cons of any project and help you make informed decisions.

Remember that even if you are the one out prospecting and generating a project, you are still investing your valuable time! Make sure you are taking steps to ask the right questions and reduce your risk. Mining due diligence will take some time and may cost some money, but it is worth the peace of mind to make sure it is done right. With a little mining due diligence and a pinch of luck you could be well on your way to making the next mining fortune!

Burgex Inc. has successfully helped several investors and investment groups with mining due diligence on a variety of different mining projects. Contact Burgex today to find out how they can help you!