Gold Developers Navigate Risks for Project Success: Self-assessment and critique

• Rio2 and Erdene Resource Development are advancing gold projects in Chile and Mongolia respectively
• Both companies are focused on risk mitigation and building strong local relationships
• Management experience and track record are crucial for success in mining projects
• The gold market presents opportunities, but there are challenges in project execution
• Partnerships and cash flow generation are important strategies for junior mining companies

Risk Management

The gold mining sector continues to attract investor interest due to gold's enduring value and role as a safe-haven asset. However, successfully developing gold projects requires navigating complex technical, financial, and social challenges. This article examines insights from two companies advancing gold projects - Rio2 in Chile and Erdene Resource Development in Mongolia - to understand the opportunities and risks facing gold developers today.

Rio2 is developing the Phoenix Gold project in Chile, which contains approximately 5 million ounces of gold resources. The company is currently in the construction financing phase and aims to recommence construction in October 2024. Erdene Resource Development has discovered four deposits in southwestern Mongolia and is advancing its first project, Bayan Khundii, through the construction phase with production expected in 2025.

Both companies represent the advanced development stage that many investors find attractive - projects that have moved beyond early exploration but have not yet reached production. This stage offers potential for significant value creation as projects de-risk and advance towards cash flow generation. However, it also comes with execution risks that must be carefully managed.

A key focus for both Rio2 and Erdene is implementing robust risk mitigation strategies.

As Alex Black of Rio2 explains: "Mining is not an exact science, and it is a business of risk mitigation in lots of aspects, whether it's finance, environmental, construction, operating risk management, etc.

Robust Engineering and Design

Rio2 has implemented conservative design criteria for critical infrastructure like heap leach pads, going beyond regulatory requirements. This is particularly important given recent industry incidents with leach pad failures. Partnerships: Erdene partnered with MMC, Mongolia's largest mining company, which provides capital, mining expertise, and local relationships.

As Peter Akerley of Erdene notes: "We elected to enter a partnership with MMC. They bring mining expertise... and national contacts, national relationships. I've been in that country for 25 years, but I'm not a Mongolian.

Both companies emphasized the importance of retaining experienced team members who understand the projects and local context. Phased Development: Erdene plans to develop its district in phases, allowing for cash flow generation before expanding to additional deposits. These strategies aim to address key risks around technical execution, financing, stakeholder management, and optimizing returns. However, investors should recognize that all mining projects carry inherent risks that can never be fully eliminated.

Social License and Stakeholder Engagement

Both executives highlighted the critical role of obtaining and maintaining a social license to operate. This requires ongoing engagement with local communities and careful management of social and environmental impacts.

Peter Akerley emphasized the importance of respecting local cultures and livelihoods, even in sparsely populated areas:"It doesn't matter if it's 10,000 people or 10 people, you have to treat those local people with the utmost respect... Mongolia's nomadic lifestyle is unique and something I'm proud to be a part of.

"Alex Black noted that government support is insufficient - companies must build relationships from the ground up:

Some Junior companies try to come down from the top down and say, " We've got government support, but they don't have support at the bottom. You've got to go from the bottom up and get that support at the ground level and then push that up to the government levels. This highlights that mining companies today must have strong social and environmental management capabilities alongside technical and financial expertise. Investors should examine a company's track record and approach in this area.

Market Dynamics and Commodity Outlook

While the interviews did not focus extensively on gold price forecasts, the overall tone suggested a constructive outlook for gold. Factors supporting gold include its safe haven status, inflation hedging properties, and supply constraints for new large-scale projects.

However, both executives emphasized focusing on project economics and execution rather than relying on higher commodity prices.

As Peter Akerley noted regarding their project economics: "Here we are, a $100 million market cap company with what will be $35 to $45 million a year in free cash flow. That will get a rerating.

This suggests that well-structured projects can generate attractive returns even at current gold prices. Investors should examine a project's cost position and ability to generate free cash flow across a range of gold price scenarios.

Management Experience and Track Record

A recurring theme was the critical importance of management teams with relevant experience and a proven track record.

As Alex Black stated, "There's only a handful of people who have been successful at it, and it's the track record of management and their ability to execute and deliver that adds value.

Peter Akerley advised investors to look beyond company presentations:"Get out and talk to other people in the business, get to some of these shows and ask them what they think about different management teams because, as Alex said, it's a pretty small group of sincere companies that are out there to build something. This suggests investors should conduct thorough due diligence on management teams, examining their past projects, relationships in target jurisdictions, and reputation within the industry. Teams that successfully brought projects from exploration to production are particularly valuable.

Financing Strategies and Capital Allocation

Both companies highlighted the importance of building a strong balance sheet and avoiding excessive dilution. Erdene's partnership with MMC provides significant funding and reduces reliance on equity markets. Rio2 is working to finalize construction financing to move their project forward.Peter Akerley emphasized how reaching production and cash flow is transformative for junior companies:

"To have a vision on what will be $60 million a year in free cash flow coming out of this project at $1,800 gold... that will get a rerating, and if I'm right about the exploration potential of this district, there are lots more room to grow beyond that.

This highlights that investors should examine current projects and a company's pipeline and ability to reinvest cash flows into further growth. Companies that can self-fund exploration and development may be able to create more long-term value for shareholders.

Jurisdictional Considerations

The interviews touched on the challenges and opportunities of operating in Chile and Mongolia. Both countries have established mining sectors but have also seen periods of political uncertainty affecting the industry.

Peter Akerley provided perspective on Mongolia's evolution: "Mongolia, like everywhere else, has had its issues, but no, I wouldn't choose another place to go invest in. It's the rocks first. When you can find extremely high-grade unexplored areas with the potential for super-sized deposits, that's where you want to be.

This suggests that the geological potential can outweigh jurisdictional risks for companies with strong local relationships and risk management practices. However, investors should carefully assess target jurisdictions' political, regulatory, and social dynamics.

Industry Challenges and Opportunities

The executives highlighted several broad challenges facing the gold mining sector:

1. Project execution risks, as highlighted by recent incidents at other companies
2. Difficulty in making new large-scale discoveries
3. Rising costs and technical complexity of projects
4. Increased stakeholder expectations around social and environmental performance
5. Volatility in equity markets for mining companies

However, they also see significant opportunities:

1. Strong fundamentals for gold demand
2. Potential for high returns from well-executed projects
3. Ability to create value through exploration in under-explored regions
4. Partnerships allowing junior companies to access expertise and capital
5. Application of new technologies to improve project economics

Rio2 and Erdene Resource Development provide insights into the opportunities and challenges facing gold developers today. Successfully advancing projects requires strong technical capabilities, robust risk management, effective stakeholder engagement, and the financial flexibility to weather market cycles.

While the gold mining sector faces headwinds, well-positioned companies with quality assets and experienced management teams can potentially create significant value for investors. However, investors must conduct thorough due diligence and understand both project-specific factors and broader industry dynamics.

The experiences of Rio2 and Erdene highlight that there is no one-size-fits-all approach to successful gold project development. Companies must tailor their strategies to local contexts while maintaining disciplined capital allocation and risk management. This underscores the importance of assessing management's track record and approach alongside technical project metrics for investors.

As the gold mining industry evolves, companies that can effectively navigate technical, social, and market challenges while maintaining a long-term growth outlook may be best positioned to deliver shareholder value.

The Investment Thesis for Rio2 and Erdene Resource Development

• Near-term production potential: Both companies are advancing projects towards production, offering exposure to potential near-term cash flows
• Experienced management teams: Leadership with track records of successful project development in relevant jurisdictions
• Strong local partnerships: Erdene's partnership with MMC provides financial and operational support
• Exploration upside: Both companies have additional exploration targets beyond their initial projects
• Conservative project design: Focus on risk mitigation and robust engineering to address potential operational challenges
• Phased development approach: Allows for initial cash flow generation before expanding to additional deposits
• Exposure to gold price upside: Projects structured to generate attractive returns at current gold prices with leverage to higher prices

Actionable advice for investors

• Conduct thorough due diligence on management teams, examining past project experience and industry reputation
• Assess projects across a range of gold price scenarios to understand potential returns and downside protection
• Examine social license strategies and track record of community engagement
• Consider companies' growth pipelines and ability to reinvest cash flows into further exploration/development
• Monitor progress on key project milestones such as permitting, financing, and construction

The insights from Rio2 and Erdene Resource Development highlight both the opportunities and challenges in the gold mining sector. Successfully developing gold projects requires navigating complex technical, financial, and social factors. Key elements for success include experienced management teams, robust risk mitigation strategies, strong local relationships, and the financial flexibility to advance projects through market cycles.

For investors, these case studies underscore the importance of thorough due diligence beyond simple project metrics. Assessing management track records, stakeholder engagement approaches, and long-term growth strategies is crucial. While the gold mining sector faces headwinds, well-positioned companies with quality assets can potentially create significant value as they transition from advanced development to production.

However, investors must remain aware of the inherent risks in mining projects and the potential for setbacks, even with experienced teams. A diversified approach to the sector, combined with closely monitoring company progress and industry trends, may help balance the potential for high returns with the sector's volatility.

The gold mining sector operates within a complex macro environment shaped by global economic trends, geopolitical factors, and industry-specific dynamics. Several key themes emerge from the insights provided by Rio2 and Erdene Resource Development:

1. Persistent demand for safe-haven assets: Economic uncertainties and inflationary pressures continue to support gold's role as a store of value and portfolio diversifier.
2. Supply constraints: The scarcity of large, high-grade gold discoveries is creating opportunities for companies with quality assets in emerging jurisdictions.
3. Rising stakeholder expectations: Mining companies face increasing pressure to demonstrate strong environmental and social performance, requiring more sophisticated management approaches.
4. Technological innovation: Advancements in areas like automation, data analytics, and processing techniques create opportunities to improve project economics and sustainability.
5. Consolidation and partnerships: The challenges of developing large-scale projects drive increased collaboration between junior explorers and established producers.
6. Jurisdictional diversification: While traditional mining jurisdictions remain essential, companies increasingly look to emerging regions for growth opportunities.
7. Focus on free cash flow: Investors are prioritizing companies that can demonstrate an ability to generate sustainable free cash flow over pure production growth.

These themes suggest a sector evolving to address challenges and opportunities. Companies that can effectively navigate this landscape - balancing technical execution, stakeholder management, and financial discipline - may be well-positioned to create value.

As Peter Akerley noted, "When you can find extremely high-grade unexplored areas that have the potential for super-sized deposits, that's where you want to be."

This encapsulates the enduring allure of gold exploration and development, while acknowledging the need for careful project selection and execution in today's complex operating environment.