Mining Sector Dynamics: M&A Activity, Economic Studies & Project Developments

• Goldfields acquires Osisko Mining for $2B, showcasing mining sector consolidation
• Economic studies crucial for evaluating mining projects
• Arizona Sonoran's PEA reveals major improvements in NPV and production
• Metallurgy plays critical role in project economics and viability
• Industry trends: consolidation, tech advancements, capital recycling to juniors

Introduction

The mining sector is constantly evolving, with mergers and acquisitions (M&A), economic studies, and technological advancements shaping the landscape for investors. This latest episode of Compass, with Derek Macpherson and Samuel Pelaez of Olive Capital, examines recent developments in the industry, focusing on the Osisko Mining acquisition, the importance of economic studies in project evaluation, and a detailed look at Arizona Sonoran Copper Company's latest Preliminary Economic Assessment (PEA).

Recent M&A Activity: Goldfields Acquires Osisko Mining

The episode begins with a discussion of a significant M&A transaction in the gold sector. Derek Macpherson notes, "We just saw another transaction this morning with Osisko Mining being taken out by Goldfields for another $2 billion cash transaction." This deal follows the trend of consolidation in the mining industry, particularly among gold companies.

Key points about the Osisko Mining acquisition:

• Transaction value: Approximately $2 billion in cash
• Asset size: The Osisko project contains around 7 million ounces of gold
• Upside potential: The deposit has exploration potential at depth
• Impact on the sector: This transaction represents another instance of capital being recycled in the mining space

Sam from Olive Resource Capital adds context to the acquisition: "This is about give or take a seven million ounce deposit, but it certainly has upside at depth. The type of upside that you are not going to drill from the surface; you will drill that later on as you continue to start developing underground."

This transaction highlights several important trends for investors to consider:

• Ongoing consolidation in the gold sector
• Major companies' interest in assets with exploration upside
• The recycling of capital within the mining industry, potentially benefiting junior miners
• The importance of jurisdiction, with this transaction occurring in Quebec, Canada

The Importance of Economic Studies in Mining

The discussion then shifts to the crucial role that economic studies play in evaluating mining projects. These studies, which include Preliminary Economic Assessments (PEAs), Pre-Feasibility Studies (PFS), and Feasibility Studies (FS), are essential tools for investors to assess the potential of a mining project.

Derek Macpherson explains:

"With every investment that you do, you hold, you're always reevaluating every piece of news, every change in the market. You're always looking at going, does the thesis that I held on this investment still hold?"

Key aspects of economic studies:

• PEA vs. PFS: Macpherson clarifies the distinction: "The level of work or engineering work that has to be done is much higher [for a PFS]. The requirement is much higher to get to a PFS level. Things like metallurgy, et cetera. The major difference that everyone will see is that PFS produces reserves, whereas a PEA won't."
• Confidence levels: PFS and Feasibility Studies provide higher confidence levels due to more detailed work and stricter requirements.
• Metal price assumptions: Macpherson emphasizes the importance of consistent metal price assumptions when comparing studies: "Generally speaking, QPs make you sign off on the three, basically sign off on the three-year trailing average."
• Margin of error: PEAs typically have a margin of error of around ±20%, which can significantly impact project economics.
• Impact on market expectations: How companies communicate study results can significantly influence market reactions. Macpherson notes, "The perfect scenario is under promise, over deliver."

Arizona Sonoran Copper Company's PEA

Against this backdrop, the discussion turns to Arizona Sonoran Copper Company's recently released PEA, which shows substantial improvements over their previous Pre-Feasibility Study (PFS).

Key findings of the PEA:

• NPV and IRR: The post-tax Net Present Value (NPV) at an 8% discount rate increased from $500 million to over $2 billion. The Internal Rate of Return (IRR) rose from 15% to 24%.
• Production capacity: Average annual copper production increased from 55,000 tons to 86,000 tons over a 31-year mine life, with the first 20 years averaging 115,000 tons per annum.
• Project scale: The project is now positioned to become the fifth-largest copper mine in the United States.
• CAPEX to NPV ratio: Initial CAPEX is estimated at around $600 million, compared to an NPV of over $2 billion, representing a favorable ratio of nearly 1:4.

Drivers of improvement:

• Discovery of the MainSpring deposit
• Shift from combined open-pit and underground to primarily open-pit operation
• Increased production rate

Sam from Olive Capital contextualizes the scale: "The first 20 years of production at this new project would be something in the range of 400,000 to 450,000 ounces of gold per year [equivalent]."

The Importance of Metallurgy in Mining Projects

A significant portion of the discussion focuses on the crucial role of metallurgy in mining projects, particularly in the context of Arizona Sonoran's PEA and ongoing studies.

Key points on metallurgy:

• Confidence levels in studies: Macpherson, a metallurgist by training, emphasizes: "You don't have to do a lot of rigor in metallurgy for a PEA. And, you know, that is always a concern."
• Potential for improvement: Arizona Sonoran has an agreement with Rio Tinto's technology subsidiary, Nuton, to test a new metallurgical process. Results are expected in Q3 2024.
• Impact on project economics: Sam notes, "If you can prove that this technology can enhance those recoveries in an economic way, not only are we gonna get more economics, but also higher volumes of production, which will translate higher NPV, higher IRR, and overall an even more attractive project than it already is."
• Conservative assumptions: The current PEA uses conservative recovery assumptions for sulfides, leaving room for potential upside.
• Importance in project development: Metallurgical performance can significantly impact a project's viability and economics, making it a crucial area for investors to monitor.

Management & Communication

The discussion also highlights the importance of strong management and clear communication in the mining sector. Arizona Sonoran's management team, led by CEO George Ogilvie, is praised for its execution and communication skills.

Sam comments, "This company has phenomenal people working for it. George Ogilvie, the CEO, had a trail of success in his past. He took on this project early and through the iterations, he and his team have obviously delivered now a $2 billion plus NPV."

The quality of the company's investor communications, particularly in presenting the PEA results, is highlighted as exemplary and set as a benchmark for the industry.

Future Catalysts & Next Steps for Arizona Sonoran

Looking ahead, several key milestones are identified for Arizona Sonoran:

• Q3 2024: Expected results from Nuton metallurgical testing
• Ongoing: Infill drilling at the Mainspring deposit
• H1 2025 (around June): New Pre-Feasibility Study incorporating all recent work

These milestones provide investors with a clear roadmap of potential catalysts that could further enhance the project's value.

Valuation Considerations & Takeover Potential

The dramatic improvement in Arizona Sonoran's project economics naturally raises questions about the company's valuation and potential as a takeover target. Several factors are worth considering:

• The project's scale now puts it in a category that could attract interest from major mining companies.
• Rio Tinto, through its Nuton subsidiary, already has an option to earn into a significant portion of the project.
• On a per-pound basis, the company appears to trade at a discount to peers with similar-stage projects.

Macpherson observes:

"I think it's materially undervalued here. As far as the takeout side of it, Rio, via Nuton, has an option to earn into a significant portion of this project."

Broader Industry Trends

The discussion touches on several broader trends in the mining industry that investors should be aware of:

• Ongoing consolidation, particularly in the gold sector
• The importance of jurisdiction in project evaluation
• The critical role of metallurgy in project economics
• The impact of new technologies on project viability
• The recycling of capital within the industry, potentially benefiting junior miners

Key Takeaways

The mining sector continues to evolve, driven by M&A activity, technological advancements, and changing market dynamics. The recent acquisition of Osisko Mining by Goldfields demonstrates the ongoing consolidation in the industry and the potential for capital to be recycled into junior miners.

Economic studies, such as PEAs and PFSs, remain crucial tools for investors to evaluate mining projects. Arizona Sonoran's recent PEA highlights the potential for significant value creation through exploration success and optimization studies. The importance of metallurgy in these studies cannot be overstated, as demonstrated by the potential impact of Rio Tinto's Nuton technology on Arizona Sonoran's project.

As the industry moves forward, investors should pay close attention to management quality, clear communication, and the potential for technological advancements to unlock value in mining projects. While risks remain, including commodity price volatility and technical challenges, the sector continues to offer intriguing opportunities for informed investors.