In the world of mining and exploration, understanding the dynamics of the industry is crucial for investors and industry professionals alike. One concept that has gained prominence is the Lassonde Curve, named after Pierre Lassonde, a renowned figure in the mining industry. The Lassonde Curve provides valuable insights into the stages of the mining life cycle and the potential value creation at each phase. In this article, we will delve into the details of the Lassonde Curve, exploring its significance and how it can guide investors in navigating the early-stage opportunities offered by junior mining companies.
Understanding the Lassonde Curve
The Lassonde Curve is a graphical representation that illustrates the value creation process in the mining industry. It showcases the various stages of a mineral property's life cycle, from concept and discovery to feasibility, development, and ultimately, production. The curve helps investors and industry professionals visualize the value trajectory of a mining project as it progresses through these stages.
Concept Phase: The journey begins with the acquisition of a prospective mineral property. This phase involves conducting initial exploration work, including surface mapping and sampling, to determine the property's mineral potential. By communicating the property's value proposition to the capital markets, companies aim to attract investors willing to fund further exploration activities.
Discovery Phase: If the concept phase yields promising results, companies proceed to the discovery phase. Here, diamond drilling is employed to assess the presence and extent of valuable minerals beneath the surface. A significant discovery can spark investor interest and contribute to a surge in the company's valuation.
Feasibility Phase: After confirming the existence of mineral resources, the project enters the feasibility phase. This stage involves comprehensive engineering and financial studies to evaluate the project's viability and assess its potential profitability. Different types of studies, such as Preliminary Economic Assessments (PEAs) and Pre-Feasibility Studies (PFS), provide detailed insights into the project's technical and economic aspects.
Development Phase: Once a mining project has undergone rigorous engineering and financial evaluations, it may progress to the development phase. Here, companies work towards transforming the mineral deposit into a fully operational mining operation. Securing funding and obtaining necessary permits are crucial steps in this phase. Development requires substantial capital investment and expertise, as the project moves closer to actual production.
Startup Phase: The startup phase represents a significant milestone in a mineral company's journey. It marks the transition from development to production, where the mine becomes operational and generates revenues. At this stage, investors can assess the company's operational, environmental, social, and financial performance to make informed investment decisions.
Applying the Lassonde Curve
The Lassonde Curve serves as a guide for investors interested in early-stage opportunities in the mining sector, particularly with junior mining companies focused on exploration and development. By understanding the stages of the curve, investors can assess the progress and potential value creation of a mining project.
Investors can analyze a company's milestones and compare them to the expected progression on the Lassonde Curve. This assessment helps them gauge the project's stage and the potential impact on its intrinsic value. For example, a positive feasibility study announcement can act as a catalyst for share price movement, indicating a significant step towards development.
It's important to note that the Lassonde Curve is not the sole determinant of a project's success or an investor's decision-making process. External factors, such as market conditions, commodity prices, regulatory hurdles, and operational challenges, can influence a project's outcomes.
Case Study: The Oyu Tolgoi Deposit
The Oyu Tolgoi copper-gold discovery in Mongolia provides a real-life illustration of the value cycle in action. From the initial concept and exploration stages to feasibility, development, and production, this case study exemplifies the complex journey of a mining project.
By studying the Oyu Tolgoi example, investors and industry professionals can gain valuable insights into the dynamics of mineral discoveries, assess their investment potential, and navigate the inherent risks.
Concept: 15+ Years
Initial exploration work near the Oyu Tolgoi site took place in the 1980s. However, it wasn't until 1996 that Australian miner BHP conducted further exploration activities.After conducting 21 drill holes, BHP lost interest in the project and opted to option the property to mining entrepreneur Robert Friedland and his company Ivanhoe Mines. At this stage in 1999, investing in Ivanhoe shares was considered speculative.
Pre-Discovery/Discovery: ~3 years
Ivanhoe Mines and BHP entered into an earn-in agreement, whereby Ivanhoe gained ownership rights by conducting exploration work on the Oyu Tolgoi site. Approximately a year later, the first drill results were released from drill hole 150, revealing an impressive intersection of 508 meters with 1.1 g/t Au and 0.8% copper. To put this into perspective, imagine a 45-story building, with one-third of each story consisting of copper. This discovery represented only a fraction of the potential deposit, which could extend for miles. The release of these promising drill results sparked wild speculation, as the growing evidence of a massive copper-gold deposit in Mongolia drove up Ivanhoe's share price.
Feasibility/Orphan Period: ~2 years
In 2004, the drilling results contributed to the development of the first scoping study, providing a preliminary understanding of the project's economic viability.
With this study in hand, the company needed to secure sufficient funding to construct a mine and extract the valuable ore. It wasn't until two years later, when Ivanhoe Mines entered into an agreement with major mining company Rio Tinto, that a production decision was ultimately solidified.
Development: 7 years
By 2006, the Oyu Tolgoi mineral deposit had entered the development phase, with the completion of the first shaft headframe, hoisting frame, and associated infrastructure. Over the next two years, the shaft reached a depth of 1,385 feet. Further development work resulted in the delineation of a resource estimate of 1.2 billion pounds of copper, 650,000 ounces of gold, and 3 million ounces of silver. The initial stage of Oyu Tolgoi's development propelled Mongolia to become the world's fastest-growing economy between 2009 and 2011.
Startup/Production: Ongoing
On January 31, 2013, Ivanhoe Mines announced the production of the first copper-gold concentrate from the Oyu Tolgoi mine. Six months later, the company reported processing up to 70,000 tonnes of ore daily.
Depletion: Into the Future
Given the immense scale of the Oyu Tolgoi deposit, it is expected to last for generations, making it challenging to determine its long-term investment value.However, it is essential to acknowledge that risks still lie ahead. Potential challenges include labor disruptions, mining method issues, or fluctuations in commodity prices. Investors must carefully consider these factors as they unfold.
Conclusion
The Lassonde Curve offers valuable insights into the mining life cycle and the potential value creation at each stage. By understanding this concept, investors can navigate the complex mining industry more effectively. The curve provides a framework for assessing the progress of mining projects, from early exploration to production, and helps investors make informed decisions.
While the Lassonde Curve serves as a useful guideline, it's essential to consider other factors that can impact a project's success. Investors should conduct thorough due diligence, analyze market conditions, evaluate the management team's expertise, and consider the project's unique characteristics.
In summary, the Lassonde Curve acts as a roadmap, enabling investors to track a mining project's progress and evaluate its value potential. With a comprehensive understanding of the mining life cycle and the insights provided by the curve, investors can make more informed investment decisions in the dynamic and rewarding world of mining.