While Mark Twain said “Explore. Dream. Discover”, he is also credited with quipping that “a gold mine is a hole in the ground with a liar standing at the top”. The latter was a facetious remark, but the resources sector is full of characters. It takes a resolute attitude and adventurous spirit to drill holes in far-flung places hoping to discover mineral deposits that can be processed to support global economic development and prosperity. Successful exploration is critical to replacing depleting resources and meeting global demand growth. Exploration is a key way for companies to create shareholder value in a world where much exploration does not lead to discovery.
It also takes a lot of effort to attract the financing that supports these generally capital-intensive activities. The challenge for investors is to identify experienced management with the right strategies for exploration and development success – to spend quality time sifting through and finding the diamonds in the rough.
It’s fair to say that for the past few years, global exploration activity has been anaemic, but that is starting to change. Exploration activity in Australia is enjoying a resurgence, unearthing exciting new minerals and making energy discoveries around the country. We have astutely invested in a few of the companies at the
forefront of this exploration success, applying an investment process that strives to identify companies with outstanding natural resource advantages.
Our investment approach is based on our core belief that natural resource quality is paramount when investing in resources. The primary asset of any natural resource company is the resource itself. Site visits, project benchmarking and extensive meetings with management and operational personnel are an important part of
evaluating any resources investment opportunity.
Quality factors include size, grade, orebody geometry, metallurgical recovery, product specifications, and resource definition technique. Other key quality factors are location and availability of infrastructure, capital allocation history and appraised management calibre. When these stars align, we invest.
Gold has often been the key metal sought by junior explorers, as gold exploration generally requires less capital than other mineral ventures. In the 1990s, the gold sector had over 30 solid companies, and merger and acquisition activity was common. The gold price was relatively stable from 1990 to 2005, trading at around AUD 400- 600/oz. Great mines were discovered, developed, and expanded, including Telfer, The Super Pit, The Granites, and Boddington. New successes came at Plutonic, Great Central, Jundee, and Cadia. The North American gold majors, including Homestake, Barrick and Newmont were also very active in Australia.
The gold price tripled from 2006 to 2011 (to AUD 1,500/oz), then had a seven-year consolidation, trading between AUD 1,350/oz and AUD 1,750/oz. During this time, many new deposits were discovered and new mines brought into production. In 2019, gold jumped 20% to AUD 2,200/oz, with some of the most recent exploration successes bringing renewed interest back into the mining sector, across a range of locations and company sizes.
Kirkland Lake Gold (ASX:KLA): Exploration success at its Fosterville gold mine has driven market capitalisation from USD 1.1 billion in early 2017 to nearly USD 10 billion in 2019 as the gold mine is now one of the most profitable in the world.
The Fosterville Gold Mine, located near Bendigo in the Victorian goldfields, started life as a modestly profitable mine, taking eleven years to produce 1Moz. The mine averaged 90-110koz p.a. of production at a grade of 4-5 grams per tonne (gpt) of gold (Au) until 2015. All that changed with the discovery of materially higher-grade mineralisation below known workings at the Phoenix and Lower Phoenix underground lodes, now called the Eagle and Swan Zones. As a result, the company accelerated its exploration effort garnering extremely positive results for reserves and resources due to increasing gold grades. Incorporating this discovery saw Fosterville’s 2017 gold reserves increase 110% to 1Moz at gold grades of 17.9gpt Au compared to 9.8gpt Au previously. The Swan Zone alone contained 532koz Au grading at 58.8gpt Au, making Fosterville one of the highest-grade gold mines in the world.
By the end of 2018, additional successful exploration increased reserves by 170% to 2.7Moz grading 31gpt Au. The ability to rapidly convert exploration success into production resulted in a step-change in 2019 production guidance of 550-610koz. This is an extraordinary five to six times production increase for relatively modest capital investment. More importantly, this shift materially decreased all-in cash costs to less than USD $400/oz, making it the largest and most profitable mine in the global gold industry. Fosterville will produce its second 1Moz in less than two years.
However, the story doesn’t end there. Exploration potential remains open downdip of the Swan/Eagle Zones and, more importantly, the drilling at the previously mined Harriet Zone (around 1.8km to the south of the Phoenix lodes) also intersected similar high-grade mineralisation and geology at around the same depth of 1000m. Fosterville is proof of the old adage that “some mines never die, but just get better with age”. The new geological knowledge acquired has completely transformed the potential at both the mine and the broader Bendigo gold district. What attracted us is the combination of safe jurisdiction, existing cash flow, and the new discovery of materially higher grades under the existing mine, alongside a very accomplished management team.
Bellevue Gold (ASX:BGL): Another evolving success story with similar brownfield exploration characteristics, but at a much earlier stage of development, is Bellevue Gold. The current exploration story revolves around the historical high grade 15gpt Au Bellevue underground mine that produced around 800koz, prior to closing down in 1997. The project sat dormant for 20 years with limited new exploration activity. A fresh exploration-driven management team took over the asset in 2017 and focused on reviewing the historical geological data from a “modern” perspective. In short order, they overhauled previous geological assumptions which led to the discovery of a new gold lode on the other side of a fault previously considered barren.
Management believe that Bellevue is a classic (and world-class) multi-million-ounce Archean lode gold system, and there is a decent chance they are right. Within 18 months the new team has discovered an additional 1.5Moz (plus 300koz of unmined resources) of high-grade material across a number of new lodes. Combined with previously mined gold, the deposits host 2.5-3.0Moz, with exploration open along strike and depth in all lodes.
Grade is king in the mining industry, and at more than 11gpt Au, the project has the makings of a profitable future mine. It is located in the prolific gold/nickel Agnew-Wiluna belt of WA, proximal to infrastructure such as road access, grid power, sealed roads, water, an airport, and general mining services. Due to its grade, the project should demonstrate very competitive operating costs, with high capital efficiency.
Copper (and polymetallic/Gold)
Exploration is not just the domain of small caps. In the copper space, Rio Tinto recently announced an impressive set of drill holes that could herald a major copper discovery, as have Newcrest Mining and BHP. The pressure is on to locate copper resources across the globe. Until recently, the cupboard has been rather bare.
Winu, Western Australia
Rio Tinto (ASX:RIO): There was talk that, early in 2018, Rio Tinto had made a discovery some 130km from the Telfer Mine in the Paterson Province in Western Australia. A programme of twenty diamond drill holes commenced in late 2017 and the results highlighted large intersections of copper and gold beginning at shallow depths of less than 100m. Some of the better results in this first programme included 0.8% copper (Cu) and 0.28gpt Au over 104m, and 0.42% Cu and 0.32gpt Au over 439m. The mineralisation was open at depth and to the east, north, and south. The June 2019 release included 0.43% Cu and 0.60gpt Au over 456m. An update in August highlighted that the deposit was still open and that drilling was ongoing with eight diamond rigs and three Reverse Circulation (RC) rigs operating, with results tending to be a similar tenor to those reported above.
The key question is whether the deposit will be of a scale suitable for Rio to develop. While the grade is modest, the potential scale, the shallow nature of the deposit, and the ease of mining all suggest very favourable economics.
Oak Dam, South Australia
BHP Group (ASX:BHP): In November 2018, BHP informed the market of some exceptional drilling results at Oak Dam, just 65km south east from Olympic Dam in South Australia. Hole AD-23 intersected an impressive 6.1% Cu and almost 1gpt Au over 180m. This intersection was part of a 425m intersection grading 3% Cu and 0.6gpt Au along with uranium and silver. Unfortunately, the mineralisation is deep, with the first intersections occurring at around 1km. During the June quarter of 2019, BHP drilled 12,425m over 10 holes looking to test for the lateral extent of the deposit and how to interpret the orientation of the mineralisation. Results have confirmed the earlier results, and another drilling programme will commence in November. This is a long-dated project, but an important option for BHP if it wants to expand its presence in South Australia.
Havieron target, Greatland Gold, Newcrest Farm-In.
Newcrest Mining (ASX:NCM): Havieron is one of two major discoveries made in the Paterson Province in Western Australia over the last 18 months, with the first hole (HAD005) intersecting a combined 0.6% Cu and 4.8gpt Au over 275m. The property is only 45km to the east of Newcrest’s Telfer operation. This was the catalyst for Newcrest to farm-in and earn up to a 70% interest for the expenditure of USD 65 million over six years. Newcrest is living up to its expenditure commitment of USD 5 million within the first year of the programme. Results from three holes released in September 2019 have extended the mineralisation by 100m to the north, with intersections including 3.4gpt Au over 75m and 0.4% Cu over 816m. This is a priority target for Newcrest as it seeks to extend the life of the large Telfer project.
Strike Energy (ASX:STX) and Warrego Energy (ASX:WGO): Exciting things are also afoot in energy exploration. In August 2019, the Perth Basin re-emerged as a compelling basin for gas exploration, with the second major gas discovery at West Erregulla made by partners Strike Energy and Warrego Energy. They have seemingly unlocked the geophysical code after reprocessing 3D seismic data to show conformance between amplitude and hydrocarbon-rich rocks, and are now successfully drilling towards a resource of less than 1 trillion cubic feet (Tcf) of gas. It helped that they could reprocess the seismic data of the successful Waitsia gas discovery next door.
Whilst production testing will commence soon, the results to-date are very encouraging and material to the valuation of the companies concerned. The Waitsia (flow rates, in the range of 25-80 million standard cubic feet per day (MMscf/d)), suggest highly productive wells, which imply low future production costs. In combination with Waitsia, the Perth Basin now has 2-3Tcf of gas with additional exploration upside. This scale of resource is likely to spur interest from major industry players who will be keen to participate in some form or other.
Santos (ASX:STO) and Carnarvon Petroleum (ASX:CVN): A mention must go to Santos, who, in 2018, drilled a light oil discovery well (Dorado-1) offshore of Port Hedland in Western Australia. Their junior partner, Carnarvon, owns 20% of the equity in the offshore licenses within the newly discovered Bedaut Sub Basin. The Dorado-2 well de-risked the play by proving reservoir connection and upgrading estimated 2C resources to 344 million barrels of oil equivalent (MMboe) (69 MMboe net to CVN), confirming it as a world-class discovery. We like this project because it can be monetised relatively quickly in the hands of a strong operator like Santos, who ranks it as a high priority development project with a final investment decision likely in late 2020. Given the strong flow test results, the project may be larger than initially thought.
The project has material competitive advantages being in shallow water (100m), around 110km offshore, 100km from the Browse trunk line and around 240km from the North West Shelf gas/condensate fields for potential tie in. Given the scale, product mix, and location, the project is likely to be a highly profitable venture with above average industry returns. This exploration success has increased the potential of the numerous other prospects in the under-explored basin. A new 3D seismic survey completed in 2019 will be used to evaluate and prepare for future exploration programmes. Unsurprisingly the discovery has increased interest and staking in the region.
At Janus Henderson, the Global Natural Resources Team consists of four dedicated investment specialists, with cumulative industry experience of more than 125 years. The team has collectively managed active global natural resources portfolios for over 30 years. Our objective is to generate the best risk-adjusted return for our clients. Whether it’s oil and gas, gold, or any other mineral, there is risk in investing. In order to mitigate that risk, we focus our attention on projects that have high-grade or massive scale with access to power, water, labour, stable geopolitics and robust environmental, social and governance procedures.
By sifting through the opportunity set with a quality filter, we try to skew the risk/reward equation for the benefit of investors. With a focus on quality as the leading criterion to identifying world-class resources, our funds are equipped to withstand volatility while offering long-term exposure to the development of resources that are crucial to growing global economies and improving the lives of millions. Perhaps Twain was onto something…the power of dreams and exploration.
Views as at 18 October 2019. These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors.
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