Reversion to the Mean
One of the expressions we are hearing more frequently from mining companies when they talk about high-quality assets these days is the ability to return the cost of capital, make money, generate cash fl ow, etc., “throughout the commodity cycle.” Many of the people making these statements believe that metal prices have now reached the bottom of the cycle. That generalization could be made easily looking at the last fi ve years. Looking at 15 or 25 years, however, that benchmark for Tier 1 designation rises substantially.
The boom and bust trend for commodity prices is nothing new. Some argue that the Information Age has tempered the huge historical swings. People living along fault lines have a similar justifi cation when it comes to earthquakes. Looking back historically, the trends are easy to spot, but they cannot be projected forward. Readers might be surprised to learned that 100 years ago (See E&MJ 150 Years), copper was trading at historic highs and E&MJ reported that “many properties have been resurrected, which, while dubious at $0.15/lb, are bonanzas at $0.25/lb [$5/lb today].”
Those who have attended the Prospectors & Developers Association of Canada’s (PDAC) annual meeting over the years have noticed the same trend as far as making money throughout the cycle. In this case, it’s a refl ection of the mining investor’s appetite for risk. This year was one of those years where the appetite was low and the feeling was palpable. Some of the presenters, who were talking about their projects— in some cases their life’s work—and searching for investors, were seemingly apologetic for the overly ambitious behavior exhibited during the last major push for exploration investment.
One of the presentations during the PDAC 2016 keynote session summed up the situation well and offered food for thought. In his presentation, Exploration Strategies for the Next Decade and Beyond, Jon Hronsky from Western Mining Services (WMS) told the audience that prices always revert to the mean and explained how exploration teams need to rebuild trust with investors.
In addition to the discussion of the reversion to the mean and finding orebodies that will make money throughout the cycle, Hronsky explained that with limited funds, exploration teams will have to practice more discretion. The models they use will have to consider more disruptive infl uences, such as the social license to operate, and better evaluate future extraction processes. To further complicate the situation, more of these discoveries will likely need to be made at depth.
Surviving the mining industry’s boom and bust cycles is what separates the wheat from the chaff. That’s why so few companies and institutions celebrate 100-, 125- and 150-year anniversaries. To be successful in this business requires a commitment; those that are not committed will not survive the trough. To pursue a project and prove-up a deposit not knowing what the future price of the natural resource requires knowledge, engineering skills, market intelligence and intestinal fortitude. When the market regains its momentum, remembering that metal prices always revert to the mean might prevent a costly gamble.
Steve Fiscor, Editor-in-Chief, E&MJ