November 13th, 2021

Evaluating Exploration-Stage Miners: a Cautionary Tale for Retail Investors

Dear Retail Investor,

The tale of Noront Resources Inc. (Noront) (TSXV: NOT)  is an important lesson for investing in mining.  Currently, Noront is the midst of a hostile takeover bid. In May, Wyloo Metals Pty Ltd. (Wyloo) (ASX: WYL), an insider to Noront, offered to purchase all the shares from shareholders at C$0.325 a share. A couple of months later, mining behemoth BHP Billton (NYSE: BHP) offered C$0.55 a share. Wyloo countered with a C$0.70 offer, and BHP subsequently upped the bid to C$0.75 and this is where the battle stands. Most recently, however, it appears that Wyloo and BHP are in negotiations to settle the bidding war.

Clearly both Wyloo and BHP believe Noront has something very valuable, which is true. In 2007, Noront made a major discovery of a high-grade nickel deposit and a chromite deposit a kilometer away. The nickel deposit was considered one of the best discoveries since the Voisey’s Bay nickel discovery in 1994, which is now a producing mine operated by Vale (NYSE: VALE). 

Noront’s nickel discovery in 2007 caused its stock to go from around C$0.40 to $7 in the span of a couple of months, and the stock traded between C$3-$7 for about a year.  The stock then cooled off and slid lower over the course of the next 13 years, reaching as low as C$0.12 in 2020.  

So did something bad happen? 

No, nothing bad happened. In fact, nothing happened at all. 

What do we mean?

Noront made a world-class discovery and provided economic and feasibility studies, but was unable to develop the projects.

How could such a highly touted world-class discovery never make it to development?

The projects have yet to be developed for reasons to do with geography, government and the inhabitants living in the district. These reasons are important things mining investors should be aware of when investing in a mining company.

Geologically, Noront’s projects are top-notch. Geographically, however, there is a problem for Noront, and a common issue in general for mining companies looking to develop projects.  Noront’s deposits are in area of Northern Ontario called the ring of fire. If you look at the map below you can see that the ring of fire is situated more or less in the of middle nowhere.

location-of-ring-fire-belt

The nearest paved road to the ring of fire is about 300 kilometers away from the deposits.

 Remote locations like this make it difficult for mining companies to turn a discovery into a mine. The deposit may be spectacular, but if there is no transportation infrastructure to get the ore to where it needs to go, then the project can end up turning into a dud. Transportation infrastructure also typically requires the assistance and cooperation of the government, which leads to the next series of problems: dealing with the government. 

Governments are often slow, inefficient and politically motivated when it comes to getting anything done. In Noront’s case it’s been a decade-long process negotiating with the Ontario government to get a paved road in and out of the ring of fire. It also explains part of the reason why the share price has taken a beating since the initial discovery. Shareholders get fed up with waiting and hit the bid. Even other companies in the ring of fire belt gave up their assets because of the long delays. Cliff Natural Resources Inc. sold their chromite deposits for C$0.04 on the dollar to Noront because of its inability to get transportation infrastructure set up in the region.  

Another roadblock that can lead to infrastructure development delays is the inhabitants of the region. In the case of Noront, their projects are in the middle of indigenous lands. Any mining development in Canada needs agreement from indigenous groups – this includes the mines and any other infrastructure developments. It is completely understandable and fair for indigenous groups to have their voice heard and to be able benefit from economic activity on their territories. The indigenous groups in the ring of fire region are some of the most socioeconomically disadvantaged communities in Canada. Some communities don’t even have clean drinking water, which is a shame for a developed country like Canada. 

However, things should improve for indigenous groups in Northern Ontario as ESG (Environmental, Social and Governance) factors become increasingly important for mining companies to consider when pushing a project forward. 

The way a mining company handles ESG factors will be essential in order to successfully put a project into production, and should be a consideration in the investment decision-making process for retail investors. 

Most Noront investors who bought after the discovery probably didn’t envision that Noront would make such little progress over the next 10 years. Technically speaking, it should be an operating mine by now. Noront’s predicament is a cautionary tale for retail investors to understand what phase they are at in the mining life cycle.

The lifecycle can be classified into three broad phases – exploration, development and production.

Each phase is unique and carries its own risk and reward characteristics. It is important to know what phase you are investing in and the milestones needed to be completed. 

In the case of Noront, all the money was made in the exploration phase. Investors who bought when the stock traded between $3-7 and held, lost substantially. They lost because of lack of progress in the development stage, which included no road or agreements with the government and indigenous groups to build such a road.

A great tool to know what stage you are in with a mining company is the Lassonde curve as shown below. 

junior-miner-life-cycle

This is a general representation of what happens to the stock values of mining companies from exploration to production.

For Noront, they made it through the exploration phase but have remained stagnant in the engineering (or development) phase, which has led to a bleeding share price, lasting over a decade.

That said, exploration projects have promising potential when they respect key ESG principles such as using renewable energy sources to mine, working closely with local communities and receiving approval from local governments can offer retail investors massive gains.

To conclude, know what phase you are in the mining cycle and be aware that even world-class deposits are subject to external risks that can impede the path to production. 

Sincerely,
Dear Retail Investors Editorial Team

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