World population has increased by more than 1.4 billion since 1990. World population is projected to increase by another billion by 2025. Increases in food production have out paced population growth. But the natural resource sector is struggling to keep up with increases in demand. Natural resources are real wealth. The natural resource sector presents an unrepresented investment opportunity for the prudent investor.
The high-tech world we live in is dependent on one irreplaceable component which is natural resources. The buzz word today is “green”. But green industry is dependent on natural resources as well. Our high-tech computers, smart phones, tablets, hybrid cars, electric cars, solar energy, wind energy, and just about everything else is dependent on natural resources. These include: copper, iron, aluminum and other metals, silica, rare earth minerals, silver, gold, and platinum and many more.
The world has vast reserves of natural resources but not all these resources are in production and many are yet to be discovered. Some of the largest mining companies can spend close to a billion or more on exploration in a given year. Often this exploration leads to limited results. These mining companies can and do Joint Ventures (JV) with smaller mining companies. But many small miners are unwilling to give up control of their reserves. The solution to this problem is private equity.
Private equity firms have not traditionally been involved in mining but more and more firms are seeing the enormous potential and are looking for opportunities to get involved. This is also an opportunity for the prudent investor who is willing to make a long-term investment in a project. Remember, this is private equity, we are not talking about publicly traded companies; an won’t be able easily exit an investment. But the upside has tremendous potential.
Mining can be very capital-intensive. But in rare cases, the reserves are easily accessible and so abundant that minimal processing is required. And therefore, in rare cases, the start-up cost can be relatively small. Investors must be prudent and do their due-diligence because actual circumstance can be much different than what is represented.
In the US and Canada, there are small businesses holding large reserves of iron, copper, silica, gold, silver platinum, rare earths and many other types of natural resources. Many of these reserves have been documented by geologists. Some of these small business people on holding reserves of $1 billion, $10 billion, $100 billion and more. But they need investment capital in order to put these assets into production. And these small business people are often willing to offer very lucrative deals to investors that will help make their dreams come true.
In some instances an investor can get involved for as little as $100,000. It is more typical that an investment of $1 million or more is required but everything is negotiable. The potential financial rewards astounding.
Investing in a mining project requires significantly more due-diligence than the average investment. An investor may find it necessary to hire one or more consultants to provide due diligence. Any investor should know and understand the risks involved and the upside potential. Some of the questions an investor will want answered include (additional questions may be necessary for a mine that is already in production):
- Who owns the property and/or mineral rights and/or mining lease?
- Are there any liens or encumbrances against the property and/or mining lease?
- Are there any geological reports?
- What are the estimated reserves?
- What are the credentials of the geologist?
- What is the background and credibility of the mine owner(s)?
- How much capital is needed to get into production?
- What is being offered to the investor in return for his investment?
- What is the business plan?
- What utilities are available and what utilities are needed?
- What is the access to the mine?
- Where will the ore be processed and how will it be transported?
- What is the anticipated cost of production per ton and what is the anticipated yield?
- What method will be utilized to process the ore or raw material?
- Has the ore or raw material been tested to see what percentage of the asset is recoverable using the anticipated method of recovery?
- How long will it take to get into production?
- Are there current buyers for the resources to be mined?
- Are there permits or have there been discussions with the permitting agency and what were the results?
- Is the mine owner planning on doing the mining or will a contractor be used?
- Who is the contractor?
- What is the experience of the contractor?
These above are just a few questions that need to be answered before someone makes a decision to invest. For those who know little about mining please note the following which relates to the above questions:
- A geologist report must be prepared by a licensed third-party geologist. Any geological report completed by the owner of a mine has little value to an outside investor. The National Instrument 43-101 is the highest standard for geological reports and is established by Canadian law.
- Assay reports are typically referenced in the geological report or added as an addendum. An assay reports will show the estimated amount of metal or mineral per ton of ore in specific samples. There are different assay methods and not all will yield the same result for a given sample. Correspondingly, actual processing results may not be able to recover all the metal or mineral in the ore.
There are primarily three forms of direct investment that can be used in a mining venture. Each have their advantages and disadvantageous. An investor may use one or a combination of these vehicles on any one project. The three forms of direct investment include:
- Purchase of an equity position in the company that owns the mine
- A joint venture (JV) with the mining company.
- A royalty position in the mine.
As an equity investor in the mining company, you would have the potential of reaping the profits from any and all activities of the corporation including other mining projects the company might have. But you would also face the potential risks (losses) associated with any and all other ventures the corporation may undertake. Additionally, depending on your agreement, your equity position could be diluted by future investments by others.
As a JV partner, you would be investing only in a specific mining property. You would receive a percentage of the profits as dictated by the JV agreement. You would not be participating in the profits of any other ventures the mining company might undertake. But neither would you be undertaking the risks associated with any other ventures. There is one potential exception, a corporation can have a very profitable project and still be forced into bankruptcy because of other failed projects.
Royalty streams can be a very good scenario for both the investor and the mine owner. Royalty streams can come in many different forms. Below are several different scenarios:
- A fixed stream of payments for a fixed period of time or for the life of the mine.
- A percentage of the profits of the mine.
- A percentage of the profits based on an escalating or declining scale. An example of an escalating scale: Five percent (5%) of the first $1,000,000 net profit; seven percent (7%) of the all profits between $1,000,001 and $10,000,000; and ten percent (10%) of all profits over $10,000,000.
There are many cash-strapped entrepreneurs sitting on trillions of dollars worth of known reserves of natural resources. They need cash from investors in order to put these reserves into production. These entrepreneurs are willing to share the wealth with the investors who are able to make their dreams come true. If you have an interest in this type of investment you need to start looking for opportunities. Make sure you have minimum investment capital of $100,000 to invest and preferably $1 million or more. Also make sure you are capable of making the long-term investment commitment that is necessary. And don’t forget to do your due-diligence. Good luck!