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Flashcards in IB Mining & Metals Overview Deck (33)
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How do global investment banking franchises typically structure their Mining & Metals group?

For most global investment banking franchises, metals and mining is a sub-sector of a Basic Materials or Natural Resources (along with oil & gas) coverage group – however, we have chosen to segregate M&M on this website reflecting mining’s prominence in Canadian industry and finance and in-line with Canadian investment banking industry verticals.


How is mining a building block of society?

Mined products are the building blocks of society, from:








transmission, energy to infrastructure.


What metals are used in automobiles?

Automobiles (aluminum – from bauxite, and steel – from iron ore)


What metals are used in construction?

construction (steel, zinc, copper for wiring and conductivity),


What metals are used in healthcare?

healthcare (copper for antimicrobial properties, rare metals, lead)


What are the key commodities to know in the mining space?

Precious metals

Base metals

Rare Earth Metals

Bulk Commodities


What are the main precious metals?

Gold (could be a grouping itself), Silver, PMG (Platinum, Palladium, Rhodium etc.)


What are the make base metals?

Copper, Aluminum, Zinc, Lead, Nickel, Tin


What are the main bulk commodities?

Iron Ore, Metallurgical Coal (feedstock for steel)


Broadly describe modern-day mines

Most modern-day mines are large enterprises requiring large amounts of capital to establish. As a result, large mining corporations typically dominate the sector. There is a large concentration of miners on the Toronto Stock Exchange due to Canada’s attractiveness in raising capital for the industry due to its established legal frameworks, competitive tax, and favorable royalty regime.


How do mining companies primarily raise capital?

Mining companies primarily raise capital through issuing equity on an exchange and subsequently investing the money into mines throughout the world, so due to the TSX acting as a magnet for mining companies, corporates with operating mines and core assets in jurisdictions outside of Canada will choose to list in Toronto.


How do large cap miners usually position their portfolio to ensure smooth cash flows and preserve dividends?

Large cap miners (BHP/Rio) usually have a diversified enough project base with new projects coming online while others decline to have a more consistent cash flow. These names are very savvy and often recalibrate or rationalize their project portfolios with non-core asset sales to ensure growth and continuity. Treasury at BHP and Rio are also very cognizant of when to issue debt opportunistically to smooth cash flows and preserve dividends.


How does the market react to small supply shocks?

In an imaginary scenario, demand for copper is at an equilibrium, and will continue to be as mine declines (older mines run out of copper and shut down), as measured by tonnes of copper produced, equals new production coming online (new mines starting up or mine expansion). If a small supply reduction occurs (a mine undergoes an unexpected outage), copper inventories (in London and Shanghai, mostly, but everywhere else as well) will be drawn down and the price will rise a little but overall supply and demand will be balanced.


How does the market react to large supply shocks?

If a large supply shock kicks in (war breaks out between Peru and Chile and major projects shut down), the supply curve shifts left and demand destruction takes place – some consumers of copper will be forced to use a substitute or discontinue their business as it no longer clears their margins.


In reality, why is the supply and demand situation of mining more complex?

In reality, the situation is much more complex with many more players than just miners and consumers of copper – there are speculators, middlemen (banks and physical commodity traders), and storage capacity owners. Certain miners will hedge their prices over long periods of time using off-take agreements, as they need to ensure that their mine is economic and meets returns for investors. Spot prices are very different from futures prices because futures prices are dependent on hedging activity.


Why are we constantly switching from oversupply to undersupply?

The timing of mining, depletion and demand spikes (China’s construction boom) and lulls is never certain, forcing the copper market to go into oversupply and undersupply repeatedly. This cyclicality is inextricably linked to global industrial production and mining stock prices tend to be leading indicators. Undersupply is cured by demand destruction and drive new capital expenditures on mines that will come online later. Oversupply is cured by producers who have costs above the global copper price shutting down their mines.


How does the US Dollar play into commodities?

It is important to remember that the world’s vehicle currency is still the US Dollar, and practically all commodities continue to be priced in dollars. A Canadian gold producer in Timmins, Ontario will have their operating costs in Canadian Dollars but will realize US$ equivalent when it sells the commodity. Any boost to the US$ will magnify earnings and vice versa. Overall, a strong dollar will depress a basket of commodities (otherwise it would be too expensive for non-US consumers to purchase these commodities)


How are economically viable mineral volumes in a mine classified?

Economically viable mineral volume in a mine can be classified as the mine’s resources, and further broken down into measured, indicated and inferred resources.


After the feasibility study, how are the measured and indicated resources classified?

After a feasibility study, the measured and indicated resources can be classified as proven and probable reserves. This solicits a much lower discount rate as there is high confidence of the existence of the minerals and they have been demonstrated to be economically extractable. Inferred resources are ignored as they are not commercially viable.


Define minerals classified as commercial component and the gangue minerals.

A higher quality ore reserve will have a higher composition of the desired mineral within the ore. The ore itself can be separated into the commercial component (desirable minerals) and the gangue minerals (waste).


What is very important aspect to factor into the mine’s return?

After operations cease, the company will have an environmental liability and will have to decommission the contaminated mine site. This will factor into the mine’s return.


What is after the feasibility study?

Once the feasibility study is complete, detailed engineering can begin and then a production decision can be made. Any movement in the timing for these stages (Preliminary Economic Assessment, Feasibility Study, Permitting, etc.) can shift the share price dramatically for a mining explorer, as timing affects NAV.


How do miners finance their projects after commissioning?

Once facilities are commissioned, major miners can take on project specific debt – usually in the form of project finance.


Why do banks not care about resources?

Banks do not care about resources, as they do not get to participate in any of the upside. Banks will write in tight debt service coverage ratios (DSCR) which will be satisfied by the metal sales the miner has contracted out to an offtaker (commodity traders and sometimes even bank commodity arms will do that, winning on two fronts), and ensuring repayment.


Define LIBOR

The London Inter-bank Offered Rate is the average of interest rates estimated by each of the leading banks in London that it would be charged were it to borrow from other banks.


How are interest rates generally determined?

The interest on this is always LIBOR + a margin, or a floating rate – miners will often swap this out to fixed as there is more certainty (also done with the bank). The margin for smaller miners can be 10% or more, which is very lucrative for banks. Banks may want miners to hedge in as much of the very variable components of their operations to ensure there is no cash flow volatility (diesel, electricity to run the mine).


What report do mining investors talk about all the time?

Mining investors talk about the NI 43-101 all the time. It is the required format for any reporting for a mining company that discloses information on a Canadian securities exchange. Technical reports will be conducted by a geologist and outline assumptions for reserves and resources and other information relevant to a mining investor. The report is largely interchangeable with the JORC, which is the Australian standard.


Define Open Pit Mining and what they’re best for.

Open pit mines are the gigantic, sprawling craters in the ground with trucks driving in a circular perimeter to haul extracted tonnage to mills. Open pit mines are best for low-grade (relatively less commercial material per ton or ore), bulk tonnage (large amounts of ore mined) operations.


Define underground mining and what they’re best for.

Underground mines are more difficult to engineer and require high grade ore to justify the capital expenditure. Underground mines will be in an area with certainty of high density veins. Depending on the geological features of the veins, different underground mining methods will be used (methods differ greatly in cost).


What are three different underground mining methods

Cut and fill is a popular underground mining method, where rock is blasted and then backfilled with the waste material while ore is mined. Other methods include long-hole stoping & room and pillar.


What are two mined ore processing methods?

Ore Mill

Heap Leaching


Define ore mill

Ore is sent to a mill and crushed and grinded by grinding media (steel balls and rods) before being separated into a purer mixture of the commercial metal. As this is expensive and there is fixed capacity, this is for higher grade ore.


Define heap leaching

Heap leaching uses chemicals to extract metals from the ore. Certain chemical reactions absorb the commercial metal. This method is cheap but erodes byproduct metals and is good for mines where ore grades are low.