The Grade vs. Size Tradeoff

A great mining project possesses a large, high-grade, easy-to-access resource. However, we have used up most of the world’s largest resources, and now we’re left with seconds.

The question is whether we want high-grade and small or low-grade and huge at the top of the menu. An example is Northern Dynasty’s Pebble Mine versus Oracle’s Oracle Ridge Copper Mine in Arizona. Pebble could be a material mine to a major mining company, but it is so huge and moves so much dirt versus metal produced that it is very expensive to permit, develop, and monetize.

 

Smaller mines with high grades have a niche in the current market. For some commodities like copper, we do not envision a future where small mines will not be economic. In other commodities like steaming coal, you need size in order to have an economic ore body. We have plenty of large high-grade steaming coal deposits left in the world, yet net coal demand for electrical production is decreasing.

From an investor perspective, large low-grade mines containing a material amount of metal have value to a major, but only on a major looking to buy or joint venture. Smaller higher-grade deposits have more bidders if the commodity is in high demand. Smaller projects, however, do not have the same takeover premium of larger projects. If a project only holds 500,000 contained tons of copper, BHP will never show up to the party.

Going forward we prefer smaller economic projects with higher grades versus whale-size low-grade projects that can only be developed by a major company with significant monetary resources. We do not dislike large high-grade deposits, but we can rarely find one anymore.