When is the right time for a PEA of an exploration project?

For today’s risk-averse mining investor, there is a level of comfort that comes from a Preliminary Economic Assessment (PEA) that affects an exploration project’s success or failure. As a technical document, it is a tool for investors to make informed decisions — but a PEA can (and arguably, should) be much more than that. From legal assessments to ensure that the company has uninhibited rights to the resource to financial analysis to quantify the potential returns, the breadth and degree of analysis investors expect of these projects is on the rise.

So what does this mean for a junior explorer with an early stage project, and when is it the right time for a company to release this milestone document?

The answer lies in the company’s risk tolerance, treasury and overall business strategy. While there are exceptions to this rule, most junior explorers can be categorized in one of three ways:

 1. Those who aim to discover an early stage deposit with minimal capital investment, and sell the property.

 2. Those interested in developing a project to an advanced stage for joint-venture (JV) development or acquisition by a major.

 3. Those who intend to advance a project to mine development and production.

Companies falling into the first category typically divest themselves of projects at their earliest stages. In most cases, these companies rarely advance projects far enough to warrant PEA-level analysis, since there often isn’t enough technical data to support the economic assumptions required for this level of study. While the project may already have a history of exploration, including drill-hole data, the geological model is often not fully developed to support a mineral resource estimate.

Hand in hand with this are usually gaps in all other risk assessments affecting the project, including metallurgy, infrastructure, environmental and socio-economic impacts, political engagements and market analysis. But successful companies know when to stop drilling, and when to start looking for suitors.

In the case of companies with mandates to advance a project for JV or acquisition, the decision to apply economic analysis typically comes after reporting an initial mineral resource estimate. Even then, most companies have an internal mandate to report a minimum quantity of product as part of their overall business strategy, which may mean multiple updates of the mineral resources before a PEA is done.

But this milestone can be a moving target, as commodity prices, political climates and supply and demand fluctuate during the project’s life. The decision also hinges on available suitors, or JV partners, and their willingness to pay a premium for a project with a positive net present value (NPV), versus investing in a project with no advanced analysis, and its associated risks. A seller must therefore gauge the return on investment for timing the PEA’s release.

Exploration companies with a goal towards production often face the most pressure from investors to accelerate their projects to a PEA and beyond, but applying these analyses too early can create misleading outcomes. Until an exploration project has accumulated representative data, there are just too few facts on which to base meaningful assumptions and conclusions. To do so earlier would reveal gaps in the building blocks of an otherwise successful mining endeavour.

This isn’t to say that companies shouldn’t be mindful of economics early on. Many companies have used early economic analysis to acquire undervalued and underappreciated projects that revealed their true merits.

This proactive approach can reveal gaps in the fundamental knowledge base, and corrective measures can be taken. Early economic analysis can answer essential questions, like: ‘Is the grade and width of my mineralization sufficient such that I need to find more of the same, or should I look for higher-grading mineralization and walk away?’ Unfortunately, far too often companies are blindsided by PEAs with negative NPV for lack of this guiding principle in the project’s formative years.

In some cases, these gaps are uncovered too late. Whether it’s a poorly conceived geological model or insufficient consultation with local stakeholders, any one of these factors can affect the mining project’s success, despite what the financials say.

Not all PEAs are created the same, and while regulators are enforcing more standardized reporting protocols, many fall through the cracks. In a June 27, 2013, notice issued by the Ontario Securities Commission, as many as 40% of the technical reports reviewed on SEDAR contained at least one major non-compliance concern.

Until the PEA — both as a document and as a process of due diligence — can be standardized across the industry, investors should be wary of any conclusions drawn within. A PEA’s outcome should be assessed in the context of the data, and assumptions on which the study was based.

The timing for a PEA can be as capricious as the investor awaiting its release, and can depend on the exploration company’s strategy, on the project’s robustness and on the advancement of exploration.

Releasing a PEA, as a technical document in and of itself, is the last step in an exploration process. Rome wasn’t built in day, and neither will any successful mineral project. Yes, some investors will roll the dice on speculative stocks, but a prudent and systematic approach to mineral development has and always will prevail — and with it come investors who value high-calibre mineral projects for the long haul. 

—  Kurt Breede, P.Eng.,  is vice-president of marketing at geological and mining consulting firm Watts, Griffis and McOuat Limited. Visit www.wgm.ca for more information.