Understanding the mining life cycle of gold companies like Yamana

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Sep. 22 2014, Updated 2:52 p.m. ET

Mines are important

The life cycle of a mine tells investors about the distinct phases involved in successful mine development. It typically takes 10–15 years from the time when geologists start to prospect in a location through to the first production from a gold mine. Estimates vary widely, but even optimists reckon that less than 1% of prospect mines meet the threshold to become a viable mine.

Pre-feasibility and feasibility phases

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The pre-feasibility phase is used to determine if a deposit has reasonably robust economic benefits in order to justify the cost of the next stage of studies. The feasibility phase defines the extent, location, and value of the ore body. Expenditures will rise significantly during “feasibility” and permitting.

Construction

Expenditures then rise to their peak during construction. At this point, the inflow of investment, the construction of supporting infrastructure, and direct employment are likely to be their highest.

In countries without an established mining sector or skills base, this may, however, be a period of high dependence upon imported capital goods, services, and skills.

Production

After 10–15 years of outflows, revenues are generated for the mining company for the first time as the mine comes into production. Prior to opening, significant investment has to be made in training. Now the mine will have a settled workforce.

Maturity

As the mine reaches maturity, local supply chains will reach their peak and investors will receive a return on their investment. Then, as the mine’s production begins to decline, often with lower grades, investment will increasingly be devoted to preparing for orderly closure, decommissioning, and ongoing management of environmental liabilities.

All successful mines for stocks like Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), Newmont Mining Corporation (NEM), Agnico Eagle Mines (AEM), and Yamana Gold (AUY) have to go through the above stages. Gold-backed ETFs like the SPDR Gold Trust (GLD) are another way of playing gold, while ETFs like the Gold Miners Index (GDX) are a good way of investing in gold miners without exposure to individual companies.

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