Opportunities in M&A, Requires Realistic Expectations

Currently with the down turn in commodity pricing the Directors of Ellenkay Gold has been retained by some mining and exploration companies to assist them identify and review mineral deposits for potential mergers and acquisitions. After reviewing several projects we would like to make these observations.

The first observation is that generally a lot of early stage projects don’t spend enough resources in clearly understanding the potential of their ore bodies. Geological modelling is very optimistic and continuity of the ore body is often a major assumption that remains untested. Too much wide spaced drilling chasing size rather than close space drilling and geological modelling to gain further confidence in the deposit.

Secondly, often the focus of the exploration program is on the size of the ore body rather than the grade. The major focus should be working towards a small and economic starter project, allowing a route to quick cash flow.

Thirdly, project owner’s valuation of their projects seem to be out of line with the market, their own current financial position and their ability to raise new funds to continue with their programs. Understanding that mineral exploration requires a high degree of optimism to keep going, unfortunately investors don’t share that same optimism. Investors require a realistic valuation that better reflects their risk and reward appetite. Something that can be very painful for a project owner as his ‘baby’ is critically appraised. Investors want to understand future potential not understand the adversity and challenges of getting to where the project is to date.

Fourthly, the route to quick cash flow is rarely heap leaching to provide future funding for ongoing exploration. There are very specific ore bodies where heap leaching is the ideal solution and lots and lots that aren’t. Valuable financial resources can be wasted developing a heap leaching operation for an ore body that leaches poorly instead of better defining the resource. On several occasions we reviewed projects where the project owner thought heap leaching was the answer to create funding. Often the outcome was an under drilled project with a very limited resource, insufficient (or overly optimistic) metallurgical testing and finally an under-performing heap leach operation. Usually, with a lower than expected grade (poor resource modelling) and low gold recovery (limited metallurgical testing) and a financial nightmare for the project owners.

The challenge for M & A opportunities of mineral exploration projects is defining the quickest, least expensive route to cash flow and the probability of success when looking also at all risks including country risk. The most attractive projects plan with these objectives in mind and good grades just make the project so much more interesting to the investor.

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