JV with a major? New problems arise
Good morning MINING AIM and welcome to Wednesday. Tomorrow it's August, the month where traditionally nothing happens, and yet this year I feel like a farmer about to reap the rewards of many months of effort.
Rome Resources will launch three diamond drill rigs.
Arc Minerals should be drilling in Zambia with Anglo American. Alien Metals should get project financing for Hancock or at the very least see a major shift in that direction.
Fulcrum Metals should get its exclusivity licence with Extrakt. Guardian Metal may finally gets it grant funding, but assays will certainly be reported.
Helix Exploration will start drilling. Sovereign Metals and Prospex Energy may both be subject to buyouts...
It's not going to be a quiet summer, that's for sure. I want to highlight Rome in particular, simply because there is going to be serious news flow and very soon.
On the other hand, it's hot, and the beach calls. Blue skies and ice cream is the order of the day - when it starts raining in September we can get some liquidity back in the market.
Today though, I though I'd take a moment to consider what happens when the dream becomes reality and your little exploratory minnow attracts the attention of a Great White Shark - BHP, Rio Tinto, Glencore or some unpronounceable Chinese outfit has signed a Joint Venture, earn in or similar...whereby you sign over a giant chunk of your asset in return for funded exploration and a natural buyout partner.
First off, I want to make clear that this is almost always a MASSIVE POSITIVE. These companies don't jump into bed with just anyone; every dollar spent on exploration is excessively scrutinised to ensure shareholder value (because investors buy the majors for dividends, and cash spent on exploration takes away payouts for today in exchange for a return tomorrow).
So for the love of God, don't let the takeaway be that marrying Glencore is bad news. Rather, investors should be aware that these deals always come with strings attached (consider it a marriage with a pre-nup), even when they say they don't and the upshot is usually that the pre-JV business you knew and loved will fundamentally change.
There's plenty of agreement types to consider: joint ventures, earn-ins/farm-ins, option agreements, royalty or streaming agreements...there's more and more creative ways to do a deal.
But if you do sign a deal, there are caveats to consider. If it's not a free carry, and you're expected to front 20% of the exploration costs - well, 20% of $10 million a year is tough ask in these markets when your market cap is two potatoes and a carrot.
On the other hand, retaining 30% of an explored asset in a JV is much better than 100% of a patch of dirt - and no matter how prospective, land does not increase in value much, without drilling.
But aside from the financial, the big issue is that once a deal is signed, the junior is generally no longer in control. Even if the major has a staged earn-in where they remain a minority owner of the asset for a few years. Or even things like BHP Xplor grants which come with quiet strings attached.
Fortescue jumps on? They decide where the holes go, how much drilling is happening this year, and makes all strategic decisions. That's the reality. Got used to that sweet major cash? Junior becomes reliant for cash, and also for technical and operational resources...major withdraws and the project flounders. Seen it before.
Argue with the big gun? Bad idea. You signed a contract and gave control away - and if Rio Tinto has different goals to you, you gotta suck it up. Remember to read those t's and c's - because nobody gives away millions of dollars for free.
And if you find something half-decent? I'm sorry, but how many times has Glencore snatched an asset away at a weak premium, or at the very least, for far less than it's worth? How often do majors fund the juniors, but then let their partner go under and buyout the asset in administration?
But for me, the big thing is that management at the junior cannot communicate with shareholders as openly or as freely. Everything needs to go through the major, which almost always prefers to downplay its involvement - this can create acrimony.
And a deal with a major does not always mean a share price will rise over time. It does give some credence to a deposit's attractiveness - but you are still subject to longer-term sentiment and the ravages of the Lassonde Curve.
The bottom line is that a shareholder, your choices are to sell, hold, buy more...or vote for change at the next AGM.
Complaining about the downsides is pointless; the deal is what it is and you have to either accept it or go elsewhere. Just remember that for all the annoyances, there's 1,000 juniors out there with no cash, and no partner, that are looking at your green grass with envy.
- Charles Archer, 31/7/24