When looking for high quality mining companies, mental flexibility is a must. A one size fits all analysis strategy just won’t work beyond the mega-cap miners like BHP, Rio Tinto or Vale.
When looking for small cap explorer or developer with significant upside, a few key metrics, unique to the market cap range, go a long way in managing risk while setting you up to harvest the market beating returns that come from successful exploration and mine development.
To make the investment process real, we’ll use a real-world company, Kobo Resources (TSXV: KRI). Kobo is a fast-moving exploration stage, junior gold play with its flagship asset located in Cote D’Ivoire, a country that checks many of the boxes we talk about below, making it a perfect test case for our analysis
Our analysis starts with grades…
Grade is King
To state the obvious, knowing what constitutes a good, bad and average grade is possibly the most important analysis you can initially perform on a project and company.
Granted the next big hit is always around the corner, making this more art than science, but if a company already has dozens of drill holes across a given property and is still putting out middling grades, the economics of the project are going to be challenged.
As any seasoned geologist will tell you, higher grades fix a lot of other problems. A high grade mine can still make lots of money even with a lack of infrastructure, political uncertainty and logistical issues.
Taking a look at Kobo Resources, the company has intersected high-grade mineralization at its Kossou Project as part of its inaugural RC and diamond drill programs, a major positive at this early stage.
Kobo’s main exploration target, the Jagger Zone is returning between 2-6 g/t Au over longer intervals and up to 11.4 g/t Au in certain high-grade sections. The Road Cut Zone also appears very prospective with recent trench results at similar or higher grades over widths in excess of +10 m.
Importantly these results are coming from trenches only a few meters deep, not drill holes hundreds of meters below ground. Near surface results can provide an immediate target for potential open pit mining, reducing development costs and ultimately lower overall operating costs and can also reduce the number of ounces required to tip the scale to an economic deposit.
Hand in hand with grade is size, both along strike and width of mineralized zones. Grade is very important, but without size potential of mineralized zones it is difficult to build tonnes and ounces in a resource/reserve model.
2023 Jagger Zone Drill Hole and Trench Highlights:
The fact that Kobo is discovering similar or better grades at its other main target, the Road Cut Zone, should give the market some level of confidence that the deposit could extend for multiple kilometers and be of an economic size following more drilling.
Road Cut Zone (RCZ) Grades and Widths Better than Jagger at This Early Stage
Kobo’s Kossou Gold Project: Key Targets
Securing a Strategic Partner and Access to Capital is a Great Indicator of Future Success
Yes, high grades make or break a mining project, but equally important is access to capital. Without funds to develop targets, early stage success can stagnate and momentum is lost.
Unlike in the retail or technology industries, where very little upfront capital needs to be spent before generating revenue, an explorer who discovers a bonanza gold deposit still need tens or hundreds of millions to build a mine before they see one dollar of revenue.
Taj Singh, the CEO of First Nordic Metals has built multiple successful companies and in this clip you can hear him admitting that he’s seen an inferior project move forward simply because it had better access to funding.
Grades may be king but access to capital is queen…
In Kobo’s case, management seems to have strong connections to the investment community based on the company’s ability to continue raising increasingly large amounts of financing.
Kobo raised C$520,000 in 2022, C$5.9 million in 2023 and in July of 2024 announced a C$7.4 million raise to advance their key targets at the Kossou Project.
Importantly, having a strategic partner come onboard sends a strong signal to the market that a company’s project has what it takes to succeed. For Kobo, a major conglomerate, Moto-Engil’s subsidiary, Luso Global Mining, participated in the financing and now holds 9.9% of Kobo at the completion of the offering. Securing a strategic partner offers much more than just capital, it offers operational and technical know-how, alongside a swatch of connections in the industry.
Raising larger and larger rounds, bringing in strategic investors and going from brokered to non-brokered rounds, all tell us investor demand for Kobo’s asset package is strong and only growing.
The ability to raise rounds when needed also means exploration will accelerate, potentially pulling forward value for investors, through M&A or exploration catalysts.
Kobo Resources Proposed Drilling Calendar
The Importantance of an Active District
Going elephant hunting in a completely unexplored region of the world may sound exciting on paper, but in reality, the risks can be quite high.
There is so much that needs to go right for the risks taken to be worthwhile, and things rarely go as planned in mining.
For risk-adjusted investment strategies, it may be more prudent to purchase gold explorers in jurisdictions where the majors possess an operating presence or are actively exploring. This way the explorer is already on the radar of a potential strategic partner or ultimate acquiror. The land is already locked down and willing partners are in your backyard and understand the potential of your geology.
Cote d’Ivoire turns out to be one of the hottest underexplored regions in the world and we can see this by looking at an operator map.
Operator Map and Discoveries Map (Cote d’Ivoire)
Cote d’Ivoire has seen multiple C$1 billion plus deals in recent years and is well understood to be under-produced compared to neighboring countries, given the favorable geology.
These include Endeavour Mining’s acquisition of SEMAFO for C$1 billion and Teranga Gold for C$2.4 billion, and Fortuna Silver’s acquisition of Roxgold for C$1 billion.
Kobo not only owns a large land package running right through the most productive rocks in the region (Birimian Group), but they are also less than 5 kilometers from the second largest operating gold mine in the country. A key strategic advantage compared to many explorers with deposits 100’s of kilometers from infrastructure.
A micro-cap explorer owning rocks down the street from a major discovery is good enough on its own, but to also have that same neighbor already producing and supported by a well-financed major, the setup really can’t get any better.
Kobo’s Kossou Gold Project Adjacent to the Perseus’ Yaouré Gold Mine
Don’t Discount Recovery Rates
Recovery rates don’t usually come into play until the development stage of a project but are still a very important piece of the economic puzzle.
The simplified recovery equation goes like this: tonnes x grade x recovery rate = production
A better recovery rate means higher production, a more profitable project, lower production costs and a higher terminal value as cashflow is pulled forward in time.
The cheapest recovery method is through gravity. Gold has a higher specific gravity than the host rock and can be separated from the lighter material cheaply.
The next cheapest method is heap leaching, where ore is piled up and subjected to a leach solution, usually cyanide, which dissolves the gold and the gold is then recovered in a treatment plant.
More expensive methods are needed for refractory ore where the gold is trapped within the host rock and must be most ground and then leached at high pressure and temperature.
Positively for Kobo, the nearby Yaouré Gold Mine uses the less expensive grinding and cyanide leaching technique to extract close to 94% of the gold held in the deposit. Yaouré also currently produces all of its gold from open pits, again a much cheaper production method compared to an underground mine.
With Yaouré production costs below US$1,100/ounce compared to current gold prices at US$2,350, should Kobo continue to find exploration success, the economics of the deposit are likely quite attractive, making it a potential target for another miner or a big financial backer.
Summing It All Up
To summarize, the investment factors you should look for in a small cap miner in order of importance:
- High Grades
- Strategic Partner and Access to Capital
- Active Region with Recent M&A or Major Miner Activity
- Open Pit vs, Underground Deposit
- High Recovery Rate Potential
Unlike when buying large-cap producers, grades and access to additional cash are by far the two most important factors to consider. Far more important than potential production costs, recovery rates or depth of the deposit.
Kobo Resources one but one example of an explorer that checks all the boxes above. Now that you know what to look for, it won’t be hard to identify many more of the undervalued opportunities in both North America, South America and Africa.
Gold miners continue to lag the rising gold price leaving astute investors to pick up bargains before the eventually catchup comes… and it always does.
Gold Miners Still Lagging Physical Gold Price
Kobo Resources is a market awareness client of Capital 10X. For more information, including potential conflicts of interest please see our Content Disclaimer.
