The Australian Financial Review reports that gold exploration is currently dominating the resources industry.
Despite copper prices reaching record highs on the back of AI demand, investment in copper exploration remains below the level seen three years ago.
The same is true for base metals like silver, zinc, and lead. This dynamic can be seen in the chart below:
Source: The Australian Financial Review
Investors tend to gravitate to gold because it’s less sensitive to economic conditions and often not as complex to produce as some other minerals.
Sherif Andrawes, head of global natural resources at advisory firm BDO, sums it up like this:
“Copper is in hot demand, but as long as the gold price is high, copper will be the poorer cousin because investors and explorers are more comfortable with gold.”
There’s a solution to this.
Mining companies can use their own cash flow to fund drilling programs and not rely on investors to fund it.
This becomes possible when a firm moves from developer to producer and starts to generate free cash flow.
Silver sizzle: Polymetals makes the big switch to producer
Polymetals Resources (ASX:POL) successfully restarted its Endeavor Mine in the Cobar Basin of New South Wales during the last financial year.
The June quarter saw it generate its first free cash flow.
Polymetals’ initial business plan is to produce silver for the next two to five years from its existing resource base.
That will generate the income needed to fund further resource drilling and regional exploration.
Not only will further resources extend its operational life, but Polymetals also has spare capacity through its existing infrastructure.
Therefore, higher throughput will improve its unit economics and increase revenue.
If Polymetals can identify further zones of mineralisation, the longer-term case for Endeavor strengthens.
That’s one growth angle.
Another is the company’s regional exploration program.
This type of exploration has seen little growth in investment in recent years, with gold the notable exception, as the chart above shows.
Polymetals Executive Chairman David Sproule says:
“Beyond the existing mine plan, exploration provides another significant avenue for growth.
“Our geological team is pursuing opportunities within the mine, immediately around existing infrastructure, and across the broader northern Cobar Basin tenure.
“Near-mine targets, together with regional gold, copper, zinc, and lead prospects, provide the potential to discover additional ore sources capable of extending mine life, increasing production, or ultimately feeding the Endeavor processing plant.”
And, of course, the key input for Polymetals’ revenue is the silver price. Currently this is around US$67 ($92.76) per ounce.
However, silver did go above US$100 ($138.30) per ounce earlier in the year. It may do so again within the current operational time frame of the Endeavor Mine.
Polymetals is increasing production and fully exposed to the potential of a rising silver price if that outcome eventuates. It could even consider hedging some production to protect a base level of revenue.
The company also receives smaller revenue streams from gold, zinc, and lead which adds some diversification to its revenue base.
If the silver price rises further, Polymetals will have greater capacity to fund resource drilling and strengthen its growth prospects.
Write to Callum Newman at Mining.com.au
Images: Unsplash
