Mine Lives and Payback Periods• There is usually exploration...

Mine Lives and Payback Periods
• There is usually exploration upside on top of a mine life: The mine life is an important consideration
in an investment decision, for many reasons. Companies generally prove up enough ore to justify a
development, as an economic decision, leaving the full definition of the size until a more convenient time
and usually fundable out of positive cash flow from the mine.
• You want the Mine Life to be at least double the Payback Period: Bankers will look at the mine life
as a key indicator as to whether a company can generate enough cash flow, under worst case scenarios,
to repay loans. The ratio of the mine life to mine payback is an important measure for this purpose. The
chart below shows the payback period in red and the mine life in blue. If the mine life is not at least twice
the payback period then the likely funding route will be equity, not debt, due to the higher perception of
risk. While it is good to have no debt, consider that the disciplines imposed by banks often lead to
conservatism and greater accountability of management; which canʼt be all bad.
• A suitable Payback Period for uranium stocks is preferaby less than 3 years: A short payback
period is a great incentive to develop a mine, as it limits the time the capital is at risk before you recoup
your money. If we consider the appropriate payback period, consider that gold mines usually need a
payback period of less than two years to warrant development (often due to shorter mine lives). Large
copper and base metals projects can often be launched with payback period of 3-5 years provided the
mine life is in excess of 10 years. The most impressive company on this chart is Alliance, with only a few
months payback. The appropriate period for a uranium mine is probably 2-3 years, at this stage of the
cycle. Anything greater will require some refinement, unless it has a mine life in excess of 10 years.