For most investors, exposure to alternative assets may include hedge funds, private equity funds, real estate, or crypto currencies.
Alternative assets offer unique risk to return profiles and low correlation to broader financial markets than traditional asset classes such as stocks and bonds.
Mining claims, which represent a right to explore, develop, mine and sell minerals, have increasingly become an investable asset class.
Mining claims present a unique return profile and low public market correlation, which make them an attractive alternative asset class to consider adding to a diversified investment portfolio.
Mining claims make a good substitute for commodities, mining stocks, and royalty investments.
OVERVIEW ON MINING CLAIMS
The Mining Law of 1872 gives US citizens and companies the right to locate claims on public lands that are open to mineral entry.
There are 254 million acres of public land in 12 Western States that are open to claim staking. Additionally, some states – like Alaska – have significant state land that can be claimed.
There are approximately 422,000 active mining claims in the United States, most of which are 20 acres in size. The most sought-after minerals in mining claims are gold, silver, copper, lithium, and uranium. These five minerals generate annual revenues of $22 billion in the United States alone.
It is important to note that common variety minerals such as sand, gravel, and pumice are considered saleable minerals and cannot be claimed; they must be leased from the BLM in a separate process.
EVALUATING & SELECTING A PROPERTY
The process for staking a mining claim begins with evaluating and selecting properties. Properties can be categorized into three types:
- Raw properties – which have not been previously explored and therefore have no data available.
- Advanced exploration properties – which have had some level of prior exploration such as drilling, geophysics, mapping, sampling, etc. – but no mining production.
- Former production properties – which typically have extension information.
It is critical to have qualified geological advice when selecting a property for staking. For example, some advanced exploration properties have massive data packages and are worth more than former production properties, which can vary in terms of size and data availability. Raw properties can be more valuable if they are near large deposits or prospective for a commodity in current high demand (ie. lithium).
After a property is selected, the claim must be staked by filing a notice of location and map with the U.S. Bureau of Land Management (BLM). A staked claim gives the holder exclusive rights to the minerals within the boundaries of the claim, with the exception of placer and lode claims, which can overlap. The claim exists in perpetuity as long as maintenance payments are made. The U.S. Government does not charge a production royalty on federal mining claims.
MONETIZING MINING CLAIMS
Finally, and most importantly, a claim must be monetized. There are a variety of ways this can be achieved. A straight sale of the claim can be the quickest and easiest way to monetize, but often generates the lowest return for the initial claim holder. Sales consideration can be in cash, or in stock of a publicly traded mining company acquiring the claim. Purchase options are when a 3rd-party makes initial payments to the claim holder for the right to conduct further exploration, and the option to buy the claim if exploration is successful. A lease agreement to the claimed property is when a 3rd party makes monthly or annual payments, plus a royalty on any mineral production from the claimed property. Lease agreements often include a work commitment from the 3rd party. Property owners often end up with Net Smelter Royalties (paid on the gross value of metals produced by smelter minus transportation costs – but not mining costs). NSR’s can be a significant portion of the value produced and are highly sought after by royalty companies. Finally, earn-in joint ventures are when a 3rd party JV partner invests in the property for an ownership stake. After the earn-in period, the JV partners invest or distribute benefits from the claim on a pro-rata basis.
STAKING & HOLDING COSTS
Fees for staking a claim on Federal BLM land are $225 for the initial notice of location and map, plus approximately $40 per claim for county filings. Field work is approximately $150 to $200 per claim. Legal costs and mapping charges can represent another $15 to $25 per claim. Therefore, total fees for initial claim staking are between $400 to $500 per claim. Given the average claim size of 20 acres, a 5,000-acre claim package represents 250 claims and would run $125,000 at the top end. This equates to $25 per acre.
Holding costsfor claims on Federal BLM land require annual claim maintenance payments of $165 per claim. Additional county fees are approximately $10 per claim. Legal review of the annual claim package can range from $2,000 to $5,000 depending on the size and complexity of the claim package. For a 5,000-acre claim package (250 claims) annual holding costs would be approximately $45,000. This equates to $9 per acre.
Mining companies such as Newmont Gold Mines (NGM) and Barrick Gold Corporation (GOLD), which produce greater than 1 million ounces annually, are referred to as the “seniors” or “majors.” Mid-tiers like Equinox Gold (EQX) or Alamos Gold (AGI) produce less than 1 million but greater than 100k ounces per year. Anything under this, including the exploration only companies, are referred to as “juniors.” There are about 1,500 publicly traded juniors worldwide. Landowners or claim holders play a wholesaler role in the market. They have an ability to acquire properties inexpensively, provide value-added services (i.e., drilling and exploration), and then monetize those properties at a significant profit. Junior mining companies purchase mining claims from claim holders and monetize the underlying commodities. Junior mining companies are a middleman between claim holders and public market investors. The value of these companies is driven by the value of their underlying properties, which often represents greater than 90% of their market capitalization. The remaining value of junior mining companies is in their property acquisition costs, which are only a small percentage (2-3% median) of their market caps. A $1 million cost property (claim) can be sold to a junior mining company for $10 million, which supports a $100 million market cap. Those who invest directly in the property (claim) at $1 million capture more of the value than those investing in the junior mining company at a $100 million market cap. Said differently, investors in junior mining companies immediately take 90% dilution on the value of the underlying properties they’re investing in. Junior mining companies are like packaged food with high fructose corn syrup, while the mining claims are like the whole foods (i.e., fruits and vegetables).
RETURN POTENTIAL OF MINING CLAIMS
Mining properties are both scarce and plentiful. There is a scarcity of properties with economic mines, but a surplus of those with exploration potential. This perceived scarcity drives the retail premiums outlined above, creating a structural inefficiency in the market. Asymmetric information about properties, where sellers have an advantage, creates further structural inefficiency. These structural inefficiencies create opportunities to generate higher levels of alpha for those with market knowledge.
Like venture capital investments, investing in a single mining claim is too risky for most investors. However, holding a diverse portfolio of claims, like a venture capital fund, where one property can generate an attractive return for the whole portfolio, presents an attractive risk-return profile. Ten properties in a variety of commodities and a reasonable time horizon of ten years could generate returns similar to venture capital and private equity funds. Junior mining companies play an important role for investors by selecting high-value properties, and by holding a diverse portfolio of properties (thus eliminating risk in any single bad property). However, investors with access to direct investment in mining claims and the ability to hold a diversified portfolio of claims (>10) will realize significantly higher returns than those investing directly in junior mining companies.
Target prices for selling claims should range from $500 to $5,000 per acre, depending on the underlying commodity and market cycle. However, a sale price of $200-300 per acre is available in short timeframes on raw prospects. Based on the staking costs of $25 per acre outlined above, even these raw prospects can generate a 10x markup. Patient claim holders willing to hold through commodity price cycles can recognize 100x returns.
Mining claims can be viewed as a purchase option on the underlying commodity. There is leveraged correlation between the mining claim and the underlying commodity, meaning a 1x move in the underlying commodity price can generate a 10x return on the claim value. Higher moves can generate 100x returns. The Black-Scholes model of option valuation can be used to value mining claims. Once the underlying commodity moves significantly above an operating cost threshold like All-in Sustaining Costs (AISC), the price of the claims becomes very responsive to the commodity price. This is driven by investors using lower discount rates, reflecting the reduced operating risk, to value future cash flows from claims.
CONSIDERATIONS FOR INSTITUTIONAL INVESTORS
The market for mining claims is attractive based on its risk-adjusted returns and portfolio diversification attributes. Yet, institutional investors looking to deploy significant amounts of capital must make other considerations, such as size, liquidity, and title before investing in alternative asset classes. The top five staked commodities, gold, silver, copper, lithium, and uranium is a $22 billion annual market in the U.S. alone. Institutional investors can put significant capital to work in this market without concerns of straining the market. For example, investors might put $10 million to work in a 20,000-acre claim package, yet there are approximately 60 million acres of mining properties in Nevada alone. Liquidity is another important consideration when looking at nascent markets. Given the market structure outlined above, mining claims have a preferential position relative to thinly traded junior mining companies. Going upstream and investing in directly in claims means there are over 1,500 junior mining companies seeking to purchase this asset class, a highly liquid market. Finally, the legal infrastructure surrounding mining claims is managed by the U.S. BLM in a clear, reliable process. These claims are legal, transferable, and protected by a reliable registrar.
Mining claims are an investable asset class that offer secure title, attractive returns, leveraged exposure to commodity markets, low holding costs, and arbitrage type risk profiles. Additionally, investors should consider holding mining claims as a portfolio diversification tactic based on their low correlation to public equity markets. Investing directly in mining claims is the best way to gain commodity exposure, as we’ve shown the dilution that junior mining companies take on property values. Institutional investors can profitably deploy capital in ranges from $100,000 to $10,000,000 in opportunities including overlooked or abandoned uranium, gold, silver, and copper mines, and large lithium basins on the Nevada-Oregon border.