What Is A Project Generator
A project generator maintains a portfolio of multiple projects and funds major exploration work by creating joint-venture partnerships with other companies. They acquire prospects they deem to have significant mineral potential and option them to a partner, generally a mid-tier or major mining company. In exchange for a majority share of the project, the partner agrees to spend a certain dollar amount, generally in the millions of dollars, progressing the project forward.
The model enables the project generator to de-risk mineral exploration by accessing capital from partner companies to fund the high-risk and expensive drilling phases of exploration. For Millrock, this means only spending shareholder’s money on the earliest stages of exploration and mineral acquisition, which are relatively inexpensive compared to drilling.
Typically, a project generator has multiple projects partnered with multiple partners at any given time. This increases the chances of exploration success and share price increase. The company can expand its business without having to go back to the market to raise funds.
In addition, revenues can be derived if the partner makes cash payments in the form of option agreement payments and management fees, or in the case of a junior company partner, share issuances to complete the earn-in.
A Project Generator’s Key Activities
Unlike a typical junior explorer, whose key activities are to raise money and drill their project, the project generator focuses on:
- Generating Projects – by continuously generating quality projects, a project generator builds a pipeline of projects it can partner.
- Finding Partners – once the mineral rights have been acquired, the goal is to partner the project, entering into an option-to-joint venture agreement with a partner that will fund exploration in exchange for a majority stake.
While the operator can be either the project generator or the partner, in Millrock’s case, it prefer to act as the operator. In doing so, Millrock earns a management fee on all work completed. This fee, as well as option agreement payments help offset the company’s overhead and results in a lower burn rate. By operating, Millrock also gains valuable geologic data about the regions it operates in.
The Project Generator’s Lifecycle
The project generator model typically follows these steps:
- Develop a Strong Geological Concept, Completing Research and Compiling Data – before acquiring the mineral rights, the company develops a geological concept that has the potential to host significant mineral potential.
- Acquire Mineral Rights to the Prospect – once a compelling argument for the potential of a significant ore body has been found, the company will stake claims or acquire the mineral rights.
- Complete Early Stage Exploration (if required) – initial cost-effective exploration work is sometimes completed (geologic mapping, geophysics, geochemistry, etc.) in order to establish drill targets and outline the potential for an ore body.
- Option Agreement with a Partner – as soon as possible, the project generator works to secure a joint-venture partner on the project to fund drilling and exploration work. In exchange for exploration expenditures, the partner will receive a majority interest in the project.
- Complete Partner-Funded Exploration – drilling and exploration work will be completed on the project.
Once partner-funded exploration has been completed, there are three outcomes:
- Exploration Success – the exploration program has been successful enough to move the project forward immediately or prompt the partner to wholly-purchase the project.
- Strong Results But More Exploration Is Required – the results of theinitial work were encouraging enough to warrant further exploration work. In this case, partners will generally agree to fund more exploration, to further understand the mineral potential.
- Exploration Failure – if the results are discouraging the partnership can end. However, even though the partner has walked away, it doesn’t mean the project is dead. Many times a project generator is able to re-partner the project with another company who sees potential in further exploring. In this case, another option-to-joint-venture agreement is entered and more partner-funded exploration will occur.
How Do Project Generators Create Value?
Project generators return shareholder value in three ways:
- Share Price Appreciation on Discovery – even with a project partnered, share prices upon discovery can rise significantly. Price appreciations offer investors many opportunities to exit at higher levels.
- Spinout of a New Company – when a discovery is made, companies will sometimes spin the project out into a new company. When this happens, shareholders will receive free shares in the new company, as well as retain their shares in the existing one.
- Buyout/Takeover – a major benefit partnering with larger partners is their ability to purchase the project upon discovery. Examples include when Couer D’Alene Mines purchased the Joaquin project from Mirasol Resources for $60M in cash and stock. This was after a 1,000%+ run up of the share price. The project generator will often retain a royalty in the project, like Virginia Mines who is receiving a $1.2M per year royalty on their Éléonore Mine, which was purchased by Goldcorp in 2006.