2026 UPDATE: We first published this Mining 101 guide in 2018 to help newer investors understand what actually happens between finding something interesting in the ground and building a mine. Eight years later, the terminology hasn’t gotten any friendlier. We’ve updated the guide, corrected a few oversimplifications in the original, and added a section explaining how investors can actually read a PEA.
ORIGINAL EDITOR’S NOTE (2018): When we started Equity.Guru, we wanted to open up the financial markets to a new audience, because the markets can’t thrive without new money entering the space, and younger, newer investors from different background and demographics are fueling everything right now.
That’s been great for weed as a sector, because younger investors understand that product. And it’s been great for blockchain/crypto, because they live there. And it’s been great for energy metals, because nobody understands the need for MOAR BATTERY like millennials.
But what about industrial and precious metals?
The old guys who have been investing in mining since the 80’s, they know what a PEA is and an NI 43-101, they understand grades and recovery rates, and they invest accordingly.
But our readers? They’re not entirely knowledge-based in their metals moves, as a general rule.
So this is the first in a new series, Mining 101, where our guys will get a little deeper into what happens when a mining explorer wants to move towards mine production. What permits do they need, and what are the stages of progression, and – in this instance – what makes for a good PEA?
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Preliminary economic assessments, or PEAs, are an early report a company can put out on a piece of land under their control, to help investors understand whether the plot is likely to move to an economically feasible producing mine down the road.
Due to the Canadian Securities Administrators’ (CSA) strict policies on mineral disclosures, they’re also a rare opportunity to promote the potential profit from a mineral site to investors before more scientific exploration starts, triggering a whole whack of regulations designed to prevent, well, this:
To communicate with investors, mining companies have to follow a very specific path with pre-feasibility studies, feasibility studies, and on and on. In each of these steps, companies have to stick with a ‘just the facts’ approach. Even if they KNOW they are sitting on a mother lode, they generally can’t make any projections or estimates public, just the qualified results of the actual holes drilled in the ground, assessed by an independent party.
Generally, exploration involves a geologist finding a piece of ground that has indicators there may be something special beneath (or on) the surface. An explorer will take steps from flying over the property with magnetic imaging cameras to taking ground samples to going through prior data from other prospectors. When they’re satisfied there’s reason to get underground, they’ll start drilling.
The data from the drill cores helps build a mineral resource estimate, which, when publicly disclosed by a Canadian issuer, falls under the NI 43-101 regulatory framework. If that resource is sizable enough, a company may move to a Preliminary Economic Assessment (PEA), which looks at the potential economic viability of developing the resource into a mine.
A PEA really adds legitimacy to a mining project. They are more than simply putting up stakes and saying ‘Thar be gold here’ – they tell a story of how much gold (or zinc, what it might cost to get at and process, what the market is likely to pay for it, and whether it would make sense to do all the work needed to get there, financially.
When mining companies survey their claims, there are very good techniques for taking sample data and extrapolating the size and yield of the resources… Assuming you tell the truth and don’t massage the data.
Some enormous scandals in this area (see: BRE-X in the video above) helped drive tighter disclosure standards. Today, Canadian public companies can’t simply announce what management thinks is underground. Mineral resources, exploration results and other scientific and technical information have to meet specific disclosure standards and be backed by work prepared, supervised or approved by a Qualified Person.
The downside for companies is they can’t just advertise what they think they have. Scientific and technical disclosure has to meet NI 43-101 requirements and be prepared, supervised or approved by a Qualified Person with relevant experience. They publish their samples, and potential investors (you guys) will use that data to run the numbers on your own.
You don’t have to be a geologist to parse these numbers. But it doesn’t hurt.
PEAs in a pod
A PEA is often the first point at which investors get a serious economic model showing what a mineral project might look like as a mine. By putting in the CYA-est of CYA disclosures and disclaimers, a company has the opportunity to show off what it thinks the property can do.
Okay, so how the hell do I read a PEA?
When a mining company announces a new PEA, the headline will usually give you the biggest, sexiest numbers. That’s where you start not where you stop.
NPV (Net Present Value) tells you what the project’s projected future cash flows are worth today, using a specified discount rate. If somebody tells you their project has a $1 billion NPV, check the discount rate and assumptions before getting excited.
IRR (Internal Rate of Return) is another measure of the project’s projected economics. Basically, it’s the annualized rate of return the project is expected to generate based on the model’s projected cash flows. Generally, the higher it is, the more attractive the modeled economics appear but it means very little without understanding what assumptions produced it.
Initial capex is approximately what the model says it’ll cost to get the mine built. This one matters enormously. A $100-million junior with a beautiful project requiring $2 billion in construction financing still has to find $2 billion.
Payback period estimates how long the operation would take to recover its initial capital investment.
Mine life tells you how many years the modeled operation is expected to run.
Production rate tells you how much material the proposed operation expects to process and/or how much metal it expects to produce.
Recovery rate estimates how much of the metal contained in the ore the proposed processing method can actually recover. Gold in the ground isn’t much use if you can’t economically get the damn stuff out.
Commodity-price assumptions deserve particular attention. A project modeled using US$5,000 gold is obviously going to look considerably sexier than the same project modeled at US$3,000 gold.
Sensitivity analysis can be even more useful than the headline number. It shows what happens to the project’s economics when important assumptions like metal prices, costs, discount rates and sometimes other variables change.
And resource classification matters. A PEA can incorporate inferred mineral resources, which carry considerably less geological confidence than indicated or measured resources. That’s one of the reasons a PEA should not be confused with a PFS or FS. The CSA explicitly requires caution around inferred resources and says a PEA cannot demonstrate economic or technical viability.
The Equity.Guru bullshit detector
A company announces:
AFTER-TAX NPV OF $1.7 BILLION!
Excellent.
Now ask:
- What commodity price did they use?
- What’s the initial capex?
- What’s the IRR?
- How long is the payback period?
- How much of the resource is inferred?
- What recovery rate are they assuming?
- What happens to the NPV if the commodity price falls?
- Where is the project?
- Is there road access, power and water?
- What permits are required?
- What are the environmental and social constraints?
- And if this is a $75-million junior with a $900-million construction bill: where the hell is the money coming from?
PEA in the mining pool
PEAs are something like the project’s first serious sales brochure. They’re a way for a company to say: “We’ve done enough geological and engineering work to model what this thing might look like as a mine, what it might produce, what it might cost and whether the economics could make sense.”
But might is doing a lot of work in that sentence. A PEA is preliminary. It isn’t a construction decision, it isn’t a feasibility study, and it isn’t proof that the deposit will ever become a mine.
Big Brother watches your PEA
The CSA still monitors PEAs. They are *very* squirrely when it comes to shall we say, overly aggressive predictions. If you submit or see a very optimistic PEA, you can be sure the CSA will want the company to prove where it gets its results.
A PEA also has to be prepared or supervised by Qualified Persons with appropriate experience for the technical work they’re responsible for. “Qualified” doesn’t just mean somebody has a geology degree hanging on the wall. Their education, professional standing and relevant experience have to meet NI 43-101 requirements.
In other words, you can’t put Doris from HR in charge of the metallurgy section because she once collected some interesting rocks in Sudbury.
PEAce in our time.
A PEA is a great way to see what a company’s best, earliest case scenarios are. Since they don’t have the same straitjackets as a regular disclosure the company can be more frank about what they think they are sitting on.
Conversely, you have to understand the assumptions behind their numbers and who’s doing the number crunching. PEAs are best treated like car dealer brochures. Everything is presented in the best possible light, but do some research and have a test drive too.
You can read more dry and detailed information in CSA Staff Notice 43-307 Mining Technical Reports – Preliminary Economic Assessments