By: Spencer Dickson, Investment Advisor, Red Cloud Securities.
In an economic environment of rising costs and scarcity of capital, investors are becoming more selective on where to allocate funds. The market is flooded with alternative capital and thousands of public companies to choose from, ultimately making the decision to land on a single investment harder than ever.
Here at Red Cloud, we believe the roadmap for traditional junior explores and developers is tried and true. But we also have a base of project generators that offer a different opportunity to unlocking shareholder value.
What is a Project Generator?
A project generator accumulates extensive land packages and identifies projects that are hoped to have significant exploration upside. While the traditional route is to raise capital and drill the projects out on their own, a project generator will search for partners to option out a majority or minority stake of the project too. In return, the joint venture partner will commit capital to help explore the project. These partners tend to be major producers who have significant financial and technical resources.
Why Project Generation?
The upside of project generation is that the investor now has exposure to a multitude of different projects that can be drilled out with minimal shareholder dilution. In tight capital market environments, having a joint venture in place helps move forward projects that may have otherwise gone untouched during that timeframe.
Considering most project generators will have multiple partners, the investor is exposed to the upside of discovery but faces much less downside risk during an economic downturn.
Project generation also opens the door for non-mining issuers to gain access to commodities that are relevant to their main line of business.
This has become increasingly common with automakers looking to lock up future supply of critical minerals as the transition to electric vehicles continues to move forward. A recent example of this is General Motors announcing a $650M joint venture with Lithium Americas – allowing them to secure U.S.- sourced lithium that is expected to support the production of nearly 1 million electric vehicles per annum.
Creating Shareholder Value
Project generators create shareholder value in a multitude of different ways. As mentioned above, investors are exposed to the exploration value of an asset upon discovery, even if they are only retaining a minority stake. It is not uncommon for these discoveries to be spun out into a new company where the investor will receive shares and retain their ownership in the existing one.
If there is a major discovery, the chance of a buyout is also on the table. This is especially true in commodities in which the resource is considered scarce.
If you’re interested in learning more about project generator models within the Red Cloud ecosystem, please reach out – [email protected]
