An asset can be valued in two ways: option value and net present value (NPV). A marginal project can have significant option value.
If you have a permitted mining project with a 22% or 30% IRR discount, reasonable capital costs, and a decent management team, the project will trade on a NPV basis. It will trade on the concept of what cash flows can be expected.
However, most mining projects do not meet the above criteria, so they trade based on option value — the concept that significant changes occur that affect the value. The issue is determining what can change, the timeline for that change to occur, and whether it will happen due to luck or it is something you can plan for.
At this low point in the market, very little is feasible. Construction costs are at record levels and commodity prices are in a relative free fall. However, the option value is still there for many projects.
What destroys option value in a weak market is lack of patience. If a CEO runs towards production on a project with option value but no NPV, he can destroy the option value and bankrupt or wipe out the shareholders. Desperate financings at low prices will dilute shareholders out of their ownership positions. It is pointless to try to aggressively advance a marginal project when its value is clearly in the option and the money you raise does not significantly change the status quo.
Coming back to option value, there are three ways to increase it in lean times:
Reduce risk: Complete a shipping study, metallurgical work, or other things that can reduce project risk but do not cost millions.
Look for exploration upside: Complete regional soil samples and look at ways to increase drill targets.
Make an active decision to halt drilling: Cut the burn rate to zero and go on vacation. Keep what cash you have in reserve and wait. The market will turn, and if you do not take dilution when the market is weak, your shareholders will be much happier.