What is a tier-One asset? According to a cross-section of mining...

What is a tier-One asset?

According to a cross-section of mining and finance experts, the consensus seems to be all about quality and assets that generate positive free cash flow throughout the commodity cycle.

Paul Robinson, a director at consultancy CRU, says this general definition can be refined even further depending on particular commodity markets and things like technologies within those markets.
“We don’t think it is that simple to define a tier one ,” he told Mining Journal.
“Part of the reason for that is your costs in a market that is shrinking, or a market with negative margins can be as low as you like, it makes no difference. And the long life gives you no assistance whatsoever.
“So it is not just about the asset, it is about the market in which that asset operates.”
He gave an example of this by referring to the UK power industry and how a low cost coal-fired power station with flue gas desulphurisation technology, that could last another 40-years, is no longer a tier-one asset because the future of coal-fired power in the country is limited. Indeed this month, for the first time in 100 years, the amount of Great Britain coal generation has fallen to zero.
He also points at the general definition applied to tier-one assets, which refers to their position in the bottom quartile of the cost curve, saying this isn’t a hard and fast rule that can be applied across commodities.
“For instance, we think there are also very good assets further along the copper cost curve, not just in the first quartile.
“The copper market has a number of supportive factors including a scarcity of potential new tier-one mine developments, good medium-term demand prospects and generally speaking, some price protection from assets in the third and fourth quartile that are never going to come down the cost curve, because of the nature of the geology and technology that has to be deployed.”



“In bulk commodities, to create a new tier-one asset, there would need to be a real belief in sustainable consumption growth, to allow you to make that multi-billion-dollar investment into the infrastructure needed to access a new, high-quality resource base,” said Robinson.
Other factors such as a specific company’s country risk tolerance will also result in it regarding assets as tier one  when other companies do not.
Broader definitions also point at large and long-life assets, allowing for multiple expansion opportunities and flexibility.

Size might not necessarily be a required factor in identifying such assets, ....
One could also argue tier one  status can even be tied to a particular district given some of the major mining producing regions of the world are low cost, long-life and expandable on aggregate.

“In copper it is usually quite simple because you need particular types of orebodies to achieve scale. To get to tier one  status in many cases one needs porphyry style orebodies. Having said that, the copper belt hosts tier-one assets, but these are mainly sedimentary rock formations,” adds Hofmaier.

There is also an argument, in more modern times, that even if a deposit is identified as having tier-one potential it may not develop into a world-class mine, given the socio-political issues.


Time can end up transforming assets either away from this status or into it, through technological advancements, political change, combination of assets or even a structural shift in a particular commodity market, as was the case with many metals with the rise of China.



Mills says even within individual cycles there is a low risk of losing money. He says the 10-year peak-to-trough pricing on copper is circa $3,000 per tonne to about $10,000/t so roughly three times volatility for the commodity price over a 10-year period. A tier-one asset would typically have a cash cost that is below that base case $3,000/t and so could be built or expanded with confidence that it won’t get caught losing money at the bottom of a cycle.

Another benefit, on the reverse side, according to Mills, is when prices turn “your operating margins explode” on a tier-one asset.

Rio’s CFO Chris Lynch says “Robustness is founded in tier-one assets. They generate cash and retain their value and quality at points in the cycle where lower tier assets have to focus more on survival,” said Lynch.
A lot of the time, the expansion decisions or roll-outs on tier-one assets are completely counter-cyclical, as has been the case with the iron ore giants in Brazil and Australia, as well as Rio Tinto’s recent decision to build the $5.8 billion underground project at Oyu Tolgoi in Mongolia.

One of the more surprising tier-one asset deals came in 2012 when Anglo received notice Codelco would exercise an option to purchase almost half of the former’s Sur copper division in Chile.
The eventual settlement saw Japan’s Mitsui and Mitsubishi take significant stakes in the asset, valuing them at almost $10 billion.
While these examples reveal a general rule that these assets move around expensively and slowly, there are numerous instances, most often through exploration but also via acquisition, where these assets have been gained for a steal.
Two of the most obvious examples are Escondida and Oyu Tolgoi, which originally changed hands when they were both undeveloped.
In 1994 BHP bought Utah Mining from General Electric in a deal said to be worth over $2 billion. Plinian’s Mills says the primary target was Utah’s Queensland coal assets and that the Escondida asset carried no value in the transaction.
At Oyu Tolgoi, BHP was on the other end of the equation, disposing of the asset for close to nothing.
“BHP Billiton was on the losing end of the Oyu Tolgoi transaction when it sold the asset to Robert Friedland for just $5 million, having not realised the tier- one potential of the asset,” comments Hofmaier.
Resolution copper in the US was a similar story, where a major failed to see the potential of a tier-one asset and earned-out.
The action on tier-one assets does seem to occur more in the junior space when it becomes clear the potential is there.
“This being a function of the large amounts of capital involved in building them. A tier-one asset is best built big to utilise the economics of scale that other assets simply can’t support,” adds Hofmaier.

Major debt forces sales: Besides its Tenke Fungurume sale, earlier in the year Freeport sold 13% of its Morenci mine in Arizona to existing partner Sumitomo for $1 billion. Plus the company still has a number of other quality assets that could find new owners if the price is right.
The multitude of deals reflected here show that, much like their definition, the trading in tier-one assets also does not depend on the mining cycle alone. Rather, picking up a tier-one asset is the result of being opportunistic, exercising financial clout and, in some cases, pure luck.

  - from a 2016 article

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