Why is developing a new mine so difficult? - Oct 2013 - John P Sykes - Centre for Exploration Targeting / Curtin University / University of Western Australia

John P. Sykes

Centre for Exploration Targeting

Provisional PhD Candidate, Department of

Mineral & Energy Economics, Curtin Graduate

School of Business

Adjunct Research Fellow, Department of

Geology & Geography, University of Western

Australia

Email: [email protected]

WHY IS DEVELOPING A NEW MINE

SO DIFFICULT?

Abstract

“Globally there have been problems in bringing new mine capacity on stream.

With little new greenfields exploration taking place at this time, the pipeline of

high-quality mine projects is not being replenished.

The problem for the mining industry is that minerals exploration takes place

over long timescales, however, “success” is judged along much shorter

timescales. Addressing this paradox is a challenge for all in minerals

exploration management.

This study has sought to address this topic by building on the author’s tacit

knowledge, gained through experience in the mining industry, combined with

a review of the business management and strategy literature.

Emergent from this research are multiple ways for examining mining industry

problems and a new approach to developing high-level strategies for

facilitating minerals exploration.”

15 October 2013

Why is developing a new mine so difficult?

Slide 2 of 48

Contents

• Background: a ‘discovery constrained’ mining industry

• A little bit on research philosophy & methodology

• Wasting assets & limited exploration search space

• Beginning with the end in mind

• Differing incentives of industry actors

• Focus on Horizon 2

• Sustainable mining?

• Changing value drivers with development stage

• Conclusions and further research

15 October 2013


Slide 3 of 48

Background: a ‘discovery

constrained’ mining industry


15 October 2013

Section 1


Slide 4 of 48

Commodity prices at 50+ year highs

Chart: Jacks (2013)

15 October 2013


Figure 1. Cumulative Changes in Prices

Relative to the Long-Run Trend

Commodity Cumulative change in price

from 1950

Copper 24.04%

Nickel 39.00%

Chromium 206.01%

Iron Ore 34.80%

Manganese 77.11%

Potash 26.72%

Gold 206.05%

Silver 123.68%

Metal and mineral commodities with half century

real price highs selected from Jacks (2013)

Slide 5 of 48

Growing resources indicates a

development problem?

15 October 2013


Figure 2. Years of reserves until depletion

based on current mine production

Commodity Years until depletion

Copper 40.0 years

Nickel 35.7 years

Chromium >19.2 years

Iron Ore 56.7 years

Manganese 39.4 years

Potash 279.4 years

Gold 19.3 years

Silver 22.5 years

Calculations based on USGS 2013 estimates of

global reserves and mine production, from

Edelstein (2013), Kuck (2013), Papp (2013), Tuck

(2013), Corathers (2013), Jasinski (2013) and George

(2013a, 2013b)

“…the primary factors that govern whether a given project is developed will be social,

economic, and environmental in nature.” - Mudd, Weng, & Jowitt, 2013

Slide 6 of 48

Resources don’t have to be economic!

PROVEN

RESERVE

PROBABLE

RESERVE

MEASURED

RESOURCE

INDICATED

RESOURCE

INFERRED

RESOURCE

Consideration of

mining, processing,

metallurgical,

economic,

marketing, legal,

environmental,

infrastructure,

social and

government factors

(the “modifying

factors”)

15 October 2013

Mineral resource:

“reasonable

prospects for

eventual economic

extraction”

- JORC Code, 2012

Substantial portions of Australian mineral resources may not be economic “economic under current or

immediately foreseeable circumstances” and may “provide a potentially misleading

perspective on the future health of Australia’s precious and base metals mining industry”

- Cairns, Hronsky, and Schodde, 2010


Slide 7 of 48

Discovery problem caused by time

paradox

15 October 2013


“…disconnect between the very short term focus of the risk capital market compared to the

longer term gestation period required for well-conceived greenfields exploration

programmes…” - Cairns, Hronsky, and Schodde, 2010

Slide 8 of 48

A little bit on research

philosophy & methodology


15 October 2013

Section 2


Slide 9 of 48

Minerals, economics and consultancy

15 October 2013


MINERAL ECONOMICS

IND

US

TR

Y

AC

AD

EM

IA

Geology, Engineering,

Science, Technical Classical economics,

Microeconomics, Decision

Theory, Finance, Concept

Tacit knowledge,

Practice, Results,

Focus?

Subjectivity?

Explicit knowledge,

Theory, Broad?

Objectivity?

Observe

Interpret

Disaggregate

Focus

Theorise

Sources: Frodeman (1995), Maxwell & Guj (2013)

Slide 10 of 48

Wasting assets & limited

exploration search space


15 October 2013

Section 3


Slide 11 of 48

Wasting assets and constant renewal

15 October 2013


“Earth rise” from Apollo 11 Image: The Guardian/NASA

Old Geevor tin mine, Cornwall, UK,

operated late 18th century to 1990

Slide 12 of 48

Limited search space, infinite concepts

15 October 2013


Sources:

Hronsky &

Wellborn

(2013),

Hronsky

(2009)

Slide 13 of 48

Beginning with the end in mind


15 October 2013

Section 4


Slide 14 of 48

Overcoming “active inertia”

15 October 2013


Habit 2:

“Begin with the

End in Mind” - Stephen R. Covey

Source: www.stephencovey.com

Image: www.amazon.com

NB: Stephen Covey does not endorse this presentation.

However, I do endorse his book!

Source: Sull (1999)

Slide 15 of 48

http://www.stephencovey.com/

http://www.amazon.com/

Life-cycle of a mine project

Concept Exploration Discovery Economics Development Mining

Value

Time

MINING

High Risk – High

Potential

Lowered risk Full Value

Speculation Orphan Period

Speculators Leave

Institutional

Investment

EXPLORATION DEVELOPMENT

15 October 2013


Source:

Cook

(2010)

Slide 16 of 48

What makes a successful mine

project?

“Mineable” “Undiscoverable”

(we tend not to

find these!)

“Unmineable”

(usually discovered at

the production stage)

Success

“Undevelopable”

(usually get stuck in the

economics)

15 October 2013


Slide 17 of 48

Differing incentives of industry

actors


15 October 2013

Section 5


Slide 18 of 48

McKinsey’s 3 Horizons of Growth

Horizon 3

Create viable options

Horizon 2

Build emerging businesses

Horizon 1

Extend and defend core businesses

Time (years)

Pro

fit

15 October 2013


Source: Coley (2009),

Baghai, Coley, and

White (1999)

Slide 19 of 48

Differing risk horizons? R

isk

Corporate Risk

Technical Risk

Majors better at

handling this?

Juniors better at

handling this?

15 October 2013


Source: Trench &

Packey (2012)

Slide 20 of 48

The development “space” appears

to be smaller

“Mineable” “Undiscoverable”

(we tend not to find

these anyway)

Fewer “Unmineable” projects

(only the best make it into production)

Less success?

More “undevelopable”

projects

(many getting stuck in the

economics)

15 October 2013


Slide 21 of 48

Development triangle for global

copper projects

Raw

Prospects &

Early

Exploration:

2,759 projects

Advanced

Exploration:

633 projects

Pre-

Feasibility: 84

projects

Feasibility: 72

projects

Development:

63 projects

Data: Infomine (2013)

15 October 2013


Slide 22 of 48

Focus on Horizon 2


15 October 2013

Section 6


Slide 23 of 48

Life cycle “bow-tie” for global

copper mines & projects

Data: Infomine (2013), Ali (2010)

& Manning (1998)

Ra

w P

rosp

ects & E

arly

Exp

lora

tion

: 2,7

59

pro

jects

Ad

va

nced

Exp

lora

tion

: 63

3

pro

jects

Pre- F

easib

ility:

84

pro

jects

Fea

sibility

:

72

pro

jects

Dev

elop

men

t: 63

pro

jects

Production &

Recently

Closed: 566

mines

Long Closed:

100,000s

mines?

Development

“niche” point

(“Barrier to entry”)

15 October 2013


Slide 24 of 48

Development criteria narrowing the


Wide

Exploration

Search Space

Wide “Mineable”

Space

Narrow

“Developable”

Space

Explorationists should

target “developable”

space plotting onto


Miners looking to buy advanced projects should

seek projects in the “developable” space that

plots onto the “mineable” space.

3D Truncated Cones

courtesy of Nova Scotia

Learning Resources and

Technology Resources

(2013)

15 October 2013


Slide 25 of 48

Sustainable mining?


15 October 2013

Section 7


Slide 26 of 48

Modern “Wonders of the World”?

Source:

Martin &

Morrison

(2012)

15 October 2013


“…meeting the needs of

the present without

compromising the

ability of future

generations to meet

their own needs…”

- World Commission on Environment &

Development (1987)

Slide 27 of 48

A successful mine project is a

sustainable one?

“Undevelopable”

(usually get stuck in

the economics)

“Unmineable”

(usually discovered at

the production stage)

“Unexplorable”

(we tend not to

find these) “Unsustainable”

(problems

significant post-

production)

Success

15 October 2013


Slide 28 of 48

Changing value drivers with

development stage


15 October 2013

Section 8


Slide 29 of 48

Research, Development, Market

Exploration Development Mining

15 October 2013


Research Development Market

Slide 30 of 48

So

urc

e: S

ch

wa

b

(20

13

)

Global development competiveness

15 October 2013


Slide 31 of 48

A development stage based profile

Source: Schwab (2013)

15 October 2013


Slide 32 of 48

“Active

waiting” as a

mine

exploration

strategy

15 October 2013


Source: Sull (2005)

Slide 33 of 48

Conclusions and further

research


15 October 2013

Section 9


Slide 34 of 48

De-risking as value drivers R

isk

Corporate Risk

Technical Risk

Majors better at

handling this?

Juniors better at

handling this?

15 October 2013


Source: Trench &

Packey (2012)

Slide 35 of 48

Uncertainty & risk value drivers

15 October 2013


Sources: Hronsky & Wellborn (2013), Guj (2013)

Slide 36 of 48

Life-cycle of a mine project

Concept Exploration Discovery Economics Development Mining

Value

Time

MINING

High Risk – High

Potential

Lowered risk Full Value

Speculation Orphan Period

Speculators Leave

Institutional

Investment

EXPLORATION DEVELOPMENT

15 October 2013


Source:

Cook

(2010)

Uncertainty

driven Risk

driven

Slide 37 of 48

Conclusions

• Why are mine projects so difficult?

• Finiteness, time & methodological paradoxes

• Moving into new “search space” – concept,

proactivity, “Beginning with the End in Mind”

• Development stages – “3 Horizons of Growth”

• Problems with “Horizon 2” – development

• Dealing with sustainability development

• Both conceptual & analytical approaches suggest

the same framework

15 October 2013


Slide 38 of 48

BUT (or “further research”)

• What are all the factors that affect mine projects?

• How do we deal with time (again)?

• How do we go from “concept” to the “real world”?

15 October 2013


“Be a philosopher; but, amidst all your

philosophy, be still a man”

– David Hume, An Enquiry Concerning Human Understanding, 1748

Slide 39 of 48

Acknowledgements

• Curtin International Postgraduate Research Scholarship

• Centre for Exploration Targeting, Curtin Graduate School of

Business & University of Western Australia

• Professors Daniel Packey, Allan Trench, Campbell

McCuaig, Jon Hronsky, Richard Schodde & Pietro Guj

• Fellow PhD students Jon Bell & Atul Chandra

• Mike Gershon (friend/amateur philosopher) & Kataryna

Sykes (wife/editor)

15 October 2013


The author respectfully acknowledges the Indigenous

Elders, custodians, their descendants and kin of this

land past and present.

Slide 40 of 48

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15 October 2013


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