why is developing a new mine so difficult?

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WHY IS DEVELOPING A NEW MINE SO DIFFICULT? 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]

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.” Why is developing a new mine so difficult? Slide 2 of 48

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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 Why is developing a new mine so difficult? Slide 3 of 48

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Section 1

Why is developing a new mine so difficult?

Background: a ‘discovery constrained’ mining industry Why is developing a new mine so difficult? Slide 4 of 48

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Commodity prices at 50+ year highs

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%

Chart: Jacks (2013)

Metal and mineral commodities with half century real price highs selected from Jacks (2013)

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Growing resources indicates a development problem? Figure 2. Years of reserves until depletion based on current mine production Commodity

Years until depletion

Copper Nickel Chromium Iron Ore Manganese Potash Gold Silver

40.0 years 35.7 years >19.2 years 56.7 years 39.4 years 279.4 years 19.3 years 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

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Resources don’t have to be economic! 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

Consideration of mining, processing, metallurgical, economic, marketing, legal, environmental, infrastructure, social and government factors (the “modifying factors”)

PROVEN RESERVE

Mineral resource:

“reasonable prospects for eventual economic extraction” - JORC Code, 2012

MEASURED RESOURCE

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PROBABLE RESERVE

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INDICATED RESOURCE

INFERRED RESOURCE

Discovery problem caused by time paradox

“…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

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Section 2

Why is developing a new mine so difficult?

A little bit on research philosophy & methodology Why is developing a new mine so difficult? Slide 9 of 48

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Minerals, economics and consultancy INDUSTRY

Observe Interpret Disaggregate Focus Theorise

MINERAL

Explicit knowledge, Theory, Broad? Objectivity?

ECONOMICS ACADEMIA

Geology, Engineering, Science, Technical

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Tacit knowledge, Practice, Results, Focus? Subjectivity?

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Classical economics, Microeconomics, Decision Theory, Finance, Concept

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

Section 3

Why is developing a new mine so difficult?

Wasting assets & limited exploration search space Why is developing a new mine so difficult? Slide 11 of 48

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Wasting assets and constant renewal

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

Old Geevor tin mine, Cornwall, UK, operated late 18th century to 1990

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Limited search space, infinite concepts

Sources: Hronsky & Wellborn (2013), Hronsky (2009)

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Section 4

Why is developing a new mine so difficult?

Beginning with the end in mind Why is developing a new mine so difficult? Slide 14 of 48

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Overcoming “active inertia” Source: Sull (1999)

Habit 2: “Begin with the End in Mind” - Stephen R. Covey NB: Stephen Covey does not endorse this presentation. However, I do endorse his book! Why is developing a new mine so difficult? Slide 15 of 48

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Source: www.stephencovey.com Image: www.amazon.com

Life-cycle of a mine project DEVELOPMENT MINING

EXPLORATION Value

High Risk – High Potential

Lowered risk

Full Value

Speculators Leave Speculation

Orphan Period

Institutional Investment

Concept

Exploration

Discovery

Time Why is developing a new mine so difficult? Slide 16 of 48

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Economics

Development

Mining

Source: Cook (2010)

What makes a successful mine project? “Mineable”

“Undevelopable” (usually get stuck in the economics)

Success

“Unmineable” (usually discovered at the production stage) Why is developing a new mine so difficult? Slide 17 of 48

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“Undiscoverable” (we tend not to find these!)

Section 5

Why is developing a new mine so difficult?

Differing incentives of industry actors Why is developing a new mine so difficult? Slide 18 of 48

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McKinsey’s 3 Horizons of Growth Source: Coley (2009), Baghai, Coley, and White (1999)

Profit

Horizon 3 Create viable options

Horizon 2 Build emerging businesses

Horizon 1 Extend and defend core businesses

Time (years) Why is developing a new mine so difficult? Slide 19 of 48

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Differing risk horizons? Source: Trench & Packey (2012)

Majors better at handling this?

Technical Risk Juniors better at handling this?

Risk

Corporate Risk

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The development “space” appears to be smaller More “undevelopable” projects (many getting stuck in the economics)

“Mineable”

“Undiscoverable” (we tend not to find these anyway)

Less success?

Fewer “Unmineable” projects (only the best make it into production) Why is developing a new mine so difficult? Slide 21 of 48

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Development triangle for global copper projects

Raw Prospects & Early Exploration: 2,759 projects

Advanced Exploration: 633 projects

PreFeasibility: 72 Feasibility: 84 projects projects

Development: 63 projects

Data: Infomine (2013)

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Section 6

Why is developing a new mine so difficult?

Focus on Horizon 2 Why is developing a new mine so difficult? Slide 23 of 48

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Life cycle “bow-tie” for global copper mines & projects

Developmen t: 63 projects Feasibility: 72 projects

Pre- Feasibility: 84 projects

Advanced Exploration: 633 projects Raw Prospects & Early Exploration: 2,759 projects

Development “niche” point (“Barrier to entry”) Production & Recently Closed: 566 mines

Data: Infomine (2013), Ali (2010) & Manning (1998)

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Long Closed: 100,000s mines?

Development criteria narrowing the exploration search space Miners looking to buy advanced projects should seek projects in the “developable” space that plots onto the “mineable” space.

Explorationists should target “developable” space plotting onto exploration search space

3D Truncated Cones courtesy of Nova Scotia Learning Resources and Technology Resources (2013)

Wide Exploration Search Space

Narrow “Developable” Space

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Wide “Mineable” Space

Section 7

Why is developing a new mine so difficult?

Sustainable mining? Why is developing a new mine so difficult? Slide 26 of 48

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Modern “Wonders of the World”? “…meeting the needs of the present without compromising the ability of future generations to meet their own needs…” - World Commission on Environment & Development (1987) Source: Martin & Morrison (2012)

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A successful mine project is a sustainable one? “Undevelopable” (usually get stuck in the economics)

“Unsustainable” (problems significant postproduction)

Success

“Unexplorable” (we tend not to find these)

“Unmineable” (usually discovered at the production stage) Why is developing a new mine so difficult? Slide 28 of 48

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Section 8

Why is developing a new mine so difficult?

Changing value drivers with development stage Why is developing a new mine so difficult? Slide 29 of 48

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Research, Development, Market

Exploration

Development

Mining

Research

Development

Market

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Global development competiveness

Source: Schwab (2013)

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A development stage based profile

Source: Schwab (2013)

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“Active waiting” as a mine exploration strategy

Source: Sull (2005)

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Section 9

Why is developing a new mine so difficult?

Conclusions and further research Why is developing a new mine so difficult? Slide 34 of 48

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De-risking as value drivers Source: Trench & Packey (2012)

Majors better at handling this?

Technical Risk Juniors better at handling this?

Risk

Corporate Risk

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Uncertainty & risk value drivers

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

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Life-cycle of a mine project DEVELOPMENT MINING

EXPLORATION Value

High Risk – High Potential

Lowered risk

Full Value

Speculators Leave Speculation

Orphan Period

Uncertainty driven

Risk driven Institutional Investment

Concept

Exploration

Discovery

Time Why is developing a new mine so difficult? Slide 37 of 48

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Economics

Development

Mining

Source: Cook (2010)

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 Why is developing a new mine so difficult? Slide 38 of 48

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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”?

“Be a philosopher; but, amidst all your philosophy, be still a man” – David Hume, An Enquiry Concerning Human Understanding, 1748 Why is developing a new mine so difficult? Slide 39 of 48

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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)

The author respectfully acknowledges the Indigenous Elders, custodians, their descendants and kin of this land past and present. Why is developing a new mine so difficult? Slide 40 of 48

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