Resource Doldrums

Published in: The Australian Geologist, Newsletter # 175, June 2015, p.8

The weeping and gnashing of teeth over the ‘dismal” state of the market for mining equities and the high unemployment/underemployment rate among exploration geologists is the result of what happens when grandiose plans based on magical thinking don’t pan out. The demands of investors for quicker discoveries and increased dividend payments seem to imply that investors want to have their cake and eat it.

But then again, the market is never wrong: so what gives? Is it, perhaps, that investors are looking for something more substantive than the perennial game of “smoke and mirrors” that has been played by the exploration industry since the early 1970’s? Why does the junior exploration sector in Australia spend hard-to-get funds on projects that are unlikely to be profitable for a very, very long time … if ever? Such projects tend to be concentrated at relatively shallow depths and are being recycled again and again, only to repeatedly fall tantalizingly short of profitability thresholds when commodity prices peak. Is it any wonder investors are wary of putting money into the junior sector?

As most practitioners know, the grade/quality of commodities have been falling for decades, occasioned by economies of scale based on bigger, better and more efficient mining and milling equipment, all powerfully underpinned by computational statistics.
This economies-of-scale paradigm has atrophied the resource business towards large-scale open-cut operations and their attendant massive capital costs … whereas only a couple of decades ago an investment of US$500m was regarded as substantial, there are now mines mooted and under construction, whose costs are in the $5-15 billion range, such as Barrick Gold’s Pascua-Lama project on the Argentinean-Chilean border (US$8.5 billion), Rio Tinto/Turquoise Hill Resources’ Oyu Tolgoi mine in Mongolia (US6.2 billion + US$5 billion expansion) and BHP’s Jansen potash mine in Canada (US$14 billion).

There are a few companies and individuals who do operate “outside the box” but their successes are insufficient to sate the voracious appetite for resources that is driven by the ever increasing world population and the demand of citizens in under-developed countries for better living conditions.

The mines of today are waning vestiges of low hanging fruit that mostly originated with outcropping orebodies: in developed countries such as Australia and Canada, those days are long gone. Companies have been looking abroad for outcropping orebodies in politically less-stable regimes but large capital commitments and their commensurate environmental impacts are pitting citizens against miners and enticing the specter of resource nationalism, the recent experiences of Kinross Gold Corp. in Colombia and Gabriel Resources in Romania being cases in point. Then there was Anglo American’s recent departure from its US$300m investment in the Pebble project in Alaska.

Blind deposits and underground block-caving mining methods are very much the way of the future but this is where the impasse becomes apparent: finding these non-outcropping deposits is both time-consuming and expensive, due to the forensic nature of the search. However, the prize can be quite substantial, such as Olympic Dam (South Australia), Escondida (Chile) and Resolution (Arizona, USA).

By labeling ‘greenfields’ projects as “too expensive”, investors might be accused of putting the kybosh on Australia’s minerals explorers were in not for the dismal success record over the last couple of decades. Yes, exploration is expensive and, yes, it is absolutely fundamental to the success of the mining industry: but it has to be done the right way, divorced from the strident clamor of short-term speculative interests.

Bohdan (Bob) Burban
Los Angeles, USA

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