Without exploration, there is no mining.
But once you get beyond that basic tenet, opinions diverge on nearly everything about this most fundamental endeavor: where, when and why should it be
done; how it might be improved and, of course, who ought to be paying for it. Meanwhile, exploration costs are skyrocketing; recent estimates suggest
spending in 2012 was 10 times higher than a decade earlier. Yet discovery rates are starting to decline at a time when companies across the industry are
slashing budgets. So the pressure is on to discover more.
Dan Wood was an exploration geologist for decades with BHP Billiton and then Newcrest whose discoveries include the Cadia Valley gold deposit in Australia.
Now retired, he is happy to discuss the state of his old industry, which he continues to monitor closely. Wood fundamentally believes that the only way to
create wealth in mining is to make new discoveries. The actual acts of mining – extracting and processing ore – are “wealth-destroying” exercises, and the
focus by majors on the production side is the single main reason why discovery rates continue to fall. “A competent mining company CEO would realize that
wealth is only created through the discovery of new ore bodies,” he says, “and would apply their attention to this part of the business, delegating the
minimizing of wealth-destruction further down the line.”
It is a bold stance, but it does not tell the whole story, argues Egizio Bianchini, the BMO Capital Markets metals & mining head. “To create wealth in
mining, real wealth, there are only two ways to do it,” he points out. “Get the commodity price right, and have your mine in production with the commodity
price right; or find [the commodity] through exploration.” He adds that while exploration can be a very significant, even dominant, piece of the
wealth-creation process, only an eye towards production gives minerals in the ground any value: “Without the efficient, continued, development and
successful exploitation of the mine, there is no wealth. The two have to go together. Discovery without exploitation is a nice cake that you can look at
but can never eat.”
Most majors, trimming exploration investment and concentrating on revenue generating operations, have in recent years forgone the discovery side of the
equation. BHP Billiton, for example, cut exploration spending by 46 per cent in the first half of 2013. The problem mining CEOs face, says Bianchini, is
that they are always struggling trying to find investors whose interests align with those of the industry in the long-term. “Most of the time in the cycle,
those investors don’t own your stock.”
The debate between exploration types like Wood and production-minded people like Bianchini should be the fundamental argument in mining today. Where a CEO
or board falls on the issue determines a company’s entire corporate strategy. Billions of dollars are at stake, and where the majors decide to focus their
attention drives the whole industry. Right now, though, they are so focused on cutting costs company-wide that many are leaving the increasingly urgent
question of how future mines will be discovered off of the agenda.
A house divided
The gradual withdrawal of majors from greenfield exploration is perhaps due to the remarkable ability of juniors – over the last 20 years or so – to make
substantial discoveries while avoiding high overhead. Many in the industry believe that the separation of the two mining tasks – exploration and production
– has been beneficial, allowing each group to focus on their strengths.
Jacques Perron, newly on the job at Thompson Creek Metals, is typical of mining CEOs. He agrees with the received wisdom that the separation of exploration
and production is, if not fundamentally good for the industry, at least an understandable development. “In the junior space, you see smaller organizations.
They don’t have to deal with large overhead, large infrastructure, or a large head office,” he says. “They’re much more focused on what they’re doing.”
And, he adds, juniors may find it easier to attract talented employees: “For some individuals, if they work for a junior company where they own shares, and
if they find something, they see a significant increase in the share price. For a good, talented exploration geologist, the appeal of working for a junior
company is much greater.”
However, there has been a dark side to this separation. “Junior companies are very, very good at finding things, but the capital markets feed the junior
companies in a drip methodology,” notes Bianchini. And as the flow of money has dried up during the current economic downturn, juniors have been largely
unable to raise the capital required to undertake exploration ventures.
Worse, increased discovery costs, driven largely by drilling and labour costs – which by some measures have doubled over the last decade – are making
exploration even more challenging. The dearth of newly discovered near-surface deposits means that future discoveries will be more risky, more difficult
and more expensive. Wood and others argue that the majors should therefore be returning more of their profits to exploration.
Major mining companies have, of course, seen huge losses of late and, in turn, big changes at the top. Operational costs at many sites have ballooned at
the same time that metal prices have regressed from all-time highs. Exploration is the last thing on anybody’s mind.
The situation for many juniors, though, is even more dire. The Prospectors and Developers Association of Canada (PDAC) estimates that there are as many as
340 juniors listed on the TSX-V with less than $50,000 in working capital. More companies de-listed from the TSX Venture last September than during all of
2012. “It is survival mode for many of them,” says PDAC executive director Ross Gallinger.
Even if investment does come back relatively quickly, there is another, more intractable problem: Returns on the exploration dollar have been declining for
decades. Reversing that troubling trend will take more than just an economic recovery.
It’s a small world
The consensus is that most of the large, high-quality, near-surface deposits in accessible and politically stable areas of the world have been found.
Future exploration, everyone agrees, will have to look deeper.
“The Earth is as big as the Earth is: there’s only so much surface area,” explains Cooper Quinn. His title of senior geologist at McLeod Williams Capital
Corp. belies the youthful enthusiasm with which he explains the history and evolution of the exploration business. “A lot of the discoveries over the last
little while have been driven by going into areas that were underexplored.” Once everything on the surface has been found, though, the only place left to
go is further down. “That’s where exploration gets a lot harder and a lot more expensive. And so your discovery rates are going to naturally decline
because of that.”
BMO’s Bianchini notes that some near-surface ore bodies do likely remain. “When God put all the stuff in the ground, he didn’t worry about the politics. So
the world still has a lot of deposits,” he argues.
Pursuing the remaining surface deposits, in areas like Afghanistan, the Democratic Republic of the Congo, or high in the Andes, however, is essentially
trading technical risk for political risk. Although Quinn agrees that developing underexplored areas of the world may happen faster than developing
techniques to explore deeper, he insists it will be a band-aid solution. “That may drive a round of discovery,” he concedes. “But sooner or later,
eventually we run out of surface area. We have to start looking deeper.”
The deeper story
The oil and gas industry has already faced this problem. Its solution was to conduct research and development on an enormous scale, resulting in entirely
new techniques and technologies to explore deeper down. Its experience is also now reflected in the way that industry is structured and operates, according
to Wood. It was hugely expensive – billions upon billions of dollars, industry-wide – but discovery rates did increase again, and new fields were
identified, such as the deep-water oil and gas in the Gulf of Mexico.
Quinn says a similar effort must be made in mining, so that the industry can start looking deeper with a higher chance of success. He points to the
Resolution copper project in Arizona, with an Inferred Resource of 1.2 billion tonnes at depths exceeding 1,300 metres, as proof of the approach. “It’s
ridiculously deep. So these mega-deposits and world-class size deposits are still there.”
Exploring deeper into the Earth’s crust will be even harder for mining than it was for the energy industry. Oil and gas deposits are much more obvious on
geophysical surveys than ore deposits, according to Quinn. Any geophysical survey will show anomalies, based on differences inside the Earth, but “not all
of those are anomalous and mineralized.” The problem is figuring out which ones are worth something.
“You look at geophysics as it stands,” Quinn sighs, sounding frustrated, “and there aren’t a lot of new technologies. A lot of the geophysical techniques
that you use – like the ground-mag maps that appear on every mining website – are not new. We were doing magnetics in the Second World War. We’re just much
better at measuring it now. You’ll find that’s the same with most geophysics. It’s not anything new, we’re just better at measuring it than we were.”
For science and for profit
Making exploration cheaper, especially deep underground, will require step changes in technology and methodology. Some research looks to extend existing
technology like the Deep Exploration Technologies Cooperative Research Centre (DET CRC) in Australia. That project aims to find alternatives to core
drilling, a particularly expensive staple of exploration. “If we can eliminate that,” Quinn says, “we could potentially save a lot of money. If we can
drill longer, deeper holes for cheaper, that could help drive your exploration.”
At the heart of DET CRC is the development of coiled tubing drilling for mining exploration. Already used in the petroleum industry, the technique saves
time and labour by driving a long, continuous metal tube, stored on a large spool aboveground, into the earth. There is no need to manually connect dozens
or hundreds of segments of drill line. The primary goal of the project is to develop, by 2017, a coiled tubing rig weighing less than 10 tonnes, which can
drill to 500 metres, at a cost of $50 per metre – or less than half the cost of conventional diamond drilling. Big improvements need to be made, though, to
convert the technology for hard rock mining. And because coiled tubing drilling does not extract a core, reliable and accurate down-hole sensing
technologies need to be developed concurrently.
Bill MacFarlane is the global geochemist at Vancouver-based AcmeLabs, a top geochemical and assaying laboratory. He explains the challenges of down-hole,
or even aboveground on-site, analysis: “Look at the things we are challenged by in the laboratory environment – in exploration samples, we’re dealing with
highly variable matrices, and concentration ranges from extremely low to extremely high. Geological materials are among the most challenging samples to
work with, analytically. So if you try to do all this on the rig, in non-ideal circumstances with non-ideal samples, it becomes extremely difficult.”
The benefits of on-site analysis could be enormous, however. Real-time data collection and analysis, combined with a rapid, cheap drilling technique, could
mean near-instantaneous vectoring of exploration. Particularly promising areas could be core-drilled the same day, and on-site analysis performed to verify
the down-hole indications.
Other research is more esoteric. Biogeochemistry analyzes the trace minerals found in plants at the surface in an attempt to detect the mineral sources –
hopefully, large ore bodies – buried at depth. Detecting such faint traces (on the parts-per-trillion scale) is one challenge; understanding the mechanisms
by which the geochemical signals migrate through hundreds of metres of cover is another. The science is young but promising.
Acme’s parent company, Bureau Veritas, is a key contributor to the DET CRC project, and Acme itself conducts significant geochemistry research and
development as a matter of course. But funding for exploration R&D will also have to come from the primary beneficiaries – the majors who will mine the
deposits found with these techniques.
To their credit, a who’s who of industry players are involved in the DET CRC consortium. The project is funded to the tune of $117 million, after factoring
in matching government contributions. But initiatives of this scale are rare. They will need to be much more common if the difficulties of deep-cover
exploration are to be overcome.
Who’s got the bill?
Over the last two decades, the majors have shown an ever-decreasing interest in doing exploration themselves. It’s not at all clear that they really want
to be involved, either financially or logistically, in the future. But if not them, then who?
“That is the proverbial $64,000 question,” says Quinn. “It’s a $100 billion question, really. Obviously the small companies that are doing a lot of the
exploration don’t have the cash to be funding large R&D programs. But does Barrick right now really want to be spending a lot of money on R&D?
They’re cutting their own exploration programs back, let alone funding university programs for somebody to try to develop some new geophysical technique.”
Besides occasionally funding core research at the university level, the Government of Canada, like Australia, often matches the dollar value of industry
contributions to research. MacFarlane says such investment is vital. He is well-placed to comment – he also coordinates internal and external research for
MacFarlane’s boss, Acme technical vice-president John Gravel, says that although some projects, like the DET CRC, are very well-funded by majors, there is
little fundamental research being done on the majors’ dime. Because the majors have to justify their expenditures to their shareholders, there usually has
to be a quantifiable benefit to the company’s operations. “It won’t be altruism by which they fund,” says Gravel. “It has to have a direct application
towards some exploration they’re working on.”
At some point, however, the group that profits most from mineral discoveries will have to put some money back into finding them. Nobody else has such a
vested interest in the research. “It’s going to have to come from the majors, and the government, and the universities, to pull together to develop new
techniques,” believes Perron. But he admits that Thompson Creek will not be leading that charge anytime soon.
The company has 13 and 16 years of mine life left in their two respective molybdenum operations. Mount Milligan, Thompson Creek’s new copper and gold mine,
will begin production in the first quarter of 2014 and has 22 years of expected life. Aside from minor exploration around their existing sites to extend
reserves, Perron contends in an all-too-familiar refrain that exploration is not urgent for his company.
But without the technology to reliably find deep-cover deposits, the drip-fed juniors will almost certainly never again make discoveries with such facility
as they have in the past. They simply do not have the money to drive the technological development that will be necessary to find future deposits. Whether
it is funding R&D, funding the juniors directly, or doing the exploration themselves, the majors’ involvement will have to increase in the future.
More than anything, it will take someone to actually have faith in something new, adds Quinn: “It’s going to take a company or a group with some serious
determination to follow up on this stuff and refine this technology enough that it’s actually somewhere that we can use.”
The only question is who will take that leap? Although the costs may be hard to swallow for impatient shareholders and the CEO who must face them at the
annual general meeting, the industry has little choice. And it could be worthwhile to get ahead of the curve. Majors that own the intellectual property for
or have experience with the next generation of exploration techniques and technologies could very well emerge at the forefront of the industry. Companies
that do not may be left behind to wonder where all the shareholders – and money – have gone.
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