economic perspective on deep and under cover exploration - trench et al - mar 2015 - centre for...

AN ECONOMIC PERSPECTIVE ON DEEP

AND UNDER COVER EXPLORATION:

What are we looking for and how do we

get there?

Allan Trench12, John P. Sykes12 & Matthew Kanakis23

1. Department of Mineral & Energy Economics, Curtin University

2. Centre for Exploration Targeting, Curtin University & University of Western Australia

3. Consultant, KMPG, Perth WA 6000

ASEG-PESA 2015 Workshop

Geophysical signature of mineral systems; more than bumps

Perth, Australia: 19th Feb 2015

GEOPHYSICS

https://westerntradition.files.wordpress.com/2012/02/economics.jpg

ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps

We all bring biases to looking at industry issues….

including this one*

• Geophysicist then Mineral Economist

• Nickel/Gold bias – Kambalda, St Ives, Leinster/Mt Keith, Super Pit

– Underground EM mine/exploration ‘revolution’

– Gold/nickel division contrasting performances

• McKinsey – management perspective

• Woodside – petroleum perspective

• CRU Group – initial focus on managing copper – cost analyses of

operations and projects

• Academic – ‘What do we really know’ perspective

• So an Australian bias – nickel & gold underground bias - and

more recently Chile/copper bias

19 Feb 2015

An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there?

*Trench

Slide 2 of 43


Personal perspectives (bias) on the deep exploration

and development challenge….

• It is possible to make any project look simple on a spreadsheet

• Reality is far more complex

• Most spreadsheet cost models have an underlying and linear ‘sanctity of

grade’ built in

• Ore geometry and scale effects are as important – especially between

mines

• Cost modelling gets underground ‘wrong’ more often than for pits

• Economics suffers some similar ambiguity challenges to geophysics – i.e.

multiple solutions are possible using different costs and shapes

• Mine economics can suffer the same ‘black box’ challenges as for

geophysics – e.g. understanding what is really being measured in a model,

and the multiple definitional issues of reported costs

• Bias towards real data and factual analogues over model-only

solutions: Model simplicity can be good (being wary of the ‘sanctity of

grade’ trap)

19 Feb 2015


*Trench

Slide 3 of 43


WHAT ARE WE LOOKING FOR?

QUALITY NEW DISCOVERIES

An economic perspective on deep and under cover exploration

19 Feb 2015


Slide 4 of 43


What can mineral economics contribute?

• What are we looking for? Quality new discoveries

– Future precious and base metals discovery at depth more so than bulks

– What ‘quality’ really means (or otherwise) in Copper, Nickel & Gold as examples

• Sometimes quality will be deep and high-grade, but not always

• Quality may be deep, low-grade, but scalable for example

• How do we get there? Better Understanding

– Through a clearer understanding of the impact of grade, scale, mineralisation-style and geometrical effects on mine economics

• The excellent case study of Australian Gold Mine ‘geological economics’ (Kanakis (2014)

• Where to next? We need to get to first base yet

– Where mineral economists will likely mislead you (and fool ourselves too)

– Some high-level project economics from in-ground discovery to out-of-ground value creation

– So much more fact-based and modelling work ahead

19 Feb 2015


Slide 5 of 43


We don’t yet understand grade effects on

economics – in pits or u/g – although it looks simple

19 Feb 2015


Grade Enhancement Near Surface Mined First

Low

grade

High

grade

(blind)

Enrichment zone

General

grade

decline

with

depth

Surface

So Grade Must Fall Over Time....and costs rise?

Enriched

cap

High

grade pod

Mine design brings

this forward

%

Cu

(eq)

GEOLOGY

Preferential ‘Bring-Forward’ of High Grade

High grade

taken first Pit outline 2013

MINING

High Prices ‘Creates’ Low Grade Ore

ECONOMICS

Economic low-grade

Final pit

outline

Slide 6 of 43


...and if we don’t fully understand grade-economics

then we have a major problem: Grades vary a lot...

19 Feb 2015


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

<0.5% 0.5 - 0.8% 0.8 - 1.0 1.0 - 2.0 2.0 - 4.0

Cu ore grade

IOCG Nickel-copper sulphide Porphyry Sedimentary copper Strata bound VMS

Copper deposit type & ore grade (N = 208 projects)

CRU, MEG

Slide 7 of 43


...what we do know however is that grades

generally fall over time e.g. in copper

19 Feb 2015


0.5

0.6

0.6

0.7

0.7

0.8

0.8

0.9

0.9

1.0

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Forecast of ore grades

at currently operating

mines

Average

ore grade

in 2012:

0.65%

Cu

Average

ore grade

in 2022:

0.60%

Cu

Average

ore grade

in 2002:

0.81%

Cu

% Cu

Slide 8 of 43


And we also know that falling grades of themselves

do not drive higher prices in real terms…

0

2000

4000

6000

8000

10000

12000

14000

Long Term Real & Nominal Copper Prices: 1914-2013 (US$/tonne)

Nominal Copper Price Real Copper Price Average Real Copper Price

19 Feb 2015


Source: Sykes & Trench, 2014; Data from United States Department of Labour (2014); Historical nominal copper prices 1914-2011

from the United States Geological Survey (2012) and 2012-13 from Metal Pages (2014)

Slide 9 of 43


Declining grades are likely – so the economics of

mining of lower grades matters..

19 Feb 2015


0

0.5

1

1.5

2

2.5

3

DR Congo Zambia Russia China Australia Canada Peru Chile UnitedStates

Mexico

Grade of exploration projects in top 10 copper producers (%Cu)

CRU Consulting analysis of MEG data (Active Exploration Projects)

Slide 10 of 43


... despite the ‘future is underground’ not being

universal – e.g. pits still dominate Cu pipeline

19 Feb 2015


Source: CRU, MEG

Open pit

100%

Underground

100%

DRC

Peru

USA Russia

Chile

Canada Mexico

Zambia Australia

China

Production & Pre-production

Open pit

100%

Underground

100%

DRC

Peru USA Russia

Chile

Canada

Mexico

Zambia Australia China

Feasibility

Slide 11 of 43


…that said, Australia must focus on deep

exploration and development – or risk being

left behind..

19 Feb 2015


0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

New Cu Project Annualised Production Capacity Potential*

Data: MEG, CRU

*Advanced Cu Projects

only (excludes Olympic

Dam expansion)

Bars depict cumulative

final design capacity

tonnages by country

Slide 12 of 43


What is the cost of going deeper? With lots of

stripping, open pits soon become expensive

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

OpEx (US$/t ore)

19 Feb 2015


0

50

100

150

200

250

300

CapEx (US$ million/t ore capacity)

Costs based on 10,000 tpd capacity, estimated from CostMine, 2014

Slide 13 of 43


In Cu, underground mines are cost

disadvantaged versus pits (in contrast to Ni)

19 Feb 2015


Copper costs - Net of by-product cash costs by mining type, 2014, $/t

Data: CRU

-5,000

0

5,000

10,000

15,000

20,000

0 2,000 4,000 6,000 8,000 10,000 12,000

Underground Open Pit Mixed

Slide 14 of 43


Geology (geometry, style), commodity value and ore

value (grade) influence mine development choice

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Open Pit Open Pit & Undergound Underground Other Unknown

19 Feb 2015


Data: RMG

Other: Either tailings, placer or offshore operations (or in-situ leach for uranium)

Slide 15 of 43


…with deeper developments more typical for

precious metals over base and bulks

Platinum

Open Pit

Open Pit & Underground

Underground

Other

Unknown

Other: Either tailings, placer or offshore operations (or in-situ leach for uranium)

Nickel

Open Pit


Underground

Other

Unknown

Iron Ore

Open Pit


Underground

Other

Unknown

Data: Raw Materials Group

19 Feb 2015


Slide 16 of 43


HOW DO WE GET THERE?

BETTER UNDERSTANDING


19 Feb 2015


Slide 17 of 43


A case study of ‘geological-economics’ and

the challenges facing Australian gold

0

2

4

6

8

10

12

1989 1994 1999 2004 2009

Mil

lio

ns

of

ou

nc

es

Australian Production of Gold (1989-2013)

0

200

400

600

800

1000

1200

1400

1600

1800

US

D/o

un

ce

Increases in costs over time

GrowthCapex Cost

All-In-Costs

Gold Price

19 Feb 2015


Source: USGS and Taggart (2013)

Slide 18 of 43


Australian gold: About 50 mines with close to 50:50

underground to open pit split of production

19 Feb 2015


Fact Key Figure(s)/Mine example(s)

Total Australian and New Zealand Production Dec Half-

Year 2013 Recorded in the Study. 4,126,319 oz.

Percentage of Gold Production from Underground Mines 56%

Percentage of Gold Production from Open Pit Mines 44%

Percentage of Production that is Gold Only 72%

Percentage of Production that is Polymetallic 28%

Mined Grade Dec Half-Year 2013

Production-Weighted Average Gold Grade 3.26 g/t

Highest Grade Mine Andy Well (12.45 g/t)

Lowest Grade Mine Cadia Hill (0.36 g/t)

Cost Information Dec Half-Year 2013

Lowest Cost Mine Cadia Hill/Cadia East/Ridgeway $242/oz. (cash costs) $302/oz.

(AISC)

Highest Cost Mine Challenger $1427.64/oz. (cash costs) Henty $1527/oz. (AISC)

Lowest Cost Quartile Threshold (25th Percentile) $700/oz. (cash costs) $925/oz. (AISC)

Highest Cost Quartile Threshold (75th Percentile) $950/oz. (cash costs) $1205/oz. (AISC)

Source: Kanakis (2014)

Slide 19 of 43


How do you think a production cost versus grade

chart might look for Australian gold mines? This?

Co

sts

($A

U)

Grade (g/t)

19 Feb 2015



Higher grade,

lower cost

mines

Lower grade,

higher cost

mines

Slide 20 of 43


It is actually not that simple:

High grade doesn’t equate to low cost!

19 Feb 2015


0

200

400

600

800

1000

1200

1400

1600

1800

2000

0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00

All

in

Su

sta

inin

g C

osts

($A

U)

Operating Grade Q4 (g/t)

Open Pit

Underground


Slide 21 of 43


So what drives relative costs if not grade?

Deposit-type tells us little

• Orogenic Gold and Epithermal Au-Ag deposits gave variable results on the cost curves

• Porphyry deposits were very low cost except for Boddington

• Of the IOCG deposits the only figure available was a December Half Year Total Cash Cost for Prominent Hill, which was around the mean of the dataset

• There is not much to go with here……….

19 Feb 2015


Slide 22 of 43


What about mineralisation-style then?

19 Feb 2015


Slide 23 of 43


Disseminated mineralisation appears

important

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

Q1 Q2 Q3 Q4

Pro

du

cti

on

(%

of

qu

art

ile t

ota

l)

Percentage of deposits with different mineralisation style in

each cost quartile

Vein/Reef Style

Disseminated

• Deposits with more

disseminated style

mineralisation displayed lower

costs than those with vein/reef

style mineralisation

• Relationship especially evident

in the cash cost datasets.

19 Feb 2015



Slide 24 of 43


Geometry clearly matters too: Lower

cost deposits are equidimensional • Deposits were defined

as equidimensional,

planar and cylindrical

shaped.

• Equidimensional

deposits gave much

lower costs than planar

and cylindrical deposits.

• Gently dipping planar

deposits also give lower

costs than steeply

dipping planar deposits.

19 Feb 2015


Planar Deposit

Cylindrical Deposit

Equidimensional

Deposit


Slide 25 of 43


Contrasting geometries means that we likely

‘engineer-away’ grade advantage to reach

stopes

19 Feb 2015



Slide 26 of 43

ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps 19 Feb 2015


The cost drivers differ markedly between pits and

underground – both by function and composition

Open Pit Underground

Source: National Bank Financial Feb 15

Slide 27 of 43


WHERE TO NEXT?


19 Feb 2015


Slide 28 of 43


So is a new underground target better

economically than a typical new pit? Typical Australian medium sized

OPEN PIT gold mine

• Resource contained Au: 4.0Moz

• Reserve contained Au: 2.8Moz

• Mining Losses: 95%

• Mine Life: 15 years

• Throughput: 3.5Mt/y

• Grade: 1.5g/t

• Processing Recovery: 85%

• Production: 150,000oz/y

• Opex: $750/oz

• Capex: $150 million

• Construction: 2 years

Typical Australian medium sized

UNDERGROUND gold mine

• Resource contained Au: 13.3Moz

• Reserve contained Au: 6.7Moz

• Mining Losses: 75%

• Mine Life: 30 years

• Throughput: 1.0Mt/y

• Grade: 5.0g/t

• Processing Recovery: 90%

• Production: 150,000oz/y

• Opex: $850/oz

• Capex: $65 million

• Construction: 4 years

19 Feb 2015


Based on data collated by Matthew Kanakis (and some tacit assumptions by Sykes & Trench)

Slide 29 of 43


First convert resource to reserve…

0

1000

2000

3000

4000

5000

6000

Resource(in-ground)

Reserve (in-ground)

Mined Gold ProcessedGold

NPV ofRevenues

NPV ofProfits

NPV Project

Va

lue

(U

S$

M)

Typical medium sized Australian OPEN PIT gold mine

19 Feb 2015


0

3000

6000

9000

12000

15000

18000

Resource(in-ground)

Reserve (in-ground)


NPV ofRevenues

NPV ofProfits

NPV Project

Va

lue

(U

S$

M)

Typical medium sized Australian UNDERGROUND gold mine

Resource: 4.0Moz Au @

US$1,300/oz = US$5.2 billion

Resource to Reserve

Conversion (high) = 70%

Reserve: 2.8Moz Au @


Reserve conversion

losses = US$1.6 billion

Resource: 13.3Moz Au @


Resource to Reserve Conversion

(low) = 50%



Reserve conversion

losses = US$9 billion

NB: Calculations have undergone rounding so may not be fully accurate

Slide 30 of 43


…then consider mining losses…

0

1000

2000

3000

4000

5000

6000

Resource(in-ground)

Reserve (in-ground)


NPV ofRevenues

NPV ofProfits

NPV Project

Va

lue

(U

S$

M)


19 Feb 2015


0

3000

6000

9000

12000

15000

18000

Resource(in-ground)

Reserve (in-ground)


NPV ofRevenues

NPV ofProfits

NPV Project

Va

lue

(U

S$

M)




Mining losses (low) = 5%

Mined Gold: 2.6Moz Au @


Mining losses =

US$200 million



Mining losses (high) = 25%




Mining losses =

US$2.0 billion

Slide 31 of 43


…then consider processing losses…

0

1000

2000

3000

4000

5000

6000

Resource(in-ground)

Reserve (in-ground)


NPV ofRevenues

NPV ofProfits

NPV Project

Va

lue

(U

S$

M)


19 Feb 2015


0

3000

6000

9000

12000

15000

18000

Resource(in-ground)

Reserve (in-ground)


NPV ofRevenues

NPV ofProfits

NPV Project

Va

lue

(U

S$

M)




Processing losses (high) = 15%

Processed Gold: 2.3Moz Au @


Processing losses

= US$400 million



Processing losses (low) = 10%




Processing losses

= US$500 million

Slide 32 of 43


…and mining over several years…

0

1000

2000

3000

4000

5000

6000

Resource(in-ground)

Reserve (in-ground)


NPV ofRevenues

NPV ofProfits

NPV Project

Va

lue

(U

S$

M)


19 Feb 2015


0

3000

6000

9000

12000

15000

18000

Resource(in-ground)

Reserve (in-ground)


NPV ofRevenues

NPV ofProfits

NPV Project

Va

lue

(U

S$

M)




Discount Rate = 10%

Mine Life = 15 years

NPV of Revenues: 150Koz/y Au @


Time cost of money

= US$1.5 billion



Discount Rate = 10%

Mine Life = 30 years




Time cost of money

= US$4.1 billion

Slide 33 of 43


…not forgetting operating costs…

0

1000

2000

3000

4000

5000

6000

Resource(in-ground)

Reserve (in-ground)


NPV ofRevenues

NPV ofProfits

NPV Project

Va

lue

(U

S$

M)


19 Feb 2015


0

3000

6000

9000

12000

15000

18000

Resource(in-ground)

Reserve (in-ground)


NPV ofRevenues

NPV ofProfits

NPV Project

Va

lue

(U

S$

M)




Operating Costs = US$750/oz

NPV of Profits: 150Koz/y Au @

US$1,300/oz = US$640 million

Operating costs =

US$860 million



Operating Costs = US$850/oz




Operating costs =

US$1.26 billion

Slide 34 of 43


…and capital costs for a project…

0

1000

2000

3000

4000

5000

6000

Resource(in-ground)

Reserve (in-ground)


NPV ofRevenues

NPV ofProfits

NPV Project

Va

lue

(U

S$

M)


19 Feb 2015


0

3000

6000

9000

12000

15000

18000

Resource(in-ground)

Reserve (in-ground)


NPV ofRevenues

NPV ofProfits

NPV Project

Va

lue

(U

S$

M)




Capital Cost = US$150 million

Construction Time = 2 years

NPV of Project: 150Koz/y Au @


Construction costs

= US$250 million



Capital Cost = US$65 million

Construction Time = 4 years

NPV of Project: 150Koz/y Au @



Construction costs

= US$265 million

Slide 35 of 43


In the end there’s little difference?

0

1000

2000

3000

4000

5000

6000

Resource(in-ground)

Reserve (in-ground)


NPV ofRevenues

NPV ofProfits

NPV Project

Va

lue

(U

S$

M)


19 Feb 2015


0

3000

6000

9000

12000

15000

18000

Resource(in-ground)

Reserve (in-ground)


NPV ofRevenues

NPV ofProfits

NPV Project

Va

lue

(U

S$

M)



Total project

economic costs =

US$17.1 billion

Total project value

= US$375 million

Total project

economic costs =

US$4.8 billion

Total project value

= US$390 million

Slide 36 of 43


Where mineral economists will likely

mislead you (and ourselves too)

• Over-simplistic economic models of underground

targets – all economic assumptions, limited geology

& mining inputs

• Hard-wiring of a simple ‘grade drives economics’

modelling assumption (to the exclusion of

complexity & scale effects; orebody shape,

mineralisation style)

• Limited factual analysis of existing underground

deposits and their economics versus pit

developments

• Lack of ‘modifying factors’ within analyses

19 Feb 2015


Slide 37 of 43


A final word on the road ahead….

“What we are dealing with are complex mineral systems. As analysts we are still in the 1800’s

stuffing birds and classifying them. We want to map the genome”

- Professor Cam McCuaig, CET Director 2014

19 Feb 2015


Slide 38 of 43

http://www.google.com.au/url?url=http://www.torange.us/animals/birds/Ruff-stuffed-bird-21309.html&rct=j&frm=1&q=&esrc=s&sa=U&ei=JKbFVO_sIs7d8AWZs4KQDA&ved=0CBgQ9QEwATgo&sig2=enwIm-55PE3ckdpg-MYLKQ&usg=AFQjCNF6HfPL8kBy2uPcikoV0H00EVgQoA

http://www.google.com.au/url?url=http://www.huffingtonpost.co.uk/2012/05/15/human-genome-map_n_1517727.html&rct=j&frm=1&q=&esrc=s&sa=U&ei=VabFVNisB42B8gXx34DQCw&ved=0CCAQ9QEwBTgU&sig2=M-ek-xJLRkX8GID0U5muPw&usg=AFQjCNHbbR0qEVruKNusGsgJUxvjnCkRbw

THANK YOU

For more information:

Centre for Exploration Targeting: www.cet.edu.au

Contact information:

John P. Sykes: [email protected]

Allan Trench: [email protected]

Matthew Kanakis: [email protected]

http://www.cet.edu.au/

mailto:[email protected]



FURTHER READING • Kanakis, M.D., 2014. Grade Expectations – Australian Gold Mines defy the ‘Grade is King’ Cost

Hypothesis, Australian Institute of Geologists News, 188, November, 6-10.

• Kanakis, M.D., 2014. Grade Expectations – Australian Gold Mines defy the ‘Grade is King’ Cost

Hypothesis, Centre for Exploration Targeting Newsletter, 29, September, 14-17.

• McCuaig, T.C., Vann, J.E., & Sykes, J.P., 2014. Mines versus Mineralisation - Deposit Quality,

Mineral exploration Strategy and the Role of 'Boundary Spanners', Ninth International Mining Geology

Conference, Adelaide, 18-20 August, 33-41.

• Sykes, J.P., & Trench, A., 2014. Finding the Copper mine of the 21st century: Conceptual

Exploration Targeting for Hypothetical Copper Reserves, Society of Economic Geologists Special

Publication 18, 273–300.

• Sykes, J.P., & Trench, A., 2014. Resources versus Reserves - Towards a Systems-based

Understanding of Exploration and Mine Project Development and the Role of the Mining Geologist,

Ninth International Mining Geology Conference, Adelaide, 18-20 August, 243-270.

• Trench, A., & Sykes, J.P., 2014. Perspectives on Mineral Commodity Price Cycles and their

Relevance to Underground Mining, 12th AusIMM Underground Operators' Conference, Adelaide, 24-

26 March, 19-31.

• Trench, A., Packey, D., & Sykes, J.P., 2014. Non-Technical Risks and Their Impact on the Mining

Industry. AusIMM Monograph 30: Mineral Resource and Ore Reserve Estimation, Chapter 7: Risk in

Resource and Reserve Estimation, 605-617.


BACKUP – BROADER RISK

DISCUSSION


19 Feb 2015


Slide 41 of 43


What does economic mean nowadays?

You can choose either technical vs

political risk?

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Weda Bay,Indonesia

Dumont,Canada

(QC)

Kalgoorlie(Heron),Australia

(WA)

Zebediela,SouthAfrica

Jacaré,Brazil

Gag Island,Indonesia

MountMargaret,Australia

(WA)

Maturi,USA (MN)

Turnagain,Canada

(BC)

Sulawesi,Indonesia

Nic

ke

l G

rad

e (

%)

Co

nta

ine

d N

ick

el (M

t)

Size, Grade & Political Risk for Top 10 Largest Nickel Projects showing that the highest grade projects are in the riskiest

political environments

19 Feb 2015


1st Quartile 2nd Quartile 3rd Quartile 4th Quartile

Data: Schodde; Fraser Institute

Slide 42 of 43


Actually… it’s quantity and a more

subtle notion of ‘quality’

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Co

pp

er

Gra

de (

%)

Co

nta

ine

d C

op

per

(Mt)

Size, Grade & Political Risk for Top 10 Largest Copper Projects demonstrating that there is no clear relationship between

grade and political risk. Mine type, by-products etc coalesce to form a more subtle concept of ‘quality’

19 Feb 2015


1st Quartile 2nd Quartile 3rd Quartile 4th Quartile

Data: Schodde; Fraser Institute

Slide 43 of 43

economic perspective on deep and under cover exploration - trench et al - mar 2015 - centre for...

Economy & Finance

deep exploration

economic perspective

mineral economics

cover exploration

geophysics asegpesa

exploration targeting

chilecopper bias

bumps perth