the strategic benefits to governments in supporting...

MinEx Consulting Strategic advice on mineral economics & exploration

The strategic benefits to Governmentsin supporting exploration

Richard SchoddeManaging Director, MinEx ConsultingAdjunct Professor, Centre for Exploration Targeting , UWA

2018 NSW Minerals Council Exploration Forum7th May 2018 Sydney


Overview

1. Costs & benefits of supporting the mining industry- Resource Curse issue

2. Australia’s experience of riding the boom- Increase in mine production

3. Economic impact on Australia of the recent boom

4. The need to find new deposits

5. The value-proposition for supporting exploration- Case studies from Western Australia, South Australia and Canada

6. Cross-Check of results

7. Summary / Conclusions

2


1. COSTS & BENEFITS OF SUPPORTING MINING

3


Costs & benefits of Governments supporting mining

• Increased mining directly creates revenues, wealth and employment– However there is the risk of “resource-curse” … where other sectors of the economy are adversely affected

– Question of the long-term sustainability of the industry

• Mining can diversify the country’s economy

• Opportunity for downstream processing and service industries– Government requirements (Indonesia) for downstream processing can be value-destroying

– Financial Services and Mining Equipment Technology & Services (METS) sectors can be big

• Exploration (and its success) is an essential first step in developing a mining industry– Challenge is the inherent uncertainty of discovery. And the long lead times for development

• Financial support for mining and exploration can be expensive– Need to invest in infrastructure and pre-competitive data

– Co-Funded drilling programs and (in the case of Canada) tax breaks such asFlow Through Funding

Cost of the various exploration support programs in Australia is ~A$60-80m paNet cost of FTF to the Canadian Government is ~C$150-200m pa

4


Resource Curse - Definition

The resource curse is a paradoxical situation in which countries with anabundance of non-renewable natural resources experience stagnant economicgrowth or even economic contraction. The resource curse occurs as a countrybegins to focus all of its production means on a single industry, such as mining,and neglects investment in other major sectors.

Source: https://www.investopedia.com/terms/r/resource-curse.asp#ixzz5EkRFFBCB

Question : Isit “real” ?

Question : Isit “real” ?


Empirical evidence of the “Resource Curse” is not strong

Source: “Reverse the curse: Maximising the potential of resource-driven countries”Report by the McKinsey Global Institute Dec 2013

1) The MGI economic performance scorecard is the sum of 22 different social and economic metrics across 5 broad themes- institutions & governance, infrastructure, fiscal policy & competitiveness, local content, spending the windfall andeconomic development

2) Resource-driven countries defined as those where resource accounts for >20% of exports or 10% of economic output

Australia

On average “Resource-driven”countries tend to have poorer

economic performance

On average “Resource-driven”countries tend to have poorer

economic performance

… But this issue can be overcome throughbetter governance and fiscal responsibility.

Australia does a good job.

MGI economic performance scorecard 1

IndexAverage economic performance scoreby income bracket2005 US$ per Capita

Per Capita GDP (2005 US$)

Per Capita

Income

(2005 US$)

Resource-

driven2

Not

resource-

driven

[A] [B] [A] / [B]

$0 - 1,000 0.24 0.28 86%

$1,000 - 3,000 0.31 0.41 76%

$3,000 - 5,000 0.36 0.46 78%

$5,000 - 10,000 0.42 0.51 82%

$10,000 - 20,000 0.46 0.64 72%

$20,000 - 40,000 0.73 0.78 94%

$40,000 + 0.88 0.90 98%

Resource curse isactually not an issue

for rich countries

Resource curse isactually not an issue

for rich countries

6


2. RIDING THE BOOM

The recent boom in commodity prices resulted in a doubling in mine productionfor Australia

7


0

100

200

300

1980 1985 1990 1995 2000 2005 2010 2015 2020

0

100

200

300

400

500

1980 1985 1990 1995 2000 2005 2010 2015 2020

Impact of commodity prices on mine productionAustralia: January 1980 – April 2018

Australian Mine Production(Year 2000 = 100)

Commodity Prices(Constant 2016 A$ and Year 2000 = 100)

Base Metals

Bulk Minerals

Mining Boom

Gold

Several years lagbetween higher

prices and increasedproduction

Several years lagbetween higher

prices and increasedproduction

100

215

134

66

37

The 1980s and 2000’s booms eachled to a doubling in mine output

The 1980s and 2000’s booms eachled to a doubling in mine output

Sources: RBA, ABS, LME and www.tradingeconomics.com

Mining Boom

8


3 Phases to the Mining BoomAustralia: 2003-2023

Source: Office of the Chief Economist, Dept of Industry Canberra,March 2018

If commodity prices stay up, thesustained rise in Production should

result in a large lift in Taxes & Royalties

If commodity prices stay up, thesustained rise in Production should

result in a large lift in Taxes & Royalties

Employment growth isstrongest in the

investment/construction phase

Employment growth isstrongest in the

investment/construction phase

Exploration expenditurestend to follow the

movement in Prices

Exploration expenditurestend to follow the

movement in Prices

The take-home message is that theboom is not really over … its justmoved onto the next phase

Stock market isstrongest in the first

phase

Stock market isstrongest in the first

phase

9


3. ECONOMIC IMPACT OF THE RECENTMINING BOOM ON AUSTRALIA’S ECONOMY

The recent boom in commodity prices has been of net benefit toAustralia’s economy and household wealth

10


Estimated impact of the Mining Boomon Australia’s economy

-20

-10

0

10

20

30

40

50

2000 2005 2010 2015 2020 2025 2030

Change in Industry Output (Percent)

Source: Reserve Bank of Australia Oct 2014Research Discussion Paper 2014-08

Mining

Construction

Electricity,Gas & Water

Overall GDP

Consumer ServicesFinance

ManufacturingAgriculture

Distribution Services

Forecast >>

The net effect of the Mining Boomhas been very positive for AustraliaThe net effect of the Mining Boom

has been very positive for Australia

Estimated changerelative to what wouldhave happened if therehadn’t been a boom in

commodity prices

Estimated changerelative to what wouldhave happened if therehadn’t been a boom in

commodity prices

11


Estimated impact of the Mining Boomon Household Income in Australia

Source: Reserve Bank of Australia Oct 2014Research Discussion Paper 2014-08

-5

0

5

10

15

20

2000 2005 2010 2015 2020 2025 2030

Change (Percent)

Household Wealth

Employment

Real HouseholdDisposable Income

Real After-TaxLabour Income

Real Consumer Wage

Forecast >>

Population

The Mining Boom has clearly hasbeen of significant positive benefit to

Australian families

The Mining Boom has clearly hasbeen of significant positive benefit to

Australian families

The challenge is that theirmemories may be short-lived… and their attitudes may bedriven by the recent declinein wealth from the peak

12


Australia is not alone in seeing a decline in manufacturingManufacturing Value-Add and Exports: Australia versus OECD

% of GDP

Source: Grattan Institute report on“The Mining Boom : Impact and Prospects” July 2013

Australia has never been a strongexporter of manufactured goods.

Decline in manufacturing drivenmainly by opening up of Free-Trade

and Globalisation

Australia has never been a strongexporter of manufactured goods.

Decline in manufacturing drivenmainly by opening up of Free-Trade

and Globalisation

13


4. THE NEED TO FIND NEW DEPOSITS

The recent boom led to several new mines opening in Australia. Howevernew discoveries need to be made now to replace these mines in the future

14


-30

-20

-10

0

10

20

30

40

1990 1995 2000 2005 2010 2015 2020 2025

New Mines

Mine Reopenings

Potential New Mines

Mine Closures

Care & Maintenance

Number of mines opened and closedAustralia: 1990-2025

Forecast >>

Source: MinEx Consulting © Nov 2016

Note: Includes Bulk and Non-Bulk depositsThe forecast number of potential new mines for 2017-2025 assumes that 75% ofthe 136 active projects currently at the Feasibility Stage are developed

Number

The “Bow Wave” of new mines in the lastdecade will inevitably lead to a flood of

mine closures in the next decade

The “Bow Wave” of new mines in the lastdecade will inevitably lead to a flood of

mine closures in the next decade

We need to find newdeposits to replace them

15


The challenge is that not only has the rate of discoveryhas slowed down, but also getting more difficult (and

taking longer) to convert a discovery into a mine

16


Cumulative Number of Discoveries that become minesAll Discoveries in Australia : Moderate + Major + Giant deposits

0%

20%

40%

60%

80%

100%

0 10 20 30 40

Years from Discovery

1970-79

1980-89

1990-99

2000-09

2010-17

Discovery Period

88%

60%

87%

9%

40%

Cumulative % refers to those deposits that (eventually) turn into mines.Caution: Even if the deposit does get mined, not all of the contained metal will be extracted /covered.

Source: MinEx Consulting © May 2018

The overall conversion rate for mostmetals is getting lower and slower

The overall conversion rate for mostmetals is getting lower and slower

17

Cumulative %

0

0.2

0.4

0.6

0.8

1

0 10 20 30 40 50


GOLD BASE METALS(Cu, Ni, Pb, Zn)

6%

50%

35%

46%

57%

Note: Excludes nickel laterites


0

0.2

0.4

0.6

0.8

1

0 10 20 30 40 50 60


1970-79

1980-89

1990-99

2000-09

2010-17

Cumulative Number of Discoveries that become minesAll Discoveries in Australia : Moderate + Major + Giant deposits

Discovery Period

29%

Source: MinEx Consulting © May 2018

18

Cumulative %

0

0.2

0.4

0.6

0.8

1

0 10 20 30 40 50 60


OTHER MINERALS& METALS

BULK MINERALS(Bauxite, Coal, Iron Ore,Phosphate and Potash)

56%

42%

29%

2%

14%

42%

57%

20%

11%

17%

Cumulative % refers to those deposits that (eventually) turn into mines.Caution: Even if the deposit does get mined, not all of the contained metal will be extracted /covered.


5. THE VALUE PROPOSITION FORGOVERNMENTS SUPPORTING EXPLORATION

Recent reviews of Government Programs in Western and South Australia show thatsupporting exploration does create significant value for the State.

Qualitative studies in Canada show strong industry support for R&D in Geoscience

19


Value proposition for Governments’ supporting explorationCASE STUDY 1: 2014 Review of South Australia’s PACE Programs

Economic Benefits of the A$56m spent on PACE between 2004-2013

• Extra A$700m invested in private mineral exploration (20:1 leverage)• Extra A$2400m in State Mining Revenues (a factor of 44x)• The collaborative drilling program led to 2 major copper discoveries and 14 other significant deposits• Establishment of 2 leading research centres in SA … Deep Exploration Technologies CRC and SA

Centre of Geothermal Energy Research

Other benefits to South Australia

• Internationally recognised as having “best practice” policies & regulations… such as “One stop shop” and improved land access decision making

• SA now recognised as a leader in developing exploration technologies• Higher PPI & MPI ratings in the Fraser Institute surveys

The Review assessed the benefits of the PACEProgram which was introduced in 2004. Totalspend (to June 2014) was A$56m.

PACE is focused on getting the right mix ofprospectivity, programs, promotion and people.

Key themes are:

1) Balancing resource development withconservation

2) Drilling partnerships3) R&D on exploring under cover4) 3D geological models5) Working relations with Indigenous

Communities6) Baseline geochem survey7) Better data delivery8) Stronger promotion through having expert

resource ambassadors

20


Value proposition for Governments’ supporting explorationCASE STUDY 2: 2015 Review of West Australia’s Exploration Incentive Scheme

Source: Report on the Exploration Incentive Scheme for the WA Dept of Mines and Petroleumby ACIL Allen Consulting Jan 2015

Every $1m spent on the EIS forgreenfield exploration will (in the

long run) generate $23.7m inbenefit to the State

Every $1m spent on the EIS forgreenfield exploration will (in the

long run) generate $23.7m inbenefit to the State

Study was based on empirical modelling of the WA’s EISscheme, which was introduced in 2009. Total spend (toJune 2017) is A$130m.

EIS funding is focused on providing new pre-competitivegeoscience data.

1) Geophysics & geochem surveys2) Innovative drilling3) 3D-geological mapping4) Strategic R&D with Industry5) Working relations with Indigenous Communities

Assumes “normal” commodity prices. A low / high pricescenario generates $0m / $38.3m benefit

Present Value calculated using a 12% discount rate.

21


Canadian Studies

• Since 2008 The Canadian Government has funded over C$100m overresearch to improve Canada’s exploration performance

• Program is called the Targeted Geoscience Initiative (TGI) - and is now in its4th iteration

• Over the years, several reviews have been carried out to assess itseffectiveness– These have mainly focused on measuring outputs (such as the number of PhD students

trained, number of research papers published, number of reports downloaded. It alsoincluded qualitative assessments of the individual R&D projects based on in-depthinterviews with stakeholders

• General conclusions were that the programs were well-managed andexpenditures were of value to industry. However it was too early to measureincreased number of discoveries


Canada: 2012 GEM Review

Evaluation of Geo-Mapping for Energy and Minerals (GEM)Program

Source: https://www.nrcan.gc.ca/evaluation/reports/2012/800

• Review included a literature review, assessed a wide range of output metrics, plus 5case studies and interviews with 60+ stakeholders.

• All of the respondents said that the GEM project was needed,• 80%strongly agreed that GEM was contributing to the understanding of the geology of

Northern Canada.• All respondents indicated that GEM was achieving its intended objectives, although it

was too early to assess the final results of the work given the short four-year windowto date. The respondents also noted that GEM projects led to more educated decision-making, more interest, and use of the information generated by the Program


Canada: 2014 Review

Evaluation Report: Targeted Geoscience Initiative 4 (TGI-4)

Source: http://www.nrcan.gc.ca/evaluation/reports/2014/16824

• Carried out a literature review (200 documents), measured outputs (in terms ofpublications and conference presentations), plus carried out two case studies andinterviews with 36 stakeholders.

• 90% of respondents strongly felt that TGI-4 was addressing their organization'sneeds. However it was too early too measure the full results


6. CROSS–CHECK ON THE RESULTS

Various studies by MinEx Consulting confirms the importance of supporting Australia’sexploration sector

25


Cross-Check

The general results of the SA and WA Case are confirmed by arecent study by MinEx Consulting which assesses the 40 yearproduction outlook for the Australian gold industry

MinEx’s Study uses a Monte-Carlo approach to model theeffect of uncertainty of the likelihood of existing mines, newprojects and exploration success

A copy of this reportcan be downloaded

from my website

A copy of this reportcan be downloaded

from my website

26


• The 12 sponsors can be broken down into three groups– State & Federal Geological Surveys (WA, SA, NSW, NT and GA) + Dept of Industry,

Innovation & Science

– Industry R&D Groups (CSIRO, CET and DET CRC)

– Industry Lobby Groups (AMEC, AIG and CME WA)

• Each group has its own interests & priorities– The Surveys need hard data to build the business case on why Government should

support the mining & exploration industry … principally the revenues and employment thatflow from it

– The R&D Groups need hard data to assess the economic and social payoff from being“smarter” at exploration

– The Lobby Groups want to raise public awareness on the critical issue that exploration andmine development are both slow-burn stories. By the time you realise that production isfalling, it may be too late to fix it

Primary Objectives of the Report

27


Forecast gold price and exploration expenditures - Australia : 1995-2057

$0

$500

$1,000

$1,500

$2,000

$2,500

1995 2005 2015 2025 2035 2045 2055

2017 AUD$/oz

$1524/oz

5-95% Confidence Interval

$1471

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

1995 2005 2015 2025 2035 2045 2055

2017 AUD$ Million

$677m

Predicted

Actual

GOLD Price(in Australian Dollars)

GOLD EXPLORATIONEXPENDITURES

(in Australian Dollars)

Forecast ->>Forecast ->>

28

Source: MinEx Consulting © October 2017


Long term outlook for the Australian gold industry : 1995-2057

0

20

40

60

80

100

120

1995 2005 2015 2025 2035 2045 2055

A: NUMBER OF MINES

$0

$5

$10

$15

$20

$25

1995 2005 2015 2025 2035 2045 2055

D: REVENUE

0

10,000

20,000

30,000

40,000

1995 2005 2015 2025 2035 2045 2055

C: EMPLOYMENT 2017 A$ Billion

Number

No of Workers

47 Mines

71 minesin 2017

8,300Workers

27,980in 2017

$7.3b

$16.6bin 2017

0

2

4

6

8

10

12

14

1995 2005 2015 2025 2035 2045 2055

Historical

Forecast

B: PRODUCTION

Moz pa

68% & 90%Confidence

Intervals

68% & 90%Confidence

Intervals

4.69 Moz

9.70 Mozin 2017

29



0

2

4

6

8

10

12

14

1995 2005 2015 2025 2035 2045 2055

Exploration Success

New Projects

Existing Mines

Historical

Forecast sources of Gold ProductionAustralia: 1995-2057

Moz pa

Note: Mean/Average forecast only. Due to uncertainty in commodity prices and exploration successthe likely forecast figure (at a 90% Confidence Interval) will vary by +/-40%.

4.1 Moz

9.7 Mozin 2017

0.3 Moz0.4 Moz

4.7 Mozin 2057

Forecast ->>


In 40 years time, 80%of gold production

will come from newdiscoveries

In 40 years time, 80%of gold production

will come from newdiscoveries

In 15 years time, halfof gold production

will deposits yet to bediscovered

In 15 years time, halfof gold production

will deposits yet to bediscovered

Of concern is that the averagedelay between discovery anddevelopment is 13 years

30


$0

$200

$400

$600

$800

2015 2025 2035 2045 2055

Spend an extra $100m per annumfor 10 years (from 2018-2027)

Incremental revenues generated from additionalgold deposits found and developed

Impact of a step increase in exploration spendIncremental change in revenues from spending and extra A$1 billion on gold exploration in Australia: 2015-2057


Spending (say) an additional $100 M pa on explorationover a decade (i.e. $1 Billion in total) will generate anextra $11.4 Billion in revenues in subsequent years

Spending (say) an additional $100 M pa on explorationover a decade (i.e. $1 Billion in total) will generate anextra $11.4 Billion in revenues in subsequent years

2017 A$ Million

$613 min 2031

31


0

2

4

6

8

10

12

14

16

1995 2005 2015 2025 2035 2045 2055

Effect of improving exploration performanceon gold production in Australia: 1995-2057

Moz paTo maintain long term production at 2017 levels,industry needs to improve its current discovery

performance by more than 2x

To maintain long term production at 2017 levels,industry needs to improve its current discovery

performance by more than 2xForecast >

BASE CASE

Note: Analysis assumes that exploration performance (discovery cost per ounce) isprogressively improved over 10 years from 2018-2027Base Case assumes a discovery cost of A$70/oz , rising by $1/oz pa

9.70 Mozin 201710.17

6.881.5x Improvement

2.0x Improvement

11.34 Mozin 2021

3.0x Improvement

4.69 Moz

6.70 Moz

8.74 Moz

13.02 Moz


32


0

2000

4000

6000

8000

10000

0

2

4

6

8

10

2015 2025 2035 2045 2055

Impact of 2x improvement in exploration performanceIncremental change over the Base Case

Discoveries &Production (Moz pa)

AdditionalOunces Found[<- LH Scale]

Additional Gold Produced[<- LH Scale]

Additional Revenue[RH Scale ->]

Additional Employment[RH Scale ->]

Revenues (2017 A$m)and No of Workers (#)

7160 workers

$6232m

4.05 Moz

6.24 Moz

Note: Analysis assumes that exploration performance (discovery cost per ounce) isprogressively improved over 10 years from 2018-2027Base Case assumes a discovery cost of A$70/oz , rising by $1/oz pa


33


Key take-aways from the Australian Gold study

• Even under a wide range of possible scenarios, it is clear that the long termsustainability of the industry critically depends on sustained explorationsuccess

• Due to the long lead times between discovery and development –Government & Industry need to support exploration now … to offset the realrisk of a supply disruption in the medium term

34


7. SUMMARY / CONCLUSIONS

35


Summary / Conclusions [1/3]

1. Costs and Benefits of supporting the mining industry- Growing the mining sector can create wealth and employment

- Governments can avoid the “resource curse” by having good governance and being fiscallyresponsible

2. Riding the boom

- The recent boom in commodity prices resulted in a doubling in mine production for Australia

3. Economic Impact of the recent mining boom- (in the case of Australia) mining’s contribution to GDP grew by 40%. While the

manufacturing and agricultural sectors were adversely affected, total GDP grew by over 6%and employment by 3%. Household wealth grew by over 15%.

36



4. The need to find new deposits- All mines have a finite life. Over the next decade an increasing number of mines will close

down (and be replaced). The challenge is is that it can take 10-20 years to convert adiscovery into a mine … and the speed and level of conversion is slowing down over time

5. The value proposition for governments supporting exploration- A review of South Australia’s exploration (PACE) program found that every dollar spent

subsequently led to $20 of spending by industry on exploration and $44 worth of extramining revenues.

- A review of Western Australia’s exploration incentive scheme found that every dollar spentcreated ~$24 of net benefit to the State

… to sustain the industry we have to start exploring now !!

37



6. The long term prosperity of Australia’s mining sector critically depends on amaintaining a pipeline of new discoveries & new projects

- Sensitivity studies indicate that each additional dollar spent on explorationgenerates an extra $11.40 in revenue

- For the gold industry to maintain production at current levels in the longer term,it will either need to double the amount spent on exploration or double itsdiscovery performance

- The long term pay-off will be an extra 4.1 Moz pa of gold production, generating extra $6.3billion in sales revenues and 7200 extra jobs

In summary … a well-constructed program to support exploration can createsignificant value to the State and be of net benefit to the overall economy

38


Contact details

Richard SchoddeManaging DirectorMinEx ConsultingMelbourne, Australia

Email: [email protected]: MinExConsulting.com

Copies of this and other similarpresentations can be downloaded

from my website

Copies of this and other similarpresentations can be downloaded

from my website

39

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