Executive General Manager – Exploration
WMC Exploration Inc.
8008 East Arapahoe Court
The comment has been made that exploration is a very complex business. In fact, some would argue that it is so complex that it should be treated more as an “art” than as an activity to which the scientific principles of business management can be applied.
In contrast to the above, I would like to share a somewhat different perspective: that exploration is fundamentally simple! Note that I say simple, not easy. I believe that it is possible to make some simple observations about our business that have significant implications for how we need to run a successful exploration organisation. However, the challenge is to maintain the discipline necessary to achieve this success. I will return to this point in my conclusion.
What then are these simple observations? Most of them will probably seem self-evident to the experienced explorationist, but this does not alter their significance.
The first and perhaps most critical observation is that most of the mineral industry’s wealth is captured by a handful of giant deposits. For example, in a comprehensive study of all base-metal deposits discovered in Canada and Australia until 1988, MacKenzie (1995) found that two-thirds of the wealth (expressed in NPV) derived from just 10% of all deposits (Figure 1). There are fundamental geological reasons for this that I will not discuss here, but the practical messages from this for both major and junior mining companies are very clear.
A major mining company must focus, to the exclusion of all else, on the discovery of these high-value, giant deposits. Only they will provide a sufficiently large return to justify the costs of an ongoing exploration program of the type typically mounted by major corporations. Perhaps even more fundamental, only deposits of this size will make a significant impact on the business of a large organisation. Even if it were possible for a major to run a profitable exploration program not focussed exclusively on giants (which is doubtful), such an exploration organisation would be doomed to irrelevancy within the broader corporate context and, ultimately, would most likely be discontinued.
A junior company often focuses on smaller deposits and, in fact, commonly its survival depends on doing so. Some small deposits have high IRRs and their discovery can have a major positive impact on their share-price. Perhaps one of the best examples of this in recent times in Australia has been the discovery of the Cosmos NiS deposit by Jubilee Mines. However, if a junior does succeed in discovering a giant, it can become a major mining company in its own right. Put another way, such deposits are “Company Makers”. The company I work for, WMC, is a good example of this. Discovery of the Kambalda Nickel deposit in 1966 transformed it from a junior gold mining company into a major organisation that today has a market capitalisation of approximately AUD$9 billion. Other examples include the discovery of the major Carlin-trend deposits by Barrick and Newmont. Given that much (if not most) of the risk capital invested in junior companies is placed there on the basis that they just might succeed in finding a giant, I wonder if even juniors can really afford to focus on the second-tier of ore deposits?
The second simple observation, which in many ways is a derivative of the first, is that within any given district, most of the endowment is tied up in a handful of deposits (Figure 2). The third simple observation is that within any given district, the largest deposits tend to be found earlier in the history of the field (Figure 3). They also tend to be discovered at lower cost. There are, of course, exceptions to this pattern, but it is remarkable how often it holds true.
These two observations have important implications for both greenfields and brownfields exploration strategies.
They tell us that majors must avoid greenfields exploration in mature provinces. Basically, if you are not the first, or perhaps the second, mover into a new district you are probably too late and unlikely to find the giants. It also means that if you are first into a new district, you should obtain as large a tenement package as possible in order to maximise the probability that the scarce giants occur on your ground. This will also put your company in a strong position to capture the value of the additional smaller deposits that will be found with time as understanding of the district develops. Such incremental ore is often of high value to a mining company with established infrastructure in the district but of much less value to an organisation without such a position.
In some situations, districts where the giants have already been found may be viable targets for juniors. In any given district, there will always be many more smaller deposits than giants, and these may still be attractive prizes for a junior. However, the junior must always be aware of the potential trap that it may end up simply doing exploration for an established major who captures the lion’s share of the discovery-value.
A significant amount of the world’s exploration dollar is spent in brownfields exploration by major companies. Such exploration is often very profitable because of the relatively low incremental cost of exploiting such ore. Nonetheless, there is a powerful message for all brownfields explorers in the two simple observations I have just made. This message is that within any given district, brownfields exploration will become less profitable with time! Increasingly smaller deposits will be found at increasingly higher discovery costs. At some point, the right thing for a company to do is to stop its brownfields exploration in that district. The difficult thing is knowing when this right time has arrived. Regrettably, I fear that we as an industry tend to spend too long in tired brownfields districts, destroying share-holder value.
This is the point where I need to make my fourth simple observation: new concepts and/or technology can help reinvigorate a mature district. A good example of this is the history of exploration success in the northern Chilean Porphyry Copper Belt, as illustrated in Figure 4. Interestingly, these data from Chile suggest that despite the positive impacts of new approaches to exploration, the pay-off appears to decline each time.
The significant implication of this observation is that there is a high premium for innovation in our business. Innovation in exploration can take many forms. It may be new conceptual models for targeting ore-bodies such as that which led to the discovery of Olympic Dam after more than a century of copper mining in South Australia, or new search methods such as BHP’s Falcon Airborne Gravity Gradiometer. Innovation does not need to directly relate to the exploration process, however. New processing technologies, such as SX-EW for copper and heap leaching for gold, can also have a dramatic impact on established districts by making previously uneconomic resources attractive. Innovative financing methods, such as gold loans or project finance, may also significantly change the value proposition. Finally, as we move into the increasingly complex business environment of the twenty-first century, a new area of innovative advantage is emerging in the importance of developing strong relationships with local communities and governments.
Irrespective of the form of the innovative advantage, the first three observations still apply, especially observation number three -- the truism remains that to capture the majority of the value of your innovation, you still have to be the first to apply it successfully. One of the harsh lessons of the history of our industry and others is that too often the innovator does not capture the benefits of the innovation. In exploration, this is often true because the innovative technology is applied in the wrong place.
With my fifth observation, I would like to challenge what many would see as the conventional wisdom in our industry. My observation is that majors have a significantly better track record than juniors (Figure 5) in finding large (>US $1 Billion in-situ value) deposits (MEG, 2000). This data is counter to the widely held view that juniors are more effective explorers than majors -- and this misconception has, in recent years, driven the strategies of several major exploration groups.
The data suggest that the success of juniors in finding small deposits (and the sometime disproportionate media coverage these discoveries receive) has led to the false impression that they are also more effective at finding large deposits. The implication for major mining companies is that it may be risky for them to rely on juniors to be their de-facto exploration group. Such a strategy is only likely to succeed if the major is particularly effective in selecting above-average junior companies to work with.
My sixth and last simple observation is that over the past decade, the average cost to find giant deposits (MEG, 2000) has been too high and appears to be rising (Figure 6). This observation has two important strategic implications for our industry. One is that on average, exploration does not seem to pay its way. The important word here is “average”. The second implication is that if this trend continues into the future without some major breakthrough in exploration concepts or technology, cost-effective replacement of existing mines will eventually become a serious issue.
There are also some other immediate implications which flow from this observation that generate challenges for today’s exploration management in both major and junior companies.
In the case of juniors, it has become more difficult over the last few years to raise risk capital. Although the recent technology bubble and the Busang scandal have both had a significant influence on this issue, it may also be that we are seeing a structural shift in the market’s attitude towards exploration risk and reward. A consequence of this is that the junior sector has had to rely increasingly on majors for funding. There are two longer-term problems for juniors in this. One is that “claw-back” clauses which are often the price of an alliance with a major cap the juniors exposure to upside, reducing their attractiveness as a risk investment. The second is that without an improvement in exploration economics, there is the risk that the majors may ultimately decide it is more cost-effective for them to do their own exploration.
In the case of majors, the industry’s poor discovery performance has led to a commonly held corporate view that it is cheaper to buy deposits than to discover them. This has led in turn to a general cutback in the level of grassroots exploration and an increased reliance on acquiring the discoveries of others. Although the general comparison between the cost-effectiveness of acquisition and exploration is hotly debated and probably has no simple answer, what cannot be in doubt is the long-term risk of major mining companies continuing down this path of reduced exploration. Clearly, as more acquisition dollars chase fewer quality deposits, it will become increasingly difficult for growth by acquisition to be value-adding. Taken to its ultimate, this trend will constrain the ability of the mining industry to supply its customers at a reasonable price.
I started this paper asserting that the key issues in our industry could be related to a small number of simple observations. These observations have significant implications for how we manage exploration and confront the fundamental challenges that face us in the future. It is definitely possible to point to exceptions to some of my general observations but that would be to miss the point. Our business is a “percentage-game” and a strategy based on exceptions is extremely high-risk.
In the above discussion, I touched on a number of principles that I believe are consistent with an effective exploration strategy. Clearly there is no one “good” exploration strategy; in each individual case, the best strategy will be that which best fits the organisation and the business environment it faces.
However, I passionately believe that there are three over-riding principles that do apply to any strategy. The first of these is a “laser-beam” focus on giant deposits as an exploration target. The second is an ironclad commitment to be much better than average. Our business is very harsh – being anything less than exceptional guarantees failure. The third principle is discipline. By this I mean the discipline to actually follow your strategy, the discipline to rigorously prioritise your investments and the discipline to make hard decisions when required. Discipline is essential – without it we cannot really claim to have a focus on world-class deposits and we certainly will never be exceptional.
In my introduction, I emphasised the distinction between “simple” and “easy”. I believe that the issues our industry confronts are simple; however, this does not mean that dealing with them is easy. On the contrary, now more than ever, we must be prepared to do the hard things to ensure our future.
Mackenzie, Brian W. The mineral wealth of nations, Mauk, J. L. (editor), St. George, J. D. (editor), Proceedings of the 1995 PACRIM congress; Exploring the rim, Publication Series - Australasian Institute of Mining and Metallurgy, 9/95, p. 351-358, illus. incl. 5 tables, 5 refs, 1995. ISBN: 875776-31-1. Meeting: 1995 PACRIM congress, Auckland, New Zealand, Nov. 19-22, 1995.
Reassessing the roles of exploration and acquisition in the 21st century mining company. Metals Economics Group, Halifax Nova Scotia, July 2000
Figure 1: Most of the mineral industry’s wealth is captured by a handful of giant deposits. This example is from Mackenzie (1995). It is based on 129 base metal deposits found in Australia and Canada up to 1988 with a total value of US$32 billion in 1994 dollars.
Figure 2: Within a district, most of the endowment is tied up in a handful of deposits. This example is from WMC’s St Ives gold field, WA (unpublished WMC data).
Figure 3: In any given district, the largest deposits tend to be found first. This example is from the Norseman gold camp (unpublished WMC data).
Figure 4: New exploration concepts and/or technology, as well as new extraction technologies, can help reinvigorate a mature exploration environment. However, the pay-off for each new phase may get smaller each time. This example is from Chilean copper exploration over the course of the twentieth century (unpublished WMC data).
Figure 5: In terms of finding big deposits, the data (MEG, 2000) indicate that majors have a better track record than junior explorers. Only deposits with an in-situ value of greater than $US1 billion have been considered in this analysis.
Figure 6: Over the past decade, the average cost to find giant deposits (MEG, 2000) has been too high and appears to be rising. Only deposits with an in-situ value of greater than $US1 billion have been considered in this analysis.