VANCOUVER -- Tough economic times and reduced access to capital will force companies to narrow their exploration efforts on "best-of-breed" mineral deposits, commodity experts told delegates at Roundup 2010, a recent conference sponsored by the Association for Mineral Exploration British Columbia (AME BC).
Session chairs Fred Daley and Mike Gunning of Teck Resources (TCK. B-T, TCK-N) caution that "best of breed" isn't a static description, but rather a moving target reflecting supply and demand fundamentals at a point in time.
In today's volatile market, the challenge is to discover world-class deposits "that can be taken to the bank" even though such deposits are increasingly difficult to find and develop.
Precious metals remain a top exploration target, driven by robust prices reflecting their role as a hedge against financial uncertainty. Copper projects scored highly on lists of "deposits that matter" based on declining discovery rates, long lead times for production and demand growth from China, India and other developing nations. Cam Allen, former chief geologist of Cominco (now part of Teck), says these factors are also giving some under-performing base metals a shot at a brighter future.
"Zinc has had a profitable cycle only two out of every ten years on average in recent decades," Allen says, attributing the metal's historic poor performance to a myriad of small producers, swing production from Chinese mines and a general lack of industry consolidation. "It's the zinc smelters that make money, not the zinc miners."
Looking ahead, Allen sees good potential for zinc prices to improve because of the forecast closures of many major mines in the next five years, including Broken Hill and Century in Australia, Brunswick (Canada), Lisheen (Ireland), Skorpion (Namibia) and others, combined with recent closures of some large mines, notably Sullivan in Canada.
Yet only one major new zinc mine was recently brought into production: San Cristobal in Bolivia. (Sumitomo Corp. owns 100% of this high-altitude open-pit mine since the 2009 bankruptcy of its former junior partner, Apex Silver Mines.)
Allen sees a significant zinc supply gap "starting in 2011" that could spur better prices and prospects for zinc. Of the main deposit types, he believes sedimentary exhalative (sedex) deposits are the most worthwhile exploration target as they account for nine of the top 15 zinc producers as well as 65% of "future minable reserves and resources."
The list of past and present Sedex giants includes Sullivan, Century, Broken Hill and Teck's producing Red Dog mine in Alaska.
Skarn deposits similar to the producing Antamina mine in Peru represent "the second best choice," Allen adds, whereas volcanogenic massive sulphide (VMS) deposits are generally less attractive because they tend to occur in small lenses around a singular body and the best VMS belts are typically controlled by senior companies.
Mississippi Valley type (MVT) deposits once accounted for 19% of zinc production, but slipped to roughly 5% since the closures of the Pine Point, Polaris and Nanisivik mines (all in northern Canada) and smaller mines of this type elsewhere in the world.
Allen says zinc oxide deposits often "look good on paper" but typically have high capital costs and technical challenges that make them a less favorable target. As for the best hunting grounds for new zinc deposits, he rates Peru and Mexico highly, with other favorable areas including China, Australia, Russia's Far East, Ireland, the fringes of the Zambian Copperbelt and the unexplored U.S. side of the Sullivan basin. The Selwyn basin and Kechika trough in Western Canada host significant sedex deposits, but development has been hindered by a lack of infrastructure.
Dave Peck, president of Peck Geosciences and Exploration, believes the dearth of giant sulphide-nickel discoveries in recent decades was, and continues to be, the main driver of the industry's ongoing transition from sulphide to laterite-dominated supply.
But because of the dismal performance of many recently built laterite mines, traditional sulphide mines continue to occupy the lower part of the nickel cost curve, making this type of deposit a "best of breed" exploration target.
"The promise of cheap nickel coming from dirt is somewhere in the distance," Peck says, citing the recent failure of the Ravensthorpe nickel mine in Western Australia.
Technical problems contributed to the closure of Ravensthorpe, a US$2.1-billion nickel laterite mine that was recently sold by BHP Billiton (BHP-N) to a unit of First Quantum Minerals (FM-T, FGM-L) for the bargain-basement price of US$340 million.
Primary nickel production has long been sourced from a few nickel-sulphide districts, mainly Sudbury in Ontario and Norilsk in Russia. Similarly, primary platinum-group- metals (PGM) production remains geologically isolated mainly in Russia and South Africa.
Peck points out that there haven't been any major sulphide discoveries since the 1970s, with the exception of Voisey's Bay in Labrador in the early 1990s. He believes, however, that several emerging sulphide districts have potential for "company- maker deposits," which in turn could foster the emergence of new nickel-focused miners to replace those lost (Inco and Falconbridge) to recent industry consolidation.
One of those districts is the Cape Smith belt (Raglan district) in northern Quebec. Others are the Mid- Continent Rift system of North America (a 2,000-km belt from Kansas northeast to the Lake Superior region encompassing parts of Ontario and Michigan) and the circum-Tanzanian craton in East Africa, hosting Xstrata's (XTA-L, XSRAF-O) and Barrick Gold's (ABX-T, ABX-N) Kabanga nickel deposit.
Peck says it's no surprise that many projects in these emerging nickel districts were discovered or advanced by junior companies.
"For the first time, junior companies are becoming the dominant players in nickel exploration," Peck says. "They're likely to outstrip the majors in the near future."
Peck sees the presence of nickel-focused juniors as a positive development because of industry consolidation at the top, with 50% of nickel production from a handful of major miners. "There's room now for mid-cap to small-cap nickel producers."
Peck expects China and Indonesia to be major sources of supply, along with Cuba and other Caribbean production centres. But as Canada and Russia diminish over time, the Southeast Pacific region and Australia will emerge as important producers.
"That will be a big change in the market, introducing an element of risk not there in the past." As for future prices, Peck says: "The nickel business goes as Asia goes."
Peck sees good reason to be cautious with respect to price given the oversupply resulting from today's weak global economy. "There still needs to be an adjustment. Some high-cost producers may have to drop off the market to avoid price volatility."
Canada has the best potential in the world for "best of breed" uranium deposits, says Dan Brisbin, chief geoscientist for Cameco (CCO-T, CCJ-N), citing the high-grade unconformity- type deposits in Saskatchewan's Athabasca basin that have propelled Canada (and Cameco) into the world's largest uranium producer.
But with exploration driven by price, Brisbin says uranium booms have tended to be sporadic and short-lived, which is problematic for an industry known for the longest lead times to production. The first boom (1940s to early 1960s) was driven by military supply needs, whereas the second (1970s) was driven by government policies favoring commercial nuclear power, which came to an abrupt end in the early 1980s because of the escalating costs of reactors and antinuclear sentiment.
The most recent boom (late 2003 to 2008) was driven by a run-up in prices triggered by interest in uranium as part of the "green energy" mix of the future. Brisbin says more than 900 companies, mostly juniors, took part in this revival, with the number of projects jumping from about 100 in 1998 to 2,500-3,000 by 2007.
Brisbin says the variety of deposit types recently sought was far greater than in past booms, which focused on near-surface vein, sandstone, quartz-pebble conglomerate and volcanic deposits in the first phase and preferentially shifted to unconformity, sandstone and iron oxide copper-gold (IOCG) deposits in the second phase.
Brisbin says there are now at least 12 recognized uranium deposit types, some better than others. But he notes that many of the exploration projects pursued by juniors at the peak of the most recent cycle, including some non-traditional deposit types, have "low grades, refractory mineralization or complex metallurgy" or other risks that make them less attractive in today's tougher markets.
"Size and grade are not the only factors; there needs to be a holistic exploration evaluation that looks at mineralogy, continuity, host rocks, processing and mining."
With speculative fever all but over, Brisbin believes future uranium exploration will be limited to companies with specialized expertise, focused on areas with the best potential to host the next generation of mines. Along with high-grade unconformity deposits found in the Athabasca basin and similar basin settings, Brisbin believes sandstone uranium deposits amenable to in-situ recovery (as occur in the Western U.S.) have potential to become important producers. He also believes IOCG deposits will continue to attract exploration interest, albeit mostly by base-metal companies.
Brisbin points out that a supply gap in mine production has existed since 1985, with demand met by secondary sources that are now nearly exhausted. He says this could trigger another exploration cycle in the future if there is broad public ac ceptance of nuclear power as part of the global energy mix to help reduce reliance on fossil fuels.
"That's the big question affecting the future of this industry," Brisbin adds.
Of all the base metals, copper has enjoyed the largest production expansion over the past three decades, says Michael Doggett, president of HanOcci Mining Advisors.
"Global production has doubled from 1979 to about 16 million tonnes in 2008, with total output during this period accounting for 60% of the total copper ever produced."
More remarkably, Doggett says, is that the industry's finding cost for the net 472 million tonnes of reserves added over this 30-year period was a low "two cents a pound." (Not all of this was represented as new discoveries; the increase also reflects the addition of reserves generated from lower cut-off grades and larger economy-of-scale mines.)
Doggett expects copper production to double again in the next 30 years, based on recent and projected increases in demand from China and the developing world.
But as with gold, 20% of the world's copper mines produce 80% of the red metal.
This poses a problem, Doggett says, as resources and grades are declining at many of the world's largest copper mines, notably in Chile, the world's largest copper producer.
"These top ten mines would need to produce 1.1 million tonnes of copper each and every year to meet expected demand, and only one deposit ever did," Doggett says, referring to the Escondida mine in Chile. "We would need 11 Escondidas to reach the target.
"The problem is that it now takes an estimated 21 years on average to bring a new mine into production," he adds. "Something has to give in the system."
To meet demand and build a reserve base over the next 30 years will require focused exploration spending of more than $2 billion a year, Doggett estimates.
"That suggests prices will have to go higher," he adds.
Mark Selby, vice-president market development for Quadra Mining (QUA-T), told delegates that political constraints to copper exploration will likely continue for years to come, with some prospective parts of the world possibly off-limits entirely.
"I can't think of another metal more tied into politics, much like crude oil."
Selby reminded the audience that there was a time when the African Copperbelt dominated copper production, long before Chile and Peru emerged as the world's top two copper producers in the early 1990s. But he says Chile and Peru have slipped to a combined 40% of global copper production in 2008.
"They've got the easy stuff in Chile and Peru," Selby says. "They're struggling to increase production with zero growth despite four years of higher prices."
Head grades at large, established mines are also declining, Selby notes, citing a recent study that shows head grades have fallen 30% on average since 2000.
On the demand side, Selby says growth has averaged 2-3% since 1960, with variations up to 5% in parts of the cycle, with demand largely driven by the developed world in the past and shifting over time to the developing world.
"Copper demand in China has at least 80% growth left to reach the developed world average," he adds.
Copper recovery from scrap has risen sharply in recent years and kept the market in balance, but Selby says scrap "won't be the same buffer going forward."
Where will new supply come from? Selby says the African Copperbelt still has "high political risk," which is no surprise to companies who tried but failed to get projects off the ground in this volatile part of the world.
Africa's loss once again could be the Cordillera's gain, with several large copper-gold projects being permitted in B.C. and Alaska, and new mine development in higher and drier parts of the Andes.
Selby says other areas -- Central Asia, Vietnam, Laos, the Philippines, Indonesia and other parts of the Pacific Arc -- are highly prospective but not without political risk.
If copper has the best fundamentals of all base metals as these experts suggest, companies may be willing to take more risks and explore new frontiers, as Ivanhoe Mines (IVN-T, IVN-N) did when it ventured into Mongolia in 2000. Nine rocky years later, after defining one of the world's largest copper-gold porphyry deposits, the company and partner Rio Tinto (RTP-N, RIO-L) signed an agreement with the Mongolian government to build the Oyu Tolgoi mine in the South Gobi region.
John Thompson, Teck's vice-president of technology and development, says new exploration technology and mining and processing advances are also needed to address the challenge of resource scarcity and demand for new quality projects. "The end of the commodity boom will come when people can't afford the commodities."
--The author is a freelance writer based in Vancouver, and a former editor of The Northern Miner.
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