MinEx Consulting Strategic advice on mineral economics & exploration The impact of commodity prices and other factors on the level of exploration Richard Schodde Managing Director, MinEx Consulting Adjunct Professor, University of Western Australia CET Seminar Series Centre of Exploration Targeting, University of Western Australia 28 th November 2013, Perth
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MinEx Consulting Strategic advice on mineral economics & exploration
The impact of commodity prices andother factors on the level of exploration
Richard SchoddeManaging Director, MinEx Consulting
Adjunct Professor, University of Western Australia
CET Seminar SeriesCentre of Exploration Targeting, University of Western Australia28th November 2013, Perth
MinEx Consulting Strategic advice on mineral economics & exploration
Introduction
1. Trends in exploration spend
2. Significant discoveries in the last decade
3. Discovery performance
4. What drives exploration spend?Rising demand for metal
Commodity prices
Availability of funds
New exploration ideas & discoveries
Changes in Country Risk
5. Special challenges for Australia – depth of cover
6. Future Exploration spend
7. Summary / Conclusions
2
MinEx Consulting Strategic advice on mineral economics & exploration
1. TRENDS IN EXPLORATION SPEND
Exploration expenditures reached an all-time high in 2012
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MinEx Consulting Strategic advice on mineral economics & exploration
Exploration expenditures: Worldby Region : 1975-2012
$0
$5
$10
$15
$20
$25
$30
1975 1980 1985 1990 1995 2000 2005 2010
Rest of World
FSU + E Europe
China
Western Europe
Africa
Pacific / SE Asia
Latin America
USA
Canada
Australia
4
2012 US$ billion
Note: “Rest of World” refers to, Mongolia, Middle East andSouth West Asia (including India and Pakistan)
MinEx Consulting Strategic advice on mineral economics & exploration
$0
$1
$2
$3
$4
$5
Mar-90 Mar-95 Mar-00 Mar-05 Mar-10 Mar-15
Exploration spend in AustraliaAll Commodities: March 1990-June 2013
7
Total Expenditures (June 2013 Australian $B)
Source: ABS Cat No. 8412.0Note: Data reported on an annualised basisIncludes exploration expenditures on Bulk Minerals (such as coal, iron ore and bauxite) and Uranium
MinEx Consulting Strategic advice on mineral economics & exploration
Most of the increase in exploration spend in recentyears was associated with Bulk Minerals
Level of exploration by Commodity in Australia: March 1990-June 2013
$0
$1
$2
$3
$4
$5
Mar-90 Mar-95 Mar-00 Mar-05 Mar-10 Mar-15
Other - Bulk
Coal
Iron Ore
Other - Non Bulk
Diamonds
Uranium
Base Metals
Gold
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Total Expenditures (June 2013 A$B)
Source: ABS Cat No. 8412.0Note: Data reported on an annualised basis
Excluding Bulk Minerals,exploration in Australia
has been subdued
Excluding Bulk Minerals,exploration in Australia
has been subdued
MinEx Consulting Strategic advice on mineral economics & exploration
Bulk Minerals now makes half of total spendLevel of exploration by Commodity in Australia: March 1990-June 2013
0%
20%
40%
60%
80%
100%
Mar-90 Mar-95 Mar-00 Mar-05 Mar-10 Mar-15
Other - Bulk
Coal
Iron Ore
Other - Non Bulk
Diamonds
Uranium
Base Metals
Gold
9
Percentage of Total Expenditures
Source: ABS Cat No. 8412.0Note: Data reported on an annualised basisIncludes exploration expenditures on Bulk Minerals (such as coal, iron ore and bauxite) and Uranium
10%
54%
There has been a dramatic shiftto Bulk Minerals in Australia
There has been a dramatic shiftto Bulk Minerals in Australia
MinEx Consulting Strategic advice on mineral economics & exploration
2. SIGNIFICANT DISCOVERIES INTHE LAST DECADE
Where were the discoveries made?
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MinEx Consulting Strategic advice on mineral economics & exploration
Significant discoveries in the world by Size: 2003-2012
MinEx Consulting Strategic advice on mineral economics & exploration
3%
Most of the wealth created are inTier 1 and 2 discoveries
Estimated value of 559 discoveries found in the World between 2003-2012
0%
20%
40%
60%
80%
100%
Number ofDeposits
NPV
18
Tier 1
50%
35%
12%
29%
2%
32%
Note: NPV values refer to the Net Present Value at the Decision-to-Build stageEV = Expected Value, which is the weighted average value of the NPV rangeValues are based on long run commodity prices as prevailing at Jan 2013
Caution: Values are indicative / approximate-only
‘Tier 1 deposits’ are Company making" mines.They are large, long life and low cost. … ie >20Years ,>200 ktpa Cu or >250koz pa Au, andBottom Quartile costs. Have an NPV of>$1000m, and EV of ~$2000m
‘‘Tier 2 deposits’ are “Significant” deposits -but are not quite as large or long life or asprofitable as Tier 1 deposits . They have anNPV of $200-1000m and EV of ~$500m
‘Tier 3 deposits’ are small / marginal depositsWhile they can be profitable they often only getdeveloped at the top of the business cycle . Atthey don’t meet more than one of the Tier 1 or 2criteria. NPV of $0 to $200m, EV of ~$100m
Definitions
Example: Golpu [Coppper/Gold]
Example: Degrussa [Cu-Zn-Pb]
Example: Andy Well [Gold]
Tier 2
Tier 3
Unclassified
Tier 1
Tier 2
Tier 3
‘Unclassified deposits’ are small depositsthat are less than “Major “in size and/or ofminimal value. EV of (say) ~$10m
Example: Mt Unicorn [Moly]
37%
Unclassified
MinEx Consulting Strategic advice on mineral economics & exploration
How do the various Regions compare?Spend & performance by Region: 2003-12
MinEx Consulting Strategic advice on mineral economics & exploration
4. WHAT DRIVES EXPLORATION SPEND ?
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MinEx Consulting Strategic advice on mineral economics & exploration
Key Drivers for Exploration spend
The main drivers are :
• Commodity price
• Availability of funds (to Junior Companies)
• Long term growth in metal demand
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MinEx Consulting Strategic advice on mineral economics & exploration
Key Drivers for Exploration spend
Secondary drivers include :
• New discoveries … such as Voisey Bay and Ekati, and failures like Bre-X
• New geological concepts and search techniques… such as the copper porphyry model, development of airborne GeoPxsystems
• New processing technologies, which make lower grade orebodies economic … such as Au CIP in 1970s, Cu SXEW in the 1980s,
PAL NiLat in the 1990s and bio heap leaching for base metals in the 2010s?
• Government Policies … such as flow-through tax credits in Canada.Conversely the introduction of new royalties or Carbon Taxes may makesome mines uneconomic or scare away investors (like in Australia)
• Changes in business risk … such as the opening up of the DevelopingWorld or, conversely, the threat of nationalism in Venezuela
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MinEx Consulting Strategic advice on mineral economics & exploration
4.1 RISING DEMAND FOR METAL
Why we need more exploration
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MinEx Consulting Strategic advice on mineral economics & exploration
World’s metal production doubles every 20-25 yearsPrimary copper production: 1900-2040
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Mt pa Cu
Source: Historical data fromUSGS Jan 2013
Cumulative copperproduction for all history
(1000BC to 2012 AD)= 611 Mt Cu
Cumulative copperproduction for all history
(1000BC to 2012 AD)= 611 Mt Cu
Forecast cumulativedemand over next 25 years
(2013-2037)= 638 Mt Cu
Forecast cumulativedemand over next 25 years
(2013-2037)= 638 Mt Cu
Forecast DemandBased on 3% pa growth
Historic DemandAverage growth rate of3.0% pa over last 20 years
17.0 Mt pain 2012
35.6 Mt pain 2037
Need to discover anddevelop new mines
Need to discover anddevelop new mines
MinEx Consulting Strategic advice on mineral economics & exploration
The challenge is that most discoveries are toosmall / low grade to develop as an economic mine
Tonnes & Grade of all primary copper deposits in the world containing >500kt Cu
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Grade (% Cu-equivalent)
Pre-Mined Resource (million tonnes)
Source: MinEx Consulting Sept 2010
Envelope foreconomic mines
Envelope forundeveloped projects
MinEx Consulting Strategic advice on mineral economics & exploration
4.2 COMMODITY PRICES
Exploration spend is strongly driven by price
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MinEx Consulting Strategic advice on mineral economics & exploration
Exploration spend vs Commodity Price: Australia 1997-2012
With adjustments for otherfactors (such as thegeneral growth in metaldemand and theavailability of risk capital),this can be used as a toolfor predicting futureexploration spend
MinEx Consulting Strategic advice on mineral economics & exploration
Why were the 1970s different for gold?
Exploration spend lagged the gold price because of:
• Inertia (it took time for the industry to respond to the higher prices)
• Innovations (in 1980s new processing methods were developed(CIP/ HL), new exploration techniques (AA Spectrometry enabledgeochem sampling) and new financing methods (gold loans)
• Geopolitics (the end of the Cold War in 1989 dramatically openedup Russia and Developing Countries to modern exploration. Asimilar take-off occurred in China in the 1990s following theEconomic Reforms implemented by Deng Xiaoping)
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MinEx Consulting Strategic advice on mineral economics & exploration
Exploration spend – actual versus predicted and forecastWorld Mineral exploration expenditures
MinEx Consulting Strategic advice on mineral economics & exploration
… and we are exploring under deeper coverDepth of cover for discoveries in Australia: 1900-2013
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Discovery Year
Depth of Cover (Metres)
Note: Excludes satellite deposits within existing Camps. Also excludes Bulk Mineral discoveries..Analysis based on Moderate-, Major- and Giant-sized deposits
MinEx Consulting Strategic advice on mineral economics & exploration
7. SUMMARY / CONCLUSIONS
The industry is facing a number of challenges and opportunities
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MinEx Consulting Strategic advice on mineral economics & exploration
Summary / Conclusions [1/2]
1. Trends in exploration spend
Exploration spend peaked at $30 billion in 2012
Industry is highly cyclical (Peak>Trough of 50-70%)
Half of exploration spend in Australia is on Bulk Minerals
2. Significant discoveries in the last decade
559 significant discoveries made
but only 15 of these were Tier1, and 69 Tier 2
3. Discovery performance
Our discovery efficiency has declined in recent years.This is due to higher input costs
In terms of Value/Cost Australia did well, Africa best
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MinEx Consulting Strategic advice on mineral economics & exploration
Summary / Conclusions [2/2]
4. What drives exploration spend?
Main factors are commodity prices and the availability offunds. At a local level spend will be influenced by newexploration ideas & discoveries, as well as country risk
5. Special challenges for Australia – depth of cover
Average depth of discovery is now 82 metres and risingDrilling is very inefficient (20,000 km per giant !!)
6. Future Exploration spend
Based on long-run commodity prices, global explorationspend will level out at ~ 28% below 2012 peak.
In the short-term, the level of spend will remain volatile
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MinEx Consulting Strategic advice on mineral economics & exploration 61
Contact details
Richard SchoddeManaging DirectorMinEx ConsultingMelbourne, Australia