The previous articles in this series covered Australia's major minerals, from iron ore to copper. We will now take a closer look at the life-cycle of a mine.
It is a long and hard road for a mine to progress from the exploration stage to actually mining a mineral. Time is measured in decades, costs can be measured in billions of dollars, and each mining operation is unique. This is a high-risk, but potentially high-return process.
Development of new projects and the acquisition of existing projects or companies are two of the ways mining companies, including Newcrest Mining Limited (ASX: NCM) and Rio Tinto Limited (ASX: RIO), have tried to increase shareholder value in recent times. The problem is that mining companies have a terrible track record in both departments.
Over the past 5 years, Newcrest and Rio Tinto have booked up huge impairments on recently acquired assets including Newcrest's Lihir gold mine and Rio Tinto's Alcan business, destroying billions of dollars of shareholder value.
When mining companies develop their own projects the end result isn't any better. A recent report (PDF) by accounting firm Ernst & Young (EY) found that 74 of the 108 surveyed mining megaprojects – those with a cost over $1 billion – resulted in an average budget overrun of 62%!
The Life Cycle of a Mine
The typical life cycle of a mine consists of 6 key stages: (1) Generative exploration; (2) Primary exploration; (3) Evaluation; (4) Mine development; (5) Mine production and (6) mine closure and rehabilitation.
1. Generative exploration is a desktop study with minimal field work. Geologists probe public and private geophysical data such as seismic, magnetics, satellite images and contour maps for potential targets. Field mapping, prospecting and sampling programs are then conducted on promising targets.
2. Primary exploration involves drilling out the target location to delineate likely zones of mineralisation. Drill cuttings will be sent to the laboratory for assaying for geochemical analysis. The main aim is to broadly define the limits of the mineral deposit.
There are hundreds of small mineral exploration companies listed on the ASX still searching for that elusive company-making deposit such as Orion Gold NL (ASX: ORN) which has a market capitalisation of just $10 million.
3. Once a mineral deposit is identified, Evaluation begins with a scoping study and ends with a feasibility study on which a final investment decision is usually made.
The evaluation stage is often lengthy for large mining projects. Newcrest commenced a scoping study for their Wafi-Golpu gold project, located in Papua New Guinea in 2009 and it has only recently progressed to final feasibility, 6 years later! If all goes to plan, production is estimated to begin in 2020.
Scoping studies are typically the first broad economic evaluation of a project and aim to highlight any technical issues that will require specific attention in the upcoming studies.Pre-feasibility and feasibility studies are comprehensive studies which consider the technical and economic viability of a mining project including the mine design, production schedule, operating costs, processing plant design and performance, and expenses.
The Chinese company CITIC Limited demonstrated how quickly things can change between the feasibility and production stages. Their Sino Iron Project located in Western Australia had an initial budget of $2.5 billion but was completed at a cost of $10 billion and three years late!
4. Development of the project begins after the necessary regulatory permits and licensing have been obtained. This involves the construction of the infrastructure required for a fully operational mine. Critical components include site access and services, mining production and crushing facilities and ore handling facilities.
5. Production processes vary significantly depending on each individual mine but typically involve controlled blasting, hauling, crushing and processing of the mineral ore. The final product is then transported off-site.
6. Mine closure and rehabilitation aim to return the land to a state similar of that before mining commenced. This stage can be extremely costly depending on the extent of environmental damage and remediation required. Recently, South32 Ltd (ASX: S32) was spun-off from parent BHP Billiton Limited (ASX: BHP) and had an initial closure and rehabilitation liability of approximately $1.5 billion.
Mount Gibson Iron Limited (ASX: MGX) recently provided an example of how not to close a mine. In 2014, the main pit at their Koolan Island mine flooded when the seawall between the pit and the surrounding ocean gave way. The end result is a huge crocodile infested swimming pool which cost Mt Gibson $844 million.
Summary
The life cycle of a mining project is an excruciatingly long process. Companies rarely have enough information and many of the factors used in feasibility studies are unable to be fully tested until after production has started. Overly optimistic feasibility studies often lead to projects costing significantly more and producing significantly less than the initial budget.
The next article in the series will cover a closer look at mining operations including the differences between mineral reserves and resources.
