The Role of World-Class Mines in Wealth Creation
Richard C. Schodde, Jon M. A. Hronsky, 2005. "The Role of World-Class Mines in Wealth Creation", Wealth Creation in the Minerals Industry: Integrating Science, Business, and Education, Michael D. Doggett, John R. Parry
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Owing to the size (as measured in terms of contained metal) of world-class mines and their ability to create significant wealth, most mining companies are eager to discover and develop such deposits. This paper reviews current definitions for the term “world-class” deposits. The existing frequency- and size-based definitions do not capture the “essence” of the term. In its place, the authors propose an economic definition for gold, diamond, and base metal deposits that is based on achieving a minimum Net Present Value (NPV, at the decision-to-build stage) of $250 M in constant 2004 U.S. dollars. In turn, this minimum NPV is based on a discount rate of 7 percent after-tax. In practice, to meet this NPV target the deposit must contain at least 6 million ounces (Moz) of gold or 5 million tonnes (Mt) of copper-equivalent metal.
The size of the NPV threshold was based on studies of 143 major base metal, gold, and diamond discoveries made in low-risk countries over the period 1985 to 2003. The analysis showed that deposits above this threshold have special economic and geologic characteristics. Over the study period, only two world-class deposits were discovered on average in the world each year.
Of the 74 major base metal deposits studied, 14 percent of the total number of deposits were considered world-class and these deposits accounted for 32 percent of the total metal content, 60 percent of the total taxes paid and 67 percent of the total NPV created.
Similarly, of the 63 major gold deposits studied, 15 percent of the total number of deposits were world-class, and these accounted for 30 percent of the contained ounces and 53 percent of the total NPV. Clearly, much of the industry’s wealth is captured in a handful of (world-class) deposits.
Of the 19 world-class deposits studied, 11 are in production, three are under construction and five are under feasibility. By comparison, of the other 95 deposits evaluated, 62 are (or were) in production, seven are presently under construction, 17 are at the feasibility study stage and 39 are undeveloped.
In addition to the wealth generated for investors, world-class mines are of great importance to industry and society. The benefits include being a driver for creating new companies and funding additional exploration and innovation. They can also stimulate other (smaller) mines to open up in the area, and encourage ancillary industries and downstream processing.
The paper also assesses the employment aspects of world-class mines. An analysis of 22 prior economic studies demonstrates that world-class mines create nearly twice as many jobs in the general economy as other mines.
Given that the majority of the mining industry’s wealth is captured in a handful of (world-class) mines, it is these deposits that give the industry the best opportunity to make a positive and lasting impact on society. For this reason, the mining industry must continue to focus on finding and developing world-class deposits.
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Global political and economic developments shape both the demand for minerals and primary metals and their supply. Overall, demand has moved broadly in step with economic activity over the past 30 years. Notwithstanding the collapse of the Soviet Union and Eastern Bloc countries, demand grew more rapidly in the second half of the period than the first. The performance of individual products within this general trend largely reflects the specific nature of their main end uses. The geographic center of demand has shifted away from the mature industrial economies of North America, Western Europe, and Japan toward the newly industrializing countries of the Pacific Rim, China, and India. Mine production rose with demand, but not always in precise step. New capacity was required not just to meet demand, even where that was static, but also to offset the continuing effects of ore depletion. There were also changes in the location of production in response to geopolitical forces, the depletion of ore reserves, and the changing economics of extraction and processing. The number of mines contracted, especially during the 1990s, and the scale of mining operations was increased in order to achieve the requisite cost savings. Prices fluctuated in response to changing balances between supply and demand, trending downward from the early 1970s until the early 2000s. Most products witnessed at least one sharp price spike during the period, usually with continuing repercussions. Prices picked up from 2003, but generally not back to their earlier peak in real terms. Profitability varied according to the products concerned. In many years the average rates of return on capital employed have been insufficient to cover the risks involved.