Costs, Risks, and Returns of Copper Exploration: Assessing Trends in Discovery and Maturity with Particular Reference to Chile
Richard A. Leveille, Michael D. Doggett, 2005. "Costs, Risks, and Returns of Copper Exploration: Assessing Trends in Discovery and Maturity with Particular Reference to Chile", Wealth Creation in the Minerals Industry: Integrating Science, Business, and Education, Michael D. Doggett, John R. Parry
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Meeting the increased global demand for copper over the past several decades has required the discovery and development of significant numbers of new copper mines. An analysis of the copper industry during the period 1950 to 2004 is presented to highlight the role that exploration has played in maintaining a sufficient reserve base. On this basis, copper exploration has been highly successful, with net reserve additions nearly double primary production and 65 lb of copper being added to reserves for every dollar of exploration expenditure. Analysis of time trends within the overall period reveals that exploration performance dropped sharply during the last half of the 1970s and first half of the 1980s before rebounding in the 1990s and beyond. A more detailed economic analysis of the deposits discovered and developed during the 1992 to 2004 period indicates that the mean and median discounted returns to development were above breakeven. When the cost of exploration is added, the returns to the industry overall are below breakeven. Only the best 26 percent of deposits could cover the average cost per deposit of discovery, delineation, and feasibility. Given the important role that Chile has played in the expansion of the copper industry, special attention is given to exploration analysis in that country. From 1970 to 2004, copper exploration in Chile has been highly effective in replacing production and adding new reserves. Time-trend analysis indicates, however, that returns to exploration have been in decline since peaking in the early 1980s. In spite of this decline, Chile outperforms the rest of the world, as evidenced by a comparison of returns to development and to exploration over the 1992 to 2004 interval.
While the returns to development in Chile were only slightly higher than those for the rest of the world, the returns to exploration were significantly higher due to the lower discovery cost for Chilean 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.