A competent, comprehensive and efficient exploration program is an important element in just about any mineral producer’s business survival plan. A recently released study by a major consulting group suggests that this crucial activity has weakened throughout the industry to the point of crisis.
The report, released by the Boston Consulting Group (BCG) in late June and titled Tackling the Crisis in Mineral Exploration, points out that from 2010 through 2013, the annual number of discoveries (excluding bulk commodities) declined by more than half, even after adjusting for discoveries yet to be drilled out. As shown in the accompanying tables presented in the report, the number of giant discoveries, which historically have accounted for the vast majority of the world’s metal supplies, has tapered off to only one or two per year despite a massive increase in exploration spending from 2010 through 2012. Even if some recent major discoveries ultimately mature to giant status, major discoveries on the whole will still have declined significantly.
The sharp decline in discoveries occurred despite a period of significant increases in exploration spending. At the height of the recent resources boom, average annual exploration expenditure grew by almost 40% to record levels. Although more money has been spent, fewer large discoveries are being made today than in the previous quarter century. The study cites estimates that the weighted average cost of base-metal discoveries nearly tripled, from $23 million from 1980 through 1989 to $64 million from 2000 through 2009.
Alexander Koch, a BCG partner and coauthor of the report, said that the crisis in mineral exploration has “flown under the radar” for much of the mining industry. “Since the end of the resources boom, most mining companies have now shifted their focus to productivity and cut back sharply on exploration spending, which has exacerbated the depletion of resources and reserves.”
Mineral discovery, according to Koch, is a key factor in superior value creation for shareholders. “The downturn in prices has highlighted the importance of mineral discovery—especially in greenfield settings—as a source of high-value deposits that can pay their way through almost all parts of the commodity cycle.”
Cyclical increases in drilling costs and the depletion of easy pickings only partly explain the discovery drought. To shed light on the more fundamental reasons for the exploration crisis, BCG said it worked with six of the world’s most illustrious ore finders—the individuals responsible for such historic finds as Minera Escondida in Chile, Oyu Tolgoi in Mongolia, and Olympic Dam and Cadia in Australia.
According to BCG, the exploration “legends” were unanimous in insisting that the crisis was not the result of external factors such as geology, industry economics or other macroeconomic forces. Nor does successful discovery depend on luck or funding. Leadership is paramount. Beyond that, four critical areas make the difference: exploration strategy (the operational approach to finding orebodies), exploration management (the principles companies follow in running exploration), innovation (in ideas and approaches as well as technology), and talent development and people management.
The following are among the observations presented in the report:
- Science (especially computer modeling) has its place, but it is no substitute for field observation and drilling.
- Risk-averse companies often forgo greenfield exploration in favor of brownfield exploration. But in doing so, they incur more risk than if they had balanced the two types of exploration in a portfolio approach.
- Exploration should be run as a profit center.
- Talent makes the critical difference in exploration success, yet many companies overlook the people management practices that are crucial to exploration success.
These conclusions correlate closely to opinions expressed by the exploration “legends,” who pinpointed practices in four critical areas that govern success:
Exploration Strategy–The strategy is the basic, but often overlooked, set of tenets for success with the drill bit. Exploration strategy encompasses the operational approach to finding orebodies by, for example, selecting larger deposit styles because they are easier targets or determining the appropriate spacing and number of drill holes or the depth of drilling.
Exploration Management–The principles companies follow to run the business of exploration effectively include approaches to funding and resource exploration activity, as well as the best ways to establish lines of reporting—and governance that offers adequate checks and balances—without obstructing exploration efforts.
Large and frequent changes to exploration spending are damaging the supply of mining talent, which only creates a vicious cycle. Ultimately, companies bear the cost of this volatility in the form of poor returns from exploration spending.
Innovation–The search for new ideas, approaches, and technologies in exploration targeting includes new techniques for finding and extracting ore. Techniques that reduce exploration and production costs confer competitive advantage.
The study points out that two new noteworthy techniques—3-D seismology and magnetotellurics—are extending the depths that are accessible by remote sensing from their current limits of about 500 m to several kilometers.
Having boosted exploration success rates in the oil industry, 3-D seismology is now being successfully applied to hard-rock targets. Magnetotelluric methods rely on Earth’s natural electrical, or telluric, currents to measure the electrical resistance of rocks from the surface to depths of hundreds of kilometers. The plummeting costs of data processing, along with the development of sophisticated 3-D modeling techniques, have unleashed the potential of this new tool.
New airborne electromagnetic (AEM) systems are also changing the way explorationists hunt for minerals. AEM uses airborne transmitters and receivers to create a 3-D picture of the conductivity of the subsurface and can quickly cover large tracts of ground. It provides rich information on the likely type of rock units, including highly conductive massive-sulphide minerals.
Talent Development and People Management–The decisions and actions needed to attract, develop, and retain the right people with the right skills include developing teams that provide a mix of skill, experience and instinct. The right team should include people who can counter the consensus view and are willing to take risks. It also refers to how the mining company structures its exploration department, including its use of contract geologists. The study’s exploration experts believe that exploration performance has suffered as companies have shifted away from mentoring young geologists to hiring contract geologists and retaining staff geologists only for the duration of a project.
Reliance on contractors has not only affected the quality of skills, but also has created a wider problem that affects the industry’s skill pool. In the past, companies would retain their teams during downswings. That’s no longer the case. For geologists, mineral exploration has become a riskier career choice. It seems that they have two options: either they work for contractors, where employment is uncertain, or they serve as staff at companies that don’t value maintaining an internal team or developing and mentoring their exploration personnel as they once did.
To optimize exploration, address the productivity challenge, and improve the long-term value of exploration to the corporate portfolio, mining companies should apply an integrated approach that addresses these four critical performance areas and recognize the ways in which decisions and actions in any one area can counteract (or augment) performance in the others. “Companies can thus prioritize interventions and apply organization resources in the most efficient, high-impact way,” explained Dale Schilling, a BCG principal and coauthor of the report.
“One of the key findings is that mining companies can turn their exploration performance around. Finding orebodies is not all about luck, and success is not unpredictable,” added Koch. “And while some companies struggle to replace depleted reserves, those that act in a countercyclical way that builds world-class exploration capabilities will be rewarded with disproportionate returns.”
