Mineral Exploration – when it is thought that counts

Market talk at the moment is seeing a high proportionate content on exploration.  Being as we are at the start of a new cycle, coming out of a bust, exploration expenditure has collapsed.  This is understandable given the state of commodity prices – across the board falls have made exploration budgets the hardest of all to justify in mining where the focus has been aggressive cost reduction.  In times such as these it is easy to forget the integral nature of exploration to mining – you can’t mine if you don’t find. 

In Australia especially, this is against a backdrop of longer term declining exploration success, a trend which often leads to two recurrent themes. I disagree with both:

• Australia is mature with respect to exploration
• Major miners should spend more on exploration

Both statements say something about how exploration culture has evolved over the last couple of cycles.  I believe the re-emergence of a mid-tier of miners in Australia provides an ideal environment for exploration to take place.

Australia is mature with respect to exploration

My position on this statement is that it is plain wrong.  Any sense of pessimism towards the future of mineral exploration in Australia is not shared by me.

It is true that the top 100m or so of Australia has been explored, reasonably well, over most of it.  Over 164 years (since the discovery of gold in 1851), prospecting and exploration has demonstrated that Australian geology is tremendously rich in minerals.  Much of it has been at or close to the surface.  Many of Australia’s largest mineral deposits were prospecting finds – betrayed by a surface expression and discovered by an observant but otherwise non-technical explorer.  So it is fair enough to presume that the easiest finds have all been made.  There are still shallow regions that are relatively unexplored due to a surface impediment, geological paradigm, long term ownership or a perception that historic work has been effective in testing for mineral abundance.

Beneath 100m or so however, most of Australia is untested, and there is absolutely no reason to presume it is any less prospective than the top 100m – the challenge is seeing through and penetrating the cover.  There is a perception issue that a deposit does not exist until it is found.  Tools to generate targets at depth are improving, but are nowhere near as good as being able to map actual rocks.  This, unfortunately, is now a fact of life.  Fortunately (call me parochial), Australian geologists are well renowned as explorers, with substantial collective knowledge in regolith development, geophysics and structural modelling, so envisioning targets that are out of sight is not an insurmountable academic exercise.

Allegations of Australia’s exploration maturity are not new.  However the last 20 years have shown that there is still much to be found in Australia.  Thanks to a remarkable (once in a life time ?) spike in iron ore prices, substantial drilling took place to delineate enormous resources of iron ore, particularly in the Pilbara region of WA.  True, many were previously known occurrences, but the point is these were new and shallow and (at the time) valuable new resources, freshly delineated.  DeGrussa (Sandfire), Nova-Bollinger (Sirius) (what is it with companies that have ASX codes starting with “S” and ending in “R” ?), Tropicana (Anglogold / Independence) are three examples of stunning, genuine company making discoveries within the last ten years – all under cover. 

In addition to new discoveries, I am personally incredibly optimistic about brown fields discoveries.  History is littered with examples of deposits that produce well beyond their original reserves, and this is an area where exploration technology advances could produce the biggest potential benefit.  High sensitivity geophysics, 3D seismic and sophisticated geochemistry are great for detecting subtle anomalies, but still ultimately require a drill hole to make a discovery.  When used in the near mine environment, the confidence to drill comes from extrapolating very high confidence information (ie the mine) into these subtle features, and I believe the sustained application of such techniques is likely to lead to step changes in the understanding of known deposits.

Major miners should spend more on exploration

The mining industry is driven by exploration: If you don’t explore you don’t find, if you don’t find you don’t mine.  Even so, there is not the level of symmetry you might expect between the size of a mining company and its expenditure and effort in exploration.  Many died in the wool explorers maintain that the major miners don’t do enough exploration (ie their fair share), which is an argument that gets a fair degree of sympathy.  However it misses the point of the culture that is required to support an exploration effort which often does not exist within the kinds of businesses that major miners have become.

Exploration is driven by knowledge, not by spending money – although this is not necessarily the way the entire industry embraces it.  Successful exploration is driven by knowledge, which is accumulated over time.  In this instance, “knowledge” encapsulates data collected from drilling, mapping, sampling, etc, but also crucially interpretation which is stored in the collective consciousness of the people in a team.  However, even knowledge is ineffective if the exploration champion is not at the strategy table with company decision makers and exploration is a key plank of the future growth of the company.  The greater the distance between decision makers and exploration champions, the more exploration becomes a cost centre and less of a core function. 

As good as knowledge is, there is also a degree of budget flexibility and discipline that is required.  Exploring on a shoe string often means the crucial holes don’t get drilled.  Equally though, a wanton approach to expenditure can lead to pattern drilling – which feeds poor information back into the knowledge tank.

Major miners probably under do their investment in exploration given the ground positions they hold, but that said undertaking exploration is not a moral obligation, it is a business decision, and smart companies tend to invest where they see their strengths.  There are exceptions, but broadly speaking major miners are more like investment banks than mining companies, driven by financial and strategic considerations.  Over time the majors have found that it is less risky to buy out junior companies that have an appealing project than it is to explore for themselves.  Probably because of this, exploration departments in majors have shrunk (or at least, not grown), exploration champions have been marginalised, and exploration has become more of an outpost than a core function.  

At the other end of the capitalisation spectrum, junior and micro-cap miners are a bunch generously characterised by a high degree of entrepreneurial flair.  Often in these companies there is a wonderful opportunity for deployment of knowledge into exploration ideas, and the organisation is commonly led by an explorationist.  Unfortunately though, purse strings of juniors are usually (non-negotiably) tightly drawn, which means that there is a short window for success to take place.  Discovery is an iterative process of target generation, testing, re-interpretation, testing, etc.  Juniors depend on a success quite early in this process, as their supporters may be quick to lose interest and patience. 

There have been instances where a major has funded a junior to explore, the philosophy being to combine a ground position with a focussed exploration vehicle.  The flaws in this model are that many junior companies lack the ability to take the risks a major miner would in exploration (eg drilling deep holes), so the resultant program may not suit the major who is sponsoring the work.  The junior after all will have other shareholders, and needs to attend to future funding, so there is often misalignment of interests.  This model has not shown as much success as other ownership structures for exploration.

Major miners have a part to play in enabling work on ground they control, but arguably have lost the culture required to be successful explorers, because of their size.  Both juniors and majors lack the balance between knowledge, funding and investor patience.  Generally, the best balance between knowledge and expenditure occurs in the mid-tier miners. 

Resurgent mid-tier

Over the course of the last 15 years, we have witnessed the disappearance of most of Australia’s mid-tier mining institutions (MIM, WMC, Acacia, Delta, Pasminco, Great Central, Normandy, etc) into majors and with them decades of accumulated exploration knowledge.  Within the major miners, exploration champions who might have presided over a strategy and stable team for many years, lost their direct link to the company decision makers, and in many cases, departed the organisation altogether.  The potentially powerful knowledge base has sadly has fallen into disrepair.

There has been a long delayed passing of the baton from companies that previously led the way in making new discoveries of Australia’s mineral wealth, to those that can now take their place.

The relatively fresh faced Australian mid-tier includes the likes of Northern Star, Evolution, Sandfire, Oz Minerals, Western Areas, Independence Group, (to name a few) and there are a number of others that may either develop or merge their way into this group.  Some owe their success to an exploration discovery, and appear to have the culture, financial capability and willingness to lead the charge into the next era of Australian exploration success.  The opportunity, which is theirs to embrace, is that these companies have the cash flow and longevity of existing assets coupled with established exploration teams, to invest time and funds growing a knowledge base in order to lead them to economically important finds.

The discussion of exploration maturity of Australia’s geology often takes place against a backdrop of declining exploration success globally.  There is almost certainly a relationship between exploration maturity and discovery rate.  However, there are also numerous examples from history of discoveries created by a technological breakthrough or radical change of thinking, often within a region thought to be “mature”.  Discovery rate in these situations is related to geological occurrence (it must exist in order to be found) combined with the existence of a creative and intelligent thought process usually, but not as a rule, coupled with a supportive funding arrangement.

We are now in the early stages of a new mining cycle, and the mid-tier has been the earliest beneficiary of this in Australia, being the recipients of most market interest to grow through acquisitions.  I have often wondered if a decline in discovery frequency was related to a decline in the number of “ideal” exploration enablers (which in my view are the mid-tier miners).  Given we are only recently seeing a resurgence of a genuine mining mid-tier in Australia, it will be fascinating to see if a renaissance of exploration thinking within these groups leads to a change in the discovery trend.

A shortened version of this article appeared on MiningNewsPremium.net on 23 July 2015