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AN ECONOMIC PERSPECTIVE ON DEEP
AND UNDER COVER EXPLORATION:
What are we looking for and how do we
get there?
Allan Trench...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
We all bring biases to looking at indu...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
Personal perspectives (bias) on the de...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
WHAT ARE WE LOOKING FOR?
QUALITY NEW D...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
What can mineral economics contribute?...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
We don’t yet understand grade effects ...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
...and if we don’t fully understand gr...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
...what we do know however is that gra...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
And we also know that falling grades o...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
Declining grades are likely – so the e...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
... despite the ‘future is underground...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
…that said, Australia must focus on de...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
What is the cost of going deeper? With...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
In Cu, underground mines are cost
disa...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
Geology (geometry, style), commodity v...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
…with deeper developments more typical...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
HOW DO WE GET THERE?
BETTER UNDERSTAND...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
A case study of ‘geological-economics’...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
Australian gold: About 50 mines with c...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
How do you think a production cost ver...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
It is actually not that simple:
High g...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
So what drives relative costs if not g...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
What about mineralisation-style then?
...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
Disseminated mineralisation appears
im...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
Geometry clearly matters too: Lower
co...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
Contrasting geometries means that we l...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps 19 Feb 2015
An Economic Perspective on...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
WHERE TO NEXT?
An economic perspective...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
So is a new underground target better
...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
First convert resource to reserve…
0
1...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
…then consider mining losses…
0
1000
2...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
…then consider processing losses…
0
10...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
…and mining over several years…
0
1000...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
…not forgetting operating costs…
0
100...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
…and capital costs for a project…
0
10...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
In the end there’s little difference?
...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
Where mineral economists will likely
m...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
A final word on the road ahead….
“What...
THANK YOU
For more information:
Centre for Exploration Targeting: www.cet.edu.au
Contact information:
John P. Sykes: johnp...
FURTHER READING
• Kanakis, M.D., 2014. Grade Expectations – Australian Gold Mines defy the ‘Grade is King’ Cost
Hypothesis...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
BACKUP – BROADER RISK
DISCUSSION
An ec...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
What does economic mean nowadays?
You ...
ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps
Actually… it’s quantity and a more
sub...
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Economic perspective on deep and under cover exploration - Trench et al - Mar 2015 - Centre for Exploration Targeting / Curtin University / University of Western Australia

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Economic perspective on deep and under cover exploration - Trench et al - Mar 2015 - Centre for Exploration Targeting / Curtin University / University of Western Australia

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Economic perspective on deep and under cover exploration - Trench et al - Mar 2015 - Centre for Exploration Targeting / Curtin University / University of Western Australia

  1. 1. AN ECONOMIC PERSPECTIVE ON DEEP AND UNDER COVER EXPLORATION: What are we looking for and how do we get there? Allan Trench12, John P. Sykes12 & Matthew Kanakis23 1. Department of Mineral & Energy Economics, Curtin University 2. Centre for Exploration Targeting, Curtin University & University of Western Australia 3. Consultant, KMPG, Perth WA 6000 ASEG-PESA 2015 Workshop Geophysical signature of mineral systems; more than bumps Perth, Australia: 19th Feb 2015 GEOPHYSICS
  2. 2. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps We all bring biases to looking at industry issues…. including this one* • Geophysicist then Mineral Economist • Nickel/Gold bias – Kambalda, St Ives, Leinster/Mt Keith, Super Pit – Underground EM mine/exploration ‘revolution’ – Gold/nickel division contrasting performances • McKinsey – management perspective • Woodside – petroleum perspective • CRU Group – initial focus on managing copper – cost analyses of operations and projects • Academic – ‘What do we really know’ perspective • So an Australian bias – nickel & gold underground bias - and more recently Chile/copper bias 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? *Trench Slide 2 of 43
  3. 3. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps Personal perspectives (bias) on the deep exploration and development challenge…. • It is possible to make any project look simple on a spreadsheet • Reality is far more complex • Most spreadsheet cost models have an underlying and linear ‘sanctity of grade’ built in • Ore geometry and scale effects are as important – especially between mines • Cost modelling gets underground ‘wrong’ more often than for pits • Economics suffers some similar ambiguity challenges to geophysics – i.e. multiple solutions are possible using different costs and shapes • Mine economics can suffer the same ‘black box’ challenges as for geophysics – e.g. understanding what is really being measured in a model, and the multiple definitional issues of reported costs • Bias towards real data and factual analogues over model-only solutions: Model simplicity can be good (being wary of the ‘sanctity of grade’ trap) 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? *Trench Slide 3 of 43
  4. 4. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps WHAT ARE WE LOOKING FOR? QUALITY NEW DISCOVERIES An economic perspective on deep and under cover exploration 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Slide 4 of 43
  5. 5. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps What can mineral economics contribute? • What are we looking for? Quality new discoveries – Future precious and base metals discovery at depth more so than bulks – What ‘quality’ really means (or otherwise) in Copper, Nickel & Gold as examples • Sometimes quality will be deep and high-grade, but not always • Quality may be deep, low-grade, but scalable for example • How do we get there? Better Understanding – Through a clearer understanding of the impact of grade, scale, mineralisation-style and geometrical effects on mine economics • The excellent case study of Australian Gold Mine ‘geological economics’ (Kanakis (2014) • Where to next? We need to get to first base yet – Where mineral economists will likely mislead you (and fool ourselves too) – Some high-level project economics from in-ground discovery to out-of-ground value creation – So much more fact-based and modelling work ahead 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Slide 5 of 43
  6. 6. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps We don’t yet understand grade effects on economics – in pits or u/g – although it looks simple 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Grade Enhancement Near Surface Mined First Low grade High grade (blind) Enrichment zone General grade decline with depth Surface So Grade Must Fall Over Time....and costs rise? Enriched cap High grade pod Mine design brings this forward % Cu (eq) GEOLOGY Preferential ‘Bring-Forward’ of High Grade High grade taken first Pit outline 2013 MINING High Prices ‘Creates’ Low Grade Ore ECONOMICS Economic low-grade Final pit outline Slide 6 of 43
  7. 7. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps ...and if we don’t fully understand grade-economics then we have a major problem: Grades vary a lot... 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% <0.5% 0.5 - 0.8% 0.8 - 1.0 1.0 - 2.0 2.0 - 4.0 Cu ore grade IOCG Nickel-copper sulphide Porphyry Sedimentary copper Strata bound VMS Copper deposit type & ore grade (N = 208 projects) CRU, MEG Slide 7 of 43
  8. 8. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps ...what we do know however is that grades generally fall over time e.g. in copper 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? 0.5 0.6 0.6 0.7 0.7 0.8 0.8 0.9 0.9 1.0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Forecast of ore grades at currently operating mines Average ore grade in 2012: 0.65% Cu Average ore grade in 2022: 0.60% Cu Average ore grade in 2002: 0.81% Cu % Cu Slide 8 of 43
  9. 9. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps And we also know that falling grades of themselves do not drive higher prices in real terms… 0 2000 4000 6000 8000 10000 12000 14000 Long Term Real & Nominal Copper Prices: 1914-2013 (US$/tonne) Nominal Copper Price Real Copper Price Average Real Copper Price 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Source: Sykes & Trench, 2014; Data from United States Department of Labour (2014); Historical nominal copper prices 1914-2011 from the United States Geological Survey (2012) and 2012-13 from Metal Pages (2014) Slide 9 of 43
  10. 10. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps Declining grades are likely – so the economics of mining of lower grades matters.. 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? 0 0.5 1 1.5 2 2.5 3 DR Congo Zambia Russia China Australia Canada Peru Chile United States Mexico Grade of exploration projects in top 10 copper producers (%Cu) CRU Consulting analysis of MEG data (Active Exploration Projects) Slide 10 of 43
  11. 11. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps ... despite the ‘future is underground’ not being universal – e.g. pits still dominate Cu pipeline 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Source: CRU, MEG Open pit 100% Underground 100% DRC Peru USA Russia Chile Canada Mexico Zambia Australia China Production & Pre-production Open pit 100% Underground 100% DRC Peru USARussia Chile Canada Mexico Zambia AustraliaChina Feasibility Slide 11 of 43
  12. 12. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps …that said, Australia must focus on deep exploration and development – or risk being left behind.. 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 New Cu Project Annualised Production Capacity Potential* Data: MEG, CRU *Advanced Cu Projects only (excludes Olympic Dam expansion) Bars depict cumulative final design capacity tonnages by country Slide 12 of 43
  13. 13. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps What is the cost of going deeper? With lots of stripping, open pits soon become expensive 0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 OpEx (US$/t ore) 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? 0 50 100 150 200 250 300 CapEx (US$ million/t ore capacity) Costs based on 10,000 tpd capacity, estimated from CostMine, 2014 Slide 13 of 43
  14. 14. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps In Cu, underground mines are cost disadvantaged versus pits (in contrast to Ni) 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Copper costs - Net of by-product cash costs by mining type, 2014, $/t Data: CRU -5,000 0 5,000 10,000 15,000 20,000 0 2,000 4,000 6,000 8,000 10,000 12,000 Underground Open Pit Mixed Slide 14 of 43
  15. 15. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps Geology (geometry, style), commodity value and ore value (grade) influence mine development choice 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Open Pit Open Pit & Undergound Underground Other Unknown 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Data: RMG Other: Either tailings, placer or offshore operations (or in-situ leach for uranium) Slide 15 of 43
  16. 16. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps …with deeper developments more typical for precious metals over base and bulks Platinum Open Pit Open Pit & Underground Underground Other Unknown Other: Either tailings, placer or offshore operations (or in-situ leach for uranium) Nickel Open Pit Open Pit & Underground Underground Other Unknown Iron Ore Open Pit Open Pit & Underground Underground Other Unknown Data: Raw Materials Group 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Slide 16 of 43
  17. 17. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps HOW DO WE GET THERE? BETTER UNDERSTANDING An economic perspective on deep and under cover exploration 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Slide 17 of 43
  18. 18. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps A case study of ‘geological-economics’ and the challenges facing Australian gold 0 2 4 6 8 10 12 1989 1994 1999 2004 2009 Millionsofounces Australian Production of Gold (1989-2013) 0 200 400 600 800 1000 1200 1400 1600 1800 USD/ounce Increases in costs over time Growth Capex Cost All-In-Costs Gold Price 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Source: USGS and Taggart (2013) Slide 18 of 43
  19. 19. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps Australian gold: About 50 mines with close to 50:50 underground to open pit split of production 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Fact Key Figure(s)/Mine example(s) Total Australian and New Zealand Production Dec Half- Year 2013 Recorded in the Study. 4,126,319 oz. Percentage of Gold Production from Underground Mines 56% Percentage of Gold Production from Open Pit Mines 44% Percentage of Production that is Gold Only 72% Percentage of Production that is Polymetallic 28% Mined Grade Dec Half-Year 2013 Production-Weighted Average Gold Grade 3.26 g/t Highest Grade Mine Andy Well (12.45 g/t) Lowest Grade Mine Cadia Hill (0.36 g/t) Cost Information Dec Half-Year 2013 Lowest Cost Mine Cadia Hill/Cadia East/Ridgeway $242/oz. (cash costs) $302/oz. (AISC) Highest Cost Mine Challenger $1427.64/oz. (cash costs) Henty $1527/oz. (AISC) Lowest Cost Quartile Threshold (25th Percentile) $700/oz. (cash costs) $925/oz. (AISC) Highest Cost Quartile Threshold (75th Percentile) $950/oz. (cash costs) $1205/oz. (AISC) Source: Kanakis (2014) Slide 19 of 43
  20. 20. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps How do you think a production cost versus grade chart might look for Australian gold mines? This? Costs($AU) Grade (g/t) 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Source: Kanakis (2014) Higher grade, lower cost mines Lower grade, higher cost mines Slide 20 of 43
  21. 21. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps It is actually not that simple: High grade doesn’t equate to low cost! 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? 0 200 400 600 800 1000 1200 1400 1600 1800 2000 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 AllinSustainingCosts($AU) Operating Grade Q4 (g/t) Open Pit Underground Source: Kanakis (2014) Slide 21 of 43
  22. 22. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps So what drives relative costs if not grade? Deposit-type tells us little • Orogenic Gold and Epithermal Au-Ag deposits gave variable results on the cost curves • Porphyry deposits were very low cost except for Boddington • Of the IOCG deposits the only figure available was a December Half Year Total Cash Cost for Prominent Hill, which was around the mean of the dataset • There is not much to go with here………. 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Slide 22 of 43
  23. 23. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps What about mineralisation-style then? 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Slide 23 of 43
  24. 24. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps Disseminated mineralisation appears important 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00% Q1 Q2 Q3 Q4 Production(%ofquartiletotal) Percentage of deposits with different mineralisation style in each cost quartile Vein/Reef Style Disseminated • Deposits with more disseminated style mineralisation displayed lower costs than those with vein/reef style mineralisation • Relationship especially evident in the cash cost datasets. 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Source: Kanakis (2014) Slide 24 of 43
  25. 25. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps Geometry clearly matters too: Lower cost deposits are equidimensional • Deposits were defined as equidimensional, planar and cylindrical shaped. • Equidimensional deposits gave much lower costs than planar and cylindrical deposits. • Gently dipping planar deposits also give lower costs than steeply dipping planar deposits. 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Planar Deposit Cylindrical Deposit Equidimensional Deposit Source: Kanakis (2014) Slide 25 of 43
  26. 26. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps Contrasting geometries means that we likely ‘engineer-away’ grade advantage to reach stopes 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Source: Kanakis (2014) Slide 26 of 43
  27. 27. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? The cost drivers differ markedly between pits and underground – both by function and composition Open Pit Underground Source: National Bank Financial Feb 15 Slide 27 of 43
  28. 28. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps WHERE TO NEXT? An economic perspective on deep and under cover exploration 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Slide 28 of 43
  29. 29. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps So is a new underground target better economically than a typical new pit? Typical Australian medium sized OPEN PIT gold mine • Resource contained Au: 4.0Moz • Reserve contained Au: 2.8Moz • Mining Losses: 95% • Mine Life: 15 years • Throughput: 3.5Mt/y • Grade: 1.5g/t • Processing Recovery: 85% • Production: 150,000oz/y • Opex: $750/oz • Capex: $150 million • Construction: 2 years Typical Australian medium sized UNDERGROUND gold mine • Resource contained Au: 13.3Moz • Reserve contained Au: 6.7Moz • Mining Losses: 75% • Mine Life: 30 years • Throughput: 1.0Mt/y • Grade: 5.0g/t • Processing Recovery: 90% • Production: 150,000oz/y • Opex: $850/oz • Capex: $65 million • Construction: 4 years 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Based on data collated by Matthew Kanakis (and some tacit assumptions by Sykes & Trench) Slide 29 of 43
  30. 30. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps First convert resource to reserve… 0 1000 2000 3000 4000 5000 6000 Resource (in-ground) Reserve (in- ground) Mined Gold Processed Gold NPV of Revenues NPV of Profits NPV Project Value(US$M) Typical medium sized Australian OPEN PIT gold mine 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? 0 3000 6000 9000 12000 15000 18000 Resource (in-ground) Reserve (in- ground) Mined Gold Processed Gold NPV of Revenues NPV of Profits NPV Project Value(US$M) Typical medium sized Australian UNDERGROUND gold mine Resource: 4.0Moz Au @ US$1,300/oz = US$5.2 billion Resource to Reserve Conversion (high) = 70% Reserve: 2.8Moz Au @ US$1,300/oz = US$3.6 billion Reserve conversion losses = US$1.6 billion Resource: 13.3Moz Au @ US$1,300/oz = US$17.5 billion Resource to Reserve Conversion (low) = 50% Reserve: 6.7Moz Au @ US$1,300/oz = US$8.5 billion Reserve conversion losses = US$9 billion NB: Calculations have undergone rounding so may not be fully accurate Slide 30 of 43
  31. 31. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps …then consider mining losses… 0 1000 2000 3000 4000 5000 6000 Resource (in-ground) Reserve (in- ground) Mined Gold Processed Gold NPV of Revenues NPV of Profits NPV Project Value(US$M) Typical medium sized Australian OPEN PIT gold mine 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? 0 3000 6000 9000 12000 15000 18000 Resource (in-ground) Reserve (in- ground) Mined Gold Processed Gold NPV of Revenues NPV of Profits NPV Project Value(US$M) Typical medium sized Australian UNDERGROUND gold mine Reserve: 2.8Moz Au @ US$1,300/oz = US$3.6 billion Mining losses (low) = 5% Mined Gold: 2.6Moz Au @ US$1,300/oz = US$3.4 billion Mining losses = US$200 million Reserve: 6.7Moz Au @ US$1,300/oz = US$8.5 billion Mining losses (high) = 25% Mined Gold: 5.0Moz Au @ US$1,300/oz = US$6.5 billion NB: Calculations have undergone rounding so may not be fully accurate Mining losses = US$2.0 billion Slide 31 of 43
  32. 32. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps …then consider processing losses… 0 1000 2000 3000 4000 5000 6000 Resource (in-ground) Reserve (in- ground) Mined Gold Processed Gold NPV of Revenues NPV of Profits NPV Project Value(US$M) Typical medium sized Australian OPEN PIT gold mine 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? 0 3000 6000 9000 12000 15000 18000 Resource (in-ground) Reserve (in- ground) Mined Gold Processed Gold NPV of Revenues NPV of Profits NPV Project Value(US$M) Typical medium sized Australian UNDERGROUND gold mine Mined Gold: 2.6Moz Au @ US$1,300/oz = US$3.4 billion Processing losses (high) = 15% Processed Gold: 2.3Moz Au @ US$1,300/oz = US$3.0 billion Processing losses = US$400 million Mined Gold: 5.0Moz Au @ US$1,300/oz = US$6.5 billion Processing losses (low) = 10% Processed Gold: 4.5Moz Au @ US$1,300/oz = US$6.0 billion NB: Calculations have undergone rounding so may not be fully accurate Processing losses = US$500 million Slide 32 of 43
  33. 33. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps …and mining over several years… 0 1000 2000 3000 4000 5000 6000 Resource (in-ground) Reserve (in- ground) Mined Gold Processed Gold NPV of Revenues NPV of Profits NPV Project Value(US$M) Typical medium sized Australian OPEN PIT gold mine 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? 0 3000 6000 9000 12000 15000 18000 Resource (in-ground) Reserve (in- ground) Mined Gold Processed Gold NPV of Revenues NPV of Profits NPV Project Value(US$M) Typical medium sized Australian UNDERGROUND gold mine Processed Gold: 2.3Moz Au @ US$1,300/oz = US$3.0 billion Discount Rate = 10% Mine Life = 15 years NPV of Revenues: 150Koz/y Au @ US$1,300/oz = US$1.5 billion Time cost of money = US$1.5 billion Processed Gold: 4.5Moz Au @ US$1,300/oz = US$6.0 billion Discount Rate = 10% Mine Life = 30 years NPV of Revenues: 150Koz/y Au @ US$1,300/oz = US$1.9 billion NB: Calculations have undergone rounding so may not be fully accurate Time cost of money = US$4.1 billion Slide 33 of 43
  34. 34. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps …not forgetting operating costs… 0 1000 2000 3000 4000 5000 6000 Resource (in-ground) Reserve (in- ground) Mined Gold Processed Gold NPV of Revenues NPV of Profits NPV Project Value(US$M) Typical medium sized Australian OPEN PIT gold mine 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? 0 3000 6000 9000 12000 15000 18000 Resource (in-ground) Reserve (in- ground) Mined Gold Processed Gold NPV of Revenues NPV of Profits NPV Project Value(US$M) Typical medium sized Australian UNDERGROUND gold mine NPV of Revenues: 150Koz/y Au @ US$1,300/oz = US$1.5 billion Operating Costs = US$750/oz NPV of Profits: 150Koz/y Au @ US$1,300/oz = US$640 million Operating costs = US$860 million NPV of Revenues: 150Koz/y Au @ US$1,300/oz = US$1.9 billion Operating Costs = US$850/oz NPV of Profits: 150Koz/y Au @ US$1,300/oz = US$640 million NB: Calculations have undergone rounding so may not be fully accurate Operating costs = US$1.26 billion Slide 34 of 43
  35. 35. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps …and capital costs for a project… 0 1000 2000 3000 4000 5000 6000 Resource (in-ground) Reserve (in- ground) Mined Gold Processed Gold NPV of Revenues NPV of Profits NPV Project Value(US$M) Typical medium sized Australian OPEN PIT gold mine 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? 0 3000 6000 9000 12000 15000 18000 Resource (in-ground) Reserve (in- ground) Mined Gold Processed Gold NPV of Revenues NPV of Profits NPV Project Value(US$M) Typical medium sized Australian UNDERGROUND gold mine NPV of Profits: 150Koz/y Au @ US$1,300/oz = US$640 million Capital Cost = US$150 million Construction Time = 2 years NPV of Project: 150Koz/y Au @ US$1,300/oz = US$390 million Construction costs = US$250 million NPV of Profits: 150Koz/y Au @ US$1,300/oz = US$640 million Capital Cost = US$65 million Construction Time = 4 years NPV of Project: 150Koz/y Au @ US$1,300/oz = US$375 million NB: Calculations have undergone rounding so may not be fully accurate Construction costs = US$265 million Slide 35 of 43
  36. 36. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps In the end there’s little difference? 0 1000 2000 3000 4000 5000 6000 Resource (in-ground) Reserve (in- ground) Mined Gold Processed Gold NPV of Revenues NPV of Profits NPV Project Value(US$M) Typical medium sized Australian OPEN PIT gold mine 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? 0 3000 6000 9000 12000 15000 18000 Resource (in-ground) Reserve (in- ground) Mined Gold Processed Gold NPV of Revenues NPV of Profits NPV Project Value(US$M) Typical medium sized Australian UNDERGROUND gold mine NB: Calculations have undergone rounding so may not be fully accurate Total project economic costs = US$17.1 billion Total project value = US$375 million Total project economic costs = US$4.8 billion Total project value = US$390 million Slide 36 of 43
  37. 37. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps Where mineral economists will likely mislead you (and ourselves too) • Over-simplistic economic models of underground targets – all economic assumptions, limited geology & mining inputs • Hard-wiring of a simple ‘grade drives economics’ modelling assumption (to the exclusion of complexity & scale effects; orebody shape, mineralisation style) • Limited factual analysis of existing underground deposits and their economics versus pit developments • Lack of ‘modifying factors’ within analyses 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Slide 37 of 43
  38. 38. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps A final word on the road ahead…. “What we are dealing with are complex mineral systems. As analysts we are still in the 1800’s stuffing birds and classifying them. We want to map the genome” - Professor Cam McCuaig, CET Director 2014 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Slide 38 of 43
  39. 39. THANK YOU For more information: Centre for Exploration Targeting: www.cet.edu.au Contact information: John P. Sykes: johnpaul.sykes@postgrad.curtin.edu.au Allan Trench: allan.trench@curtin.edu.au Matthew Kanakis: mkanakis@kpmg.com.au
  40. 40. FURTHER READING • Kanakis, M.D., 2014. Grade Expectations – Australian Gold Mines defy the ‘Grade is King’ Cost Hypothesis, Australian Institute of Geologists News, 188, November, 6-10. • Kanakis, M.D., 2014. Grade Expectations – Australian Gold Mines defy the ‘Grade is King’ Cost Hypothesis, Centre for Exploration Targeting Newsletter, 29, September, 14-17. • McCuaig, T.C., Vann, J.E., & Sykes, J.P., 2014. Mines versus Mineralisation - Deposit Quality, Mineral exploration Strategy and the Role of 'Boundary Spanners', Ninth International Mining Geology Conference, Adelaide, 18-20 August, 33-41. • Sykes, J.P., & Trench, A., 2014. Finding the Copper mine of the 21st century: Conceptual Exploration Targeting for Hypothetical Copper Reserves, Society of Economic Geologists Special Publication 18, 273–300. • Sykes, J.P., & Trench, A., 2014. Resources versus Reserves - Towards a Systems-based Understanding of Exploration and Mine Project Development and the Role of the Mining Geologist, Ninth International Mining Geology Conference, Adelaide, 18-20 August, 243-270. • Trench, A., & Sykes, J.P., 2014. Perspectives on Mineral Commodity Price Cycles and their Relevance to Underground Mining, 12th AusIMM Underground Operators' Conference, Adelaide, 24- 26 March, 19-31. • Trench, A., Packey, D., & Sykes, J.P., 2014. Non-Technical Risks and Their Impact on the Mining Industry. AusIMM Monograph 30: Mineral Resource and Ore Reserve Estimation, Chapter 7: Risk in Resource and Reserve Estimation, 605-617.
  41. 41. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps BACKUP – BROADER RISK DISCUSSION An economic perspective on deep and under cover exploration 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? Slide 41 of 43
  42. 42. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps What does economic mean nowadays? You can choose either technical vs political risk? 0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 Weda Bay, Indonesia Dumont, Canada (QC) Kalgoorlie (Heron), Australia (WA) Zebediela, South Africa Jacaré, Brazil Gag Island, Indonesia Mount Margaret, Australia (WA) Maturi, USA (MN) Turnagain, Canada (BC) Sulawesi, Indonesia NickelGrade(%) ContainedNickel(Mt) Size, Grade & Political Risk for Top 10 Largest Nickel Projects showing that the highest grade projects are in the riskiest political environments 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile Data: Schodde; Fraser Institute Slide 42 of 43
  43. 43. ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps Actually… it’s quantity and a more subtle notion of ‘quality’ 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 CopperGrade(%) ContainedCopper(Mt) Size, Grade & Political Risk for Top 10 Largest Copper Projects demonstrating that there is no clear relationship between grade and political risk. Mine type, by-products etc coalesce to form a more subtle concept of ‘quality’ 19 Feb 2015 An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there? 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile Data: Schodde; Fraser Institute Slide 43 of 43

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