Winners and losers

— The following is an excerpt from Mining Explained, published by The Northern Miner.

Mining is a large, vital and lucrative business. Its rewards are spread across a wide cross-section of our population. But not all mining ventures are successful. Risks are high and they take many forms.

The process of discovering and developing any mineral deposit involves dozens of different people with different skills, and the expenditure of many millions of dollars. But the question to ask when evaluating a deposit is always the same: Does it contain enough recoverable and marketable metal or gems to be dug out of the ground, transported to market and sold at a profit? Obviously, there are risks involved in each of the steps, and one wrong calculation can be disastrous.

The most serious risks in any mining project are those associated with geology (the actual size and grade of the mineable portion of the orebody), metallurgy (how much of the metal can be recovered) and economics (metal markets, interest rates, transportation costs). But there are many others, such as problems arising from unforeseen political developments, new restrictive regulations or the availability of workers, to name a few.

Feasibility studies

One of the features that distinguishes a mining enterprise from many other businesses is that during production, the company’s asset (i.e., the ore) is progressively consumed. Some day, the mine’s assets will be gone, hence, a mine is referred to as a wasting asset. This has important implications for the justification of allocating capital to any new mining project.

The time value of money plays an important role here. Simply put, the annual profits generated by a mine must be sufficient to pay back (within a reasonable time) the money invested in the mine. It is the job of mining engineers to estimate the “payback period” in what is called a feasibility study.

One of the important elements in a feasibility study is the estimate of mine operating costs. It is impossible to suggest what the costs might be for a particular mine without looking at all the details of the planned operation, and reasonable estimates can only be made when complete information is available. The final estimate will only be as dependable as the information used to arrive at the individual cost estimates from which it is derived.

The prices the mining company will have to pay for labour, electrical power, supplies and the shipping out of its concentrate are all factors that influence the capital costs of a mining project.

Each country has its cost-related advantages and disadvantages. For example, mining in the vast, undeveloped regions of Canada makes the construction of roads, railways and airstrips much more expensive than in developing countries. Also, miners in both Canada and the United States demand higher wages than their counterparts in developing countries.

On the other hand, mining companies working in many developing countries can encounter problems such as high tax and tariff costs, and the corruption of civil servants such as customs officials, without whose help they would have difficulty getting their project off the ground. The overall political instability of some countries can be a great deterrent to the development of mines.

Somewhat perversely, however, the existence of any combination of negative factors leads to less exploration in that country or region, which, in turn, can increase one’s chances of discovering an economic orebody. In mineral exploration, something is always better than nothing.

Geological risks

Geological conditions pose technical challenges for mine operators as well. The huge copper-zinc orebody in Flin Flon, Man., for example, was not developed until many years after it was discovered. It was delayed because in 1915, when the deposit was discovered, there was no economic way to extract the zinc from the ore, which contains more than 15% talc.

Also, many mineral deposits are oriented at awkward angles. This can cause difficulties in handling the ore underground and in supporting the ground while it is being mined.

Another risk is the quality of the work done to calculate reserves in any given deposit. This is particularly true of underground deposits, which may pinch and swell and be less continuous than indicated by surface drilling and initial deposit modelling. To mitigate this risk, mining companies often carry out an underground exploration program, which may include closely spaced, infill drilling to upgrade resources into reserves and, possibly, a bulk sample to get a better handle on grade. Usually the reserve calculation is audited by an independent engineer in order to reduce the risk for mine financing.

Some mines run into ground support problems when mining reaches a considerable depth. Those problems can increase the complexity and cost of mining. While in the early years of a mine’s life, extraction may have been relatively inexpensive, but costs may escalate as mining progresses at depth, so this must be anticipated and accounted for in the feasibility study.