The Power of economic geology

Having already established himself as a leading geological expert in the world of academia, David Groves has shifted his focus to the real world of mining.

Groves was the keynote speaker at the Innovation Luncheon at the Prospectors & Developers Association of Canada (PDAC) convention in Toronto on March 7, and his speech delved into how investors can take geological lessons from academia towards making better investment decisions.

Groves, who is Emeritus Professor at the Centre for Exploration Targeting at Western Australia’s Centre for Global Metallogeny, argues that while mineral explorers now have ever more sophisticated exploration tools at their disposal they often neglect a key factor when pursuing the next great ore body.

“The problem is that somehow we forgot about the geological side,” he says. “We use all of these techniques but we leave out the most important part: the geology.”

He explains that whereas an academic’s chief concern is answering the question of how an ore body was formed, in the investment world, the big question is modified to where did it form?

Groves, who teaches investors economic geology and also serves as Canaco Resources (CAN-V) director of project development, says the key is to understand that the best route towards discovery is via a hierarchical process that marries geological information with investing.

Such a process can be pictured as a pyramid with the global scale geological perspective forming the base. From there an investor should move up to consider a the provincial geology. Next he or she should zero in on the aspects of a property that can be defined at a district scale and only after doing all that should they arrive at the top of the pyramid, which is to consider specific project issues.

“And if we got all of those layers right we will have an economic deposit,” he says.

Before moving through each layer Groves jumped ahead and warned that the key layer is the province scale perspective. When an investor is considering a project at the province scale level (which is still early stage in the investment process) they can still simply walk away if they decide the province has limited geological potential.

“The cost of exploration goes up dramatically after the province selection level,” he explains. “It’s high risk because if you’re wrong [i.e. you choose to go ahead with the project and there isn’t anything there] you’ll never get to a pre-feasibility study. But it’s low cost because it’s just using brain power.”

That brain power should be put to use in determining such matters as whether the area has the right age of rocks for the type of mineralization being explored for.

Groves own work shows the promise of getting it right. In 1987 he wrote a paper that identified the North West Territories as a prospective diamond province. While he didn’t find the exact location, the operating Diavik diamond mine is testament to the fact that he had the province scale selection right.

“And there it is,” he says as a projected Google earth map zooms in on the Diavik mine. “Right where any intelligent geologist could have told you it would be.”

From there Groves went back to the base of the pyramid and looked at how a global perspective factors into finding the next great mining investment.

To get the global perspective right, however, an investor needs to have an understanding of the larger cycles on the earth’s surface and the role they play in ore body formation.

He explained that major earth cycles are made up of super-continents coming together then breaking apart only to come back together again in a different formation.

Groves compared the continents to ocean liners with a very deep keel. The keel of a continent would be roughly 250-km deep whereas the keel of islands like the Philippines, Indonesia or Japan, would only be around 6-km deep.

These smaller keeled vessels/islands will live shorter lives in geological terms, or as Groves says: “They get crushed by the super continents. They are destined to die so to speak.”

Looking out millions of years into the future Australia will migrate northwards and will crush the Philippines and Japan before its settles into the Asian continent and takes its place between Asia and North America.

“We use to say in Australia that our former Prime Minister John Howard was George Bush’s bosom buddy,” Groves said with a smile. “We’d joke that Howard was 75 million years ahead of his time because by then he’ll be able to just reach across and shake Bush’s hand.”

From a mining perspective the relevance is that when Australia does crash into the Asian coast it will have crushed any mineral deposits in its path by lifting them up and having them erode away…..but then that need only concern investors with a 75 million year time horizon.

To bring the lesson into a more contemporary context, Groves says that if a junior mining company says they are searching for gold in an area that has rocks billions of years old and with no gold deposits yet discovered, they won’t be very successful.

On the flip side, getting a better understanding of how large scale tectonic activity plays out can lead a geologist to an area where no one thought to look before.

One of Grove’s great successes is Canaco’s Handeni project. Only 10 years ago the area where Canaco made the discovery — southeast of the Victoria Lake gold district — was considered to be barren of gold.

“No one in their right mid would consider looking for gold in that terrain,” Groves says.

But some work by one of his students showed the corridor which held the great deposits in the northwest of the country, actually did extended south east, it just hadn’t been detected. In short, geologist had the global story wrong.

Once an investor has a better sense of global scale geological features at play in an area, they are ready to move up a rung on the pyramid to the province level. Here the metalloginic potential, the age range of the rocks and the maturity of mining development in the area are the key issues.

To demonstrate how province scale attributes affect the mine finding process, Groves compared the development of Canada’s Abitibi region to Western Australia’s Yilgarn district.

In 1990 the Abitibi hosted a suite of mid-sized projects whereas the Yilgarn only hosted one giant deposit and then a series of much smaller ones.

But over the course of the 1990s, a good deal of capital was pumped into understanding Yilgarn and just ten years later the area had all but caught up to the Abitibi in terms of number of projects and ounces of gold discovered.

Since that time there hasn’t been a world class deposit found at Yilgarn and Groves says that indicates the area has reached its maturing stage. So while Yilgarn represented an excellent opportunity from a province perspective back in the early 1990s, now it represents less so of one.

The next level of consideration is the district is level. Here an investor has to consider a given property’s known or conceptual potential, its stage of maturity and the land access. More micro considerations such as whether or not there are geochemical and geophysical targets also come into play at this stage.

This is where Grove’s research is at its most interesting as at the district level he challenges a long held belief of mining investors.

“When a property is in close proximity to a big deposit, people think its s great investment,” he said. “But is it?

While he concedes that in the early days of a discovery it may pay to be right next door as it may turn out that the same deposit trends on to a neighbours ground, but more often than not it pays to be further away from a known deposit.

Being too close to a defined deposit can be a negative because of the very nature of what it takes to make an ore body requires greater expanses of real estate than investors realize.

“So being close is a negative but it’s usually interpreted as being positive.”

This situation can mean that companies taking over a historic mine with the goal of finding new discoveries on the property could be out of luck.

“Many brownfield projects are doomed to fail because their economic based analysis will define a radius around a deposit that is less than the spacing of large deposits,” Groves says.

He says the calculation of how far from the original deposit to look for new deposits is determined by economic factors such as trucking costs. That type of analysis generally leads to the conclusion that exploring more than 25-km away from a mill makes it uneconomic to explore a certain area.

“But we know that the average distance between ore bodies is 35 to 50 km, so you doom yourself to failure by using this economic framework.”

The last level of the pyramid is project scale. At this level an investor wants get into analyzing the deposit and will look at its tonnage, its grade whether or not it has reserves and what the pricing environment is for the metal.

Here both geophysics and geochemistry come on to the stage as they will be used to help to define drill targets.

Once targets are drilled and results are released to the public, Groves offered a clue as to what to look for. He said that when looking at a cross-sectional pictorial representation of a company’s drill results, an investor should pay careful attention to the spatial relationships of drill results. If the picture shows the cross sections of three drill paths, it would be a more bullish indicator if the high grade zones in all three drill holes line up with one another.

He also cautioned about how a company may depict the ore under the ground. Conservative geologist will only fill in little blobs around the drill intercepts while more optimistic ones will start to connect them all together. The more aggressive the geologist, the more the zones between the intercepts will get filled in.

The worse case scenario, from the perspective of being too aggressive, is letting a geophysicist do the work Groves said.

“Besides from the fact that they’re in the wrong place,” he quipped while looking at one of his geophysicist friends in the audience, “they’ll always say there is more ore because they are measuring the physical properties and not what is an economic grade.”

At the end of the speech Groves rhymed off a list of questions that investors should consider when trying determining the economic potential of a property.

 Grove’s laundry list of questions:

 Does the country being considered have political stability and investment security?

 If a project is in certain parts of Africa, check to be sure that there is some sort of artisanal workings in the area. “If there are no artisanal miners there probably isn’t any gold….it’s as simple as that,” he says.

 Are the targeted rocks a suitable age for the deposit style?

 Are other geological factors favorable? For example the nature of the crust, the lithosphere, the tectonic setting, the rock sequences ….but, he conceded, an investor would need to consult an expert on these issues.

 Does the target district have low exploration maturity? You want to be a first mover or a fast follower into a given area.

 Is it favorable or not for the deposit style to have close proximity to a known large deposit?

“If it’s an orogenic deposit and property in question is right next the Timmins camp, I don’t want to be there,” Groves offered. “But if they are 35 to 50 km from Timmins and they are along similar structures, I would be more interested.”

 Are there strong indications of mineralization from geophysics or geochemical anomalies or are there direct indications of mineralization from drilling?