The power of economic geology

After establishing himself as a geological expert in the world of academia, David Groves has shifted his focus to mining.

Groves was the keynote speaker at the Innovation Luncheon during the Prospectors and Developers Association of Canada’s (PDAC) annual convention from March 4–7, and his speech delved into how investors can use geological lessons from academia to make better investment decisions.

Groves, who is emeritus professor at the Centre for Exploration Targeting at the University of Western Australia, argues that while mineral explorers have more sophisticated exploration tools at their disposal, they often neglect a key factor when pursuing the next great orebody. 

“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 an academic’s chief concern is answering the question of how an orebody was formed, while in the investment world, the big question is modified to where did it form?

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

The process can be pictured as a pyramid, with global-scale geological perspective forming the base. Next an investor can consider provincial geology, zero in on property aspects that can be defined at a district scale and finally consider specific project issues.

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

Groves warns that the province-scale perspective is a key layer. When an investor is considering a project at the province-scale level — which is early in the investment process — they can walk away if they believe 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, you’ll never get to a prefeasibility study. But it’s low cost because it’s just using brain power.”

Brain power can also help determine whether the area has the right rock age for the mineralization being explored for.

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

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

Groves returns to the base of the pyramid to show how a global perspective helps find the next great mining investment.

But to get the global perspective right, an investor needs to understand the larger cycles on the earth’s surface and the role they play in orebody formation.

He explains that major earth cycles happen when supercontinents come together, break apart and come back together again in a different formation.

Groves compares the continents to ocean liners with a deep keel. The keel of a continent would reach 250 km deep, and the keel of islands like the Philippines, Indonesia and Japan would reach 6 km deep.

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

Looking out millions of years into the future, Australia will migrate northwards and crush the Philippines and Japan before it settles between Asia and North America.

“We used to say in Australia that our former Prime Minister John Howard was George Bush’s bosom buddy,” Groves says 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 eroding them away — but that need only concern investors with a 75-million-year time horizon.

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

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

One of his 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 barren of gold.

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

But work by one of his students showed the corridor — which held the great deposits in the northwest of the country — extended southeast and hadn’t been detected. Geologists 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 on the pyramid to the province level. Here the metallogenic potential, the rocks’ age range and the area’s mine-development maturity 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, and the Yilgarn hosted one giant deposit and a series of much smaller ones.

But throughout the 1990s, a good deal of capital was pumped into understanding Yilgarn, and just 10 years later the area had all but caught up with the Abitibi in terms of projects and gold ounces discovered.

There hasn’t been a world-class deposit found at Yilgarn since then, and Groves says this indicates the area has reached its maturing stage. So while Yilgarn represented an excellent opportunity from a province perspective in the early 1990s, now it represents less of one.

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

This is where his research is at its most interesting, because 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 it’s a great investment,” he says. “But is it?”

He concedes that in the early days of a discovery it pays to be right next door in case the same deposit trends onto a neighbour’s 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 detrimental because making an orebody requires greater expanses of
real estate than investors realize.  

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

This could mean companies taking over a historic mine to find 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 adds that calculating distance from the original deposit to look for new deposits is determined by economic factors, such as trucking costs. This analysis suggests 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 orebodies is 35 km 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, grade, reserves and the pricing environment for the metal.

Here geophysics and geochemistry will help define drill targets.

Once targets are drilled and results are released to the public, Groves offers a clue as to what to look for. He says 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 cautions that a company can depict underground ore in different ways. Conservative geologists will fill in little blobs around the drill intercepts, while more optimistic ones will connect them. The more aggressive the geologist, the more the zones between the intercepts will get filled in.

The worst-case scenario, from the perspective of being too aggressive, is letting a geophysicist do the work, Groves says.

“Besides being in the wrong place,” he quips, acknowledging 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.”

Groves’ key questions

David Groves offered some questions for investors to ask when determining a property’s economic potential.

• Does the country in question have political stability and investment security? If a project is in certain parts of Africa, check to be sure there are artisanal workings in the area.  He says that “if there are no artisanal miners there probably isn’t any gold . . . it’s as simple as that.”

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

• Are other geological factors favourable? For example: the nature of the crust, the lithosphere, the tectonic setting and the rock sequences. But, he concedes, 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 favourable or not for the deposit style to have close proximity to a known large deposit? “If it’s an orogenic deposit and the property in question is right next to the Timmins camp, I don’t want to be there,” Groves offers. “But if they are 35 km 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?