Rio Tinto’s McIntosh: ‘Exploration in our DNA’

VANCOUVER — There’s likely not an exploration manager with a bigger technical team or budget than Rio Tinto’s (NYSE: RIO; LSE: RIO) Stephen McIntosh, who serves as the mega miner’s global head of exploration and has been with the company for over 28 years.

McIntosh took to the podium at the Association for Mineral Exploration BC’s annual Round-Up conference to talk about his company’s views on mineral discoveries and the current downturn in commodities.

Even a company with the financial swagger of Rio Tinto — with its US$100-billion market cap — has cut its exploration spending.

The company went from spending US$2 billion in project development and greenfield programs in 2012 to US$750 million in 2014. McIntosh was quick to reassure  that maintaining a robust project pipeline is important to Rio Tinto, and said that “exploration is in this company’s DNA.”

Rio Tinto’s exploration arm comprises 450 people who handle the company’s greenfield and brownfield programs and deal with business intelligence, big data analysis, and commodity strategies.

The company continues to drill its iron ore assets in the Pilbara region of Western Australia; sample and drill its copper projects in Utah, Arizona and Montana; carry out field reconnaissance, geophysical surveying and drilling occurred across copper projects in Chile and Peru; and hunt for nickel sulphide discoveries in Canada.

McIntosh commented that a lot of the budget cuts have come from “phasing,” wherein Rio delays project development since it isn’t under as much pressure to fast-track new production sources during downturns. He added that much of the company’s “centrally-funded” exploration programs have been maintained.

“One of the questions I’m often asked is: ‘Why explore?’ If you look at the resource statements, we have deposits in place that tend to go out decades ahead of current operations,” McIntosh said.  “I think what people often miss is the somewhat insidious nature of compounding growth rates.”

“We see in our major commodities a lot of growth over time. Over the long-run we’ve been through a number of recessions and cycles, but in reality these things tend to have limited impact on those long-term trends. So if the ‘trend is your friend’ we do inevitably need more minerals to be brought into production at the right time. I don’t know what the future holds, but we can use history as a guide,” he added, noting that back in the late 1990s many pundits viewed mining as a sunset industry.

One thing he said Rio Tinto has observed, however, is the decline in discovery rates versus capital investment, particularly in the decade between 2002 and 2012 when  there was an unprecedented expansion in global exploration spending.

This spending splurge failed to generate a commensurate pickup in discovery rates.

McIntosh argued that a great challenge the industry faces is its ability to cost-effectively explore under cover. A few metres of cover  are often an effective barrier to most companies’ ability to explore efficiently. 

McIntosh said that “a lot of very good work” has been done in the field to tackle the problem, but explorers have yet to really “crack the code.” He labels it one of the most critically pressing issues for miners, especially of precious and base metals.

“It’s always interesting to reflect back before looking forward to think a bit outside the box and predict what’s coming,” he said. “We need to get old data archives sorted out and digitize that information so that explorers can do something with it.”

MacIntosh noted that Rio Tinto is putting together a public geochemistry database with almost 10 million samples that have been vetted and organized. The company has 6 million drill holes that are being processed into that database.

“One of the great conundrums is how do you take traditional methods and marry them with new technologies to generate value and move the dial.”

McIntosh said that perhaps the largest challenge for explorers — one that was mentioned by a number of speakers at Roundup — is the fact that capital markets remain more or less closed for the majority of mining companies. 

He further commented that the global finance landscape has become unpredictable, even as shareholders demand higher returns from producers.

“The focus must be on quality programs and quality jurisdictions,’ McIntosh said. 

“The good news is we have seen that extensive production expansion over the past decade, and that will require new discoveries to keep the stock of good projects alive. A market turn is inevitably going to come, and we need to be ready for it.”