Will We Have Enough New Mines? -- Richard Schodde

Photo: Will We Have Enough New Mines? -- Richard Schodde
Sprott's Thoughts

By Henry Bonner (hbonner@sprottglobal.com)
Read On Sprott >

As metals prices boomed during the last decade, small explorers and big miners spent billions of shareholder dollars seeking new deposits. Investors wanted the high rewards of a discovery as metals soared in price. At $1,900 per ounce of gold, even mediocre finds could make money.

Richard Schodde, of MinEx Consulting, has studied past exploration cycles in detail. He says we are seeing a tightening of the sector, as the availability of capital has plummeted. Costs of exploration are coming down as companies cut back on high-salaried employees and reduce operating costs.

The following chart from MinEx shows exploration expenditures rising quickly during the boom years:



The amount of money spent exploring rose during the last decade from $2.9 in 2002 to $29.4 billion in 2012, before falling back to $21 billion in 2013 says Mr. Schodde. Over the time-frame 2002-12 $136 billion was spent world-wide on non-bulk exploration, resulting in 647 significant new discoveries, of which only 18 are considered to be ‘top tier.’

Despite a 10-fold increase in the amount of money spent on exploration over the last decade, the amount of new discoveries was relatively unchanged – meaning that more money was spent per new discovery. Mr. Schodde explains that as more money went into the sector, expenses related to exploring went up. Geologists and engineers demanded higher salaries. Drilling equipment and operators became more expensive, and money was spent liberally on general and administrative expenses.

As an ebullient market sentiment took hold, money was also wasted on projects with negligible odds of success or likelihood of development and often incompetent management. So despite high expenditures of capital, the pace of discoveries remained relatively tame.

Mr. Schodde notes that today, salaries and G&A expenses have come down since 2012, and he believes that this trend will continue as capital remains scarce.

Adding to the challenge, finding new deposits will become much tougher for the exploration industry, he says, because most ‘easy-to-find’ deposits have already been discovered. Explorers will have to drill deeper in known mineral-rich locations, such as Western Australia, or look in problematic jurisdictions, such as Central Africa. Making discoveries should become more costly for these reasons.

Already, new discoveries are barely keeping pace with depletion, says Mr. Schodde.

As he explains, only about half of new decently-sized deposits will later become a mine.1 Depending on the commodity and location it will take 10-15 years on average for a discovery to become a mine. So we must discover about twice as much metal today as we will be using in a decade from now in order to maintain supply.

Looking ahead to expected production rates in 2020, gold is being discovered at 1.5 times the expected depletion rate. New copper deposits are being discovered at 1.7 times the projected consumption rate in 2020, which is also below the ‘replacement rate’ for the metal.

The exploration sector is contracting -- spending less money and pursuing fewer projects – and is being forced to be more efficient, Mr. Schodde explains.

While exploration expenses have come down, the need for new deposits is strong. The exploration industry will need to make more new discoveries, despite decreasing capital available, or the supply of mined metals is likely to decline in coming years.

Richard Schodde has over 30 years of experience in a wide variety of project analysis and strategic planning roles within the international resources industry – including 15 years at WMC (in its Business Development Group and as Strategic Planning Manager for the Exploration Division) and more recently, 4 years at BHP Billiton (as Minerals Economist in their Global Exploration Team). In 2008 he founded MinEx Consulting to provide strategic and economic advice to mining and exploration companies.

http://www.minexconsulting.com/publications.html  Invest with Sprott

This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.


Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment. Because of significant volatility, large dealer spreads and very limited market liquidity, typically you will not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.

Comments