June 2017

Value creation through exploration in BHP

  • By L Tyler MAusIMM(CP), Head of Geoscience; S Busuttil, Manager Copper Exploration; J Des Rivieres, Vice President Copper Exploration; N McCormack, Vice President Conventional Exploration; T C McCuaig MAusIMM, Principal Geoscientist; and J Terry MAusIMM, Vice President Geoscience, BHP

Examining how BHP is leveraging expertise and knowledge between minerals exploration, petroleum exploration and the recently established Geoscience Centre of Excellence

A case for discovery

BHP views exploration as a critical enabler to the value growth of the company. As noted by CEO Andrew Mackenzie at the Bank of America Merrill Lynch 2016 Global Metals, Mining and Steel Conference, exploration is one of the company’s six identified steps to add value. Exploration will grow and sustain BHP’s high-quality resource portfolio. Successful BHP exploration finds, such as the Cannington silver-lead-zinc deposit, provide guidance and inspiration to current exploration geoscientists. As BHP undertook organisational simplification through demerger and reorganisation of its functions, a choice was made to simplify exploration and focus on those commodities that are fundamental to its future.

BHP’s strong global commitment to greenfield exploration is focused on Tier 1 copper and petroleum reserves. The company is not currently undertaking greenfield exploration for coal, iron ore and potash because of its exceptional portfolio endowment in these commodities; brownfield definition continues to support production and reserve replacement. Tier 1 systems are defined in multi-parameter space as delivering high net value to BHP (McCuaig, Vann and Sykes, 2014), but in petroleum can be summarised as assets providing more than 100 000 barrels of oil equivalent/day net to BHP, and in copper as appropriate quality to deliver positive returns to shareholders throughout the business cycle (Figure 1).

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Click for larger image.

Success requires a disciplined exploration strategy and strong strategic and technical teams to enable both discovery and joint venture and acquisition opportunities. The pursuit of an acquisition-led growth path presents challenges due to the decreasing quality of projects globally (McCuaig, Vann and Sykes, 2014; Schodde, 2013; 2017), and the high risk (Haubrich, 2014) and fierce competition for the few quality assets. Successful exploration is the lowest cost path to growth and value-add for BHP’s shareholders.

Exploration efforts cover the spectrum from brownfields through to greenfields. However, the highest potential value is provided by the discovery of a new petroleum play or mineral district through greenfields exploration. New districts provide the opportunity to capture significant tenement area and realise the option value of further brownfields discoveries. The current residual search space (Hronsky and Groves, 2008) for such new mineral districts is depleting (Schodde, 2017), and future districts now lie in areas of high country risk, or under cover in lower-risk jurisdictions. The minerals industry is in transition to undercover exploration much like the petroleum industry transformation (to deep sea exploration) some decades ago. Discovery of Tier 1 resources has therefore become more technically challenging and more expensive.

BHP’s approach to the discovery challenge

Although exploration is seen as the lowest cost path to growth and value-add, it is also highly uncertain. It is acknowledged that high-quality mineral deposits are becoming increasingly scarce and difficult to find. Discovery requires sustained investment throughout the commodity price cycle; BHP plans to spend approximately USD$1 billion in FY2017 and $900 million in FY2018 on exploration.

Area selection is crucial – value is created by being in the best plays or provinces. To lower the discovery process risk, BHP uses a science-based systems approach to exploration targeting. This involves both understanding how the system works (prediction), and using traditional data to targeting (detection) approaches. As the only mining company globally with both major petroleum and minerals assets, BHP has a unique opportunity to leverage science and technology knowledge between petroleum and minerals exploration. This is a key corporate advantage. Figure 2 shows the trade-off between prediction and detection technologies and the exploration decision process in minerals and the concomitant trade-off in exploration program flexibility and cost. This mirrors the approach taken for petroleum exploration in BHP. As it is on the ‘camp’ or cluster of mineralisation scale that costs escalate dramatically, due to the need for tenement capture and the deployment of detection technology, only a finite number of opportunities can be undertaken at this scale. Most conventional oil opportunities lie beneath the ocean, and most new mineral districts lie under cover; both are expensive places to explore. So this area selection step is critical because, if made incorrectly, the opportunity cost is extremely high and a Tier 1 discovery is not possible.

In the brownfields exploration process, maturity of petroleum plays and mineral districts or terranes is a key business consideration, either for exploration entry or exit. Petroleum and mineral creaming curves (Meisner and Demirmen, 1981) and size-frequency distributions (Guj et al, 2011) are evaluated to aid these business decisions.

Petroleum

Over the past few years in its petroleum business, BHP has rebuilt its strategy of exploration target generation, prioritisation and assessment using a petroleum systems approach.

The result is that targeting from the plate to pore scale is undertaken in a systems context. Volume-risk-value parameters are assessed across the scale, with each business decision point clearly underpinned by scientific assessment of available information from both prediction and detection standpoints and a clear understanding of the knowledge and high-quality data required to advance to the next business decision point. This systems approach has allowed confidence and success in adopting a counter-cyclical approach to securing additional acreage, access to drill rigs and testing prospects.

Exploration in petroleum is currently focused on deep water plays in the Gulf of Mexico, the Caribbean and Western Australia. BHP will be assessing and testing plays in these areas over the next three years.

Copper

Copper exploration leveraged the thinking in petroleum to apply a systems framework to balance conceptual targeting (Figure 2) with traditional deposit model approaches including empirical patterns observed in large datasets across a range of scales. Focus is on porphyry copper deposits (PCD), sedimentary-hosted copper and iron-oxide copper-gold (IOCG) systems that have the best potential to fulfil BHP’s Tier 1 criteria (Figure 1). For example, application of this systems approach to sedimentary-hosted copper systems has allowed BHP’s copper exploration team to assess all sedimentary basins on Earth (more than 5000 basins), and quickly narrow down to a prioritised list of several key basins that warrant further assessment and exploration. Similar exercises in PCD are developing global rankings on prospectivity for discovery and acquisition opportunities, in addition to a high-quality portfolio of exploration projects. This will allow BHP an early mover advantage in new districts.

Current copper exploration strategy targets PCD, skarn and sedimentary hosted copper deposits globally with a focus in North America, Chile and Peru, and IOCG mineralisation in southern Australia. These efforts comprise 1.7 million hectares with more than 100 active projects. In addition to its sole funded exploration efforts, BHP has advanced alliances with other companies, including junior explorers, to de-risk projects, embrace local expertise and more effectively progress projects and secure future options.

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Bringing the right talent to bear

To help facilitate this approach to maintain and grow a high-quality resource base, BHP established the Geoscience Centre of Excellence (GCoE) in mid-2016. The GCoE is building capacity across the organisation through supporting regional exploration teams that are reinforced by globally integrated specialist geoscience expertise and collaborative efforts across the entire business in order to address the exploration challenge.

The GCoE also engages with thought leaders in the external geoscience and technology community to bring the latest technologies and concepts to bear on the challenge. Application of the mineral systems approach has identified gaps in the conceptual understanding of the genesis of high-quality deposits. An exploration research roadmap has been generated to fill these high-leverage opportunities.

BHP is now challenging the understanding of PCD genesis across a range of scales through a multi-year research alliance with world-leading volcanic, geomorphology and experimental petrology experts at the University of Bristol. Similarly, BHP has engaged with other universities (eg the University of Wollongong and the University of Western Australia) to understand how detrital minerals can record information on host magmas that determine if intrusive rock suites are fertile, and how these signals can be used as a screening tool for area selection across a range of scales.

With advances in artificial intelligence, the ability to apply machine learning to exploration datasets across a range of scales is exciting. BHP’s technology teams have experts working in this area.

In summary, exploration is a fundamental investment for value generation in BHP. This is recognised and supported throughout the organisation. The review of what, where, how and who has been critical to the changes put in place to simplify the approach and target the commodities (both current and future) that are central to long-term value-add to the shareholders. The leverage of expertise and knowledge between minerals exploration, petroleum exploration and the global Geoscience Centre of Excellence is allowing BHP to maximise results throughout commodity cycles.

References

Guj P, Fallon M, McCuaig T C and Fagan R, 2011. A time-series audit of Zipf’s law as a measure of terrane endowment and maturity in mineral exploration, Economic Geology, 106:241-259.

Haubrich, 2014. Completion risk: why building a mine on budget is so rare [online]. Available from: www.youtube.com/watch?v=zQrQVqHOEcY

Hronsky J M A and Groves D I, 2008. Science of targeting: Definition, strategies, targeting and performance measurement, Australian Journal of Earth Science, 55:3-12.

McCuaig T C, Beresford S and Hronsky J, 2010. Translating the mineral systems approach into an effective exploration targeting system, Ore Geology Reviews, 38:128–138.

McCuaig T C and Hronsky J M A, 2014. The mineral system concept: the key to exploration targeting, in SEG 2014: Building Exploration Capability for the 21st Century, Society of Economic Geologists Special Publication 18 (eds K D Kelley and H Golden), pp 153-175.

McCuaig T C, Vann J E and Sykes J P, 2014. Mines versus Mineralisation – Deposit Quality, Mineral Exploration Strategy and the Role of ‘Boundary Spanners, in Proceedings of the AusIMM Ninth International Mining Geology Conference, 33-41 (The Australasian Institute of Mining and Metallurgy: Melbourne).

Meisner J and Demirmen F, 1981. The Creaming Method: A Bayesian Procedure to Forecast Future Oil and Gas Discoveries in: Mature Exploration Provinces, Journal of the Royal Statistical Society, Series A (General), 144(1):1-31.

Schodde R C, 2013. The impact of commodity prices and other factors on the level of exploration, seminar series presentation, Centre of Exploration Targeting [online]. Available from: www.minexconsulting.com.

Schodde R, 2017. Assessment of industry’s ability to explore under deep cover [online]. Available from: www.minexconsulting.com. 11th Biennial AMIRA Exploration Manager’s Conference, Healesville, Victoria.

Tyler L, 2016. Value creation through exploration. Presentation at Citigroup’s Mining Exploration Day, Sydney, June 26, 2016 [online]. Available from: www.bhpbilliton.com/-/media/bhp/documents/investors/reports/2016/160627_valuethroughcreation_presentation3.pdf?la=en.

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