October 2015

Tackling the crisis in mineral exploration

  • By Alexander Koch, Dale Schilling and David Upton, The Boston Consulting Group

Reevaluating exploration methods will help increase value and recapture success

A new report by The Boston Consulting Group (BCG), entitled Tackling the Crisis in Mineral Exploration, has highlighted the genuine crisis on the lack of discoveries in the sector.

The problem is worldwide, but its effects are acute in Australia where 80 per cent of the continent is under cover and new discoveries are more difficult. If exploration performance cannot be improved, Australia will be forced to rely on old and higher cost deposits and become increasingly uncompetitive.

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Global exploration performance has been in decline over the past decade. According to MinEx Consulting, since mid-2005 exploration spending has climbed sharply, reaching an all-time high in 2012 of $US23 billion. Despite the increased spending, there has been no corresponding increase in discoveries (Figures 1 and 2). Indeed, from 2010 through 2013, the annual number of non-bulk discoveries is estimated to have declined by almost half, even after adjusting for discoveries yet to be drilled out. This discovery deficit follows a 30-year period (1975–2005) during which the number of discoveries closely tracked exploration spending.

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As Figure 2 shows, breaking down recent discoveries by size reveals an even more alarming trend. The number of giant discoveries, which historically have accounted for the vast majority of the world’s metal supplies, has tapered off to only one or two per year despite the massive increase in exploration spending. The number of major discoveries has also dropped sharply, underscoring the worsening of exploration performance around the world.

Part of the decline in exploration performance is the result of cyclical increases in exploration costs during the resource boom from 2005 through 2010. During that period, the cost per metre of a diamond drill hole in many countries more than doubled.

Although more money is being spent, fewer large discoveries are being made today than in the previous quarter century. MinEx calculates that the weighted average cost of base-metal discoveries nearly tripled, from US$23 million from 1980 through 1989 to US$64 million from 2000 through 2009 (Figure 3). And since then exploration performance has continued to deteriorate.

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Deteriorating exploration performance is a concern. Mineral discovery, especially in greenfield settings, is the only source of high-value deposits that can pay a company’s way across the commodity cycle. This reality was masked for most of the past decade by the resources boom. In that high-price environment, brownfield exploration of previously discovered, lower-quality deposits seemed like a viable strategy. But the downturn in prices for iron ore and many base metals has shown that this is not a sustainable business model. The discovery of high-value deposits is crucial to the future of the mining industry.

Poor results destroy value not just at the company level. As the quality and quantity of reserves diminish, metal markets become imbalanced and prices can rise sharply, affecting both economic growth and jobs. The global market for zinc, the fourth-most-used metal (after iron ore, copper and aluminum), is an unfolding case study in the macroeconomic effects of exploration failure. The last major discovery of a primary zinc deposit was almost a decade ago at Hackett River in Canada, and six of the ten largest zinc mines and undeveloped deposits resulted from discoveries in the 1970s or earlier. Major mines, such as Australia’s Century mine, are reaching the end of their life, and with global consumption forecast to rise by 4.5 per cent annually until 2020, zinc stocks are expected to fall to critical lows by 2019.

Lessons from the past

BCG sought to understand the causes of the crisis and develop solutions by looking to the past. What was driving the success of explorers in earlier decades, and could that teach us about the things we need to change?

We interviewed six of the world’s most illustrious mineral explorationists – those responsible for such monumental finds as Minera Escondida in Chile, Oyu Tolgoi in Mongolia, and Olympic Dam and Cadia in Australia – as well as those with stellar records of serial discovery. We asked them why exploration was suffering today: Was it a matter of geology? Industry economics? Macroeconomic forces? Investor attitudes? Or was it about internal factors, such as corporate culture, strategy setting, or even talent management? Which forces exerted the greatest impact? They offered their views on the keys to success – keys that largely transcend market conditions or business cycles – along with recommendations for how mining companies might recapture exploration success.

Reclaim the lead in developing exploration strategy

The exploration leader’s job goes beyond overseeing the technical work. With his or her team, the exploration leader must actively develop the exploration strategy. The leader’s position relative to senior executives and the board should be neither adversarial nor supplicating. Exploration leaders must see themselves and act as the governing voice of exploration, making the strongest possible case for their thoughtful strategy, while also demonstrating partnership with top leadership.

Consider the approach taken at Western Mining during its heyday. Jim Lalor told us that the exploration team, which had earned the trust of senior management after years of success, had considerable autonomy once senior management had established the budget. Strategy was developed by exploration team leaders in twice yearly gatherings during which they openly debated and competed for their portions of the exploration budget. Project heads, regional managers and specialists spent four or five days presenting and debating the relative merits of exploration spending proposals, reviewing such criteria as the size of the targets and their relative risk, the number of drill holes required to establish mineralisation, and logistical ease. Everyone had his or her say.

Establish credibility with senior management and the board

Good geologists, especially the ore finders, know better than anyone else which targets to chase and where to earn the best return on exploration dollars. To have the autonomy to make such crucial decisions, the exploration leader must have credibility. Senior management and the board must trust the exploration leader to make budgetary and operating decisions within his or her department.

One viewpoint was that if the exploration leader didn’t have license to operate inside their company, they will never get the budget. If the department is seen as a cost centre, it will be difficult to be successful. Funding can be discretionary – a bit like research, which can be turned on and off depending on where you are in the commodity cycle.

A solid record of discovery makes the strongest case. It also helps to have someone on the executive team or board with experience in or a passion for exploration. With neither, though, there are several ways exploration leaders can earn the credibility and trust of those at the top.

Recruit and retain ore finders

Ore finders are known for their aptitude for finding orebodies. Some exploration legends went so far as to claim that the main reason for the declining success in exploration is that companies fail to understand the difference between scientists and ore finders.

Many large, well-known companies believe that good science in the field will lead to successful exploration. But science is an open-ended endeavour to seek knowledge. Many companies will continue doing good scientific work, but because they still don’t get all the answers, they won’t drill that hole that makes a discovery.

Ore finders, who perhaps represent only ten or 20 per cent of a successful team, have a talent for being in the right place at the right time. Many companies fail to recognise that ore finding is a distinct skill. Instead, they regard exploration as just a process. They think that if you drill enough holes, take enough samples and do enough spending, you will be successful. But this is not always the case. Companies that excel in exploration have a culture that encourages and rewards ore finders.

Mentor and develop young geologists

Successful explorers secure the right skills by taking responsibility for developing and mentoring their own people. Western Mining – which discovered Olympic Dam – is perhaps the best exemplar of this practice. As far back as the 1960s, the company was in regular contact with Australian universities, recruiting talented geologists before they graduated. Once these young recruits joined the company, the chief geologist would take them under his wing and actively manage their careers. Working alongside experienced colleagues, the young geologists had invaluable development opportunities in the field.

Western Mining also encouraged its geologists to pursue advanced degrees at universities in Australia and abroad, paying half their salary during their studies. This amounted to a substantial investment, particularly for those who enrolled in three-year PhD programs. 

Strike a better balance of staff and contract geologists

Many of the legends believe that exploration performance has suffered as companies have shifted away from mentoring young geologists to hiring contract geologists and retaining staff geologists only for the duration of a project. In the past, a chief geologist who had been with a company for 20 or 30 years would have built and nurtured his own exploration team. That has changed – dramatically.

Building an internal team also yields other benefits: loyalty and commitment to the company’s interests. With the deep reliance on consulting geologists, this benefit has largely disappeared.

Recruit mavericks, but be prepared to manage them

Some of the most talented geoscientists in exploration don’t fit the corporate mould, much like the so-called smart creatives in technology and innovators in other fields. These mavericks are the sources of innovation and conceptual thinking that often lead to exploration success. But because so many of them are non-conformists, exploration leaders must create an environment in which geoscientists can thrive in the corporate setting. Leaders need to nurture mavericks’ passion for discovery and shield them from the constraints of the corporate environment. But leaders must also be prepared to closely manage their activity.

Mining companies, therefore, might borrow from the talent management playbook of technology and other industries by bolstering recruitment, creating development programs and instituting the kind of work environment incentives that appeal to younger workers.

Create employment stability that can weather industry cycles

The reliance on contractors has not only affected the quality of skills. It has created a wider problem that affects the industry’s skill pool. In the past, companies would retain their teams during downswings. That’s no longer the case. For geologists, mineral exploration has become a riskier career choice. It seems that they have two options: either they work for contractors, where employment is uncertain, or they serve as staff at companies that don’t value maintaining an internal team or developing and mentoring their exploration personnel as they once did.

Large and frequent changes to exploration spending are damaging the supply of mining talent, which only creates a vicious cycle. Ultimately, companies bear the cost of this volatility in the form of poor returns from exploration spending.

Foster a culture of success

Creating a culture of success is important in an industry in which it is easy to become discouraged by the infrequency of discovery. Having experienced successful explorationists on the team is important: not only do they help team members learn, but they also help them understand what it takes to discover, and they help create opportunities for others to know what success feels like. It can be beneficial to get young people in the field, maximising rock exposure time, working on good projects and with experienced explorationists, particularly in the first five to ten years of their career.

Recapturing the value in exploration: think countercyclically, act holistically

Exploration efforts have not delivered much of a return, despite massive investment over the last decade. Now, most mining companies are focused on cost cutting and productivity. In this environment, exploration might not look like a priority, and may even play a part in cost reductions; this approach will only exacerbate the depletion of resources and reserves. 

But mining companies can turn their exploration performance around by acting in a countercyclical way. This means both maintaining exploration spending levels and – even more importantly – changing their whole approach to exploration. To address the productivity challenge and improve the long-term value of exploration, explorers should use an integrated approach that addresses the performance dimensions raised by the exploration legends.

When viewed as an indivisible set, these levers can dramatically boost the odds of exploration success, and exploration can once again be at the heart of the mining enterprise. As some mining companies struggle to replace depleted reserves, others that are first to apply the lessons described here to build world-class exploration capabilities will be rewarded with disproportionate returns. 

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  • Guy Lewington
    4 Nov 2015 at 12.36pm

    I see myself as one of those successful explorers (Kanowna Belle, Sunrise Dam, Nimary) of the latter part of the 20th Century and I often reflect on the dwindling number of success stories coming out of exploration in this century, in Australia particularly. The one major point that was not raised in the Boston article was the “Law of Diminishing Returns”. Every good exploration geologist is fully aware of this Law and knows that every time a discovery is made that is one less ore body that is out there to be found! Geologists of course are discovering low grade currently uneconomic resources that sit on the side lines waiting for the day that they become economic. I refer as an example of this to the ounce plus gold reefs that were mined in the gold boom of the mid nineteenth century and the lower grade 3 gram deposits which could never have been mined at that time.

    The bottom line though is that the easy ones have been found and the cost of finding the well hidden ones will continue to grow exponentially. It is a sad truth and it will require geologists with extraordinary skills including the ability to think more laterally and to visualise the third dimension to pull it off.