The rush to replace reserves is on

A negative of any downturn is the reduction in development and exploration it brings. Australian Mining explains how industry has responded since market conditions have improved.

Australian mining companies have made a renewed commitment to deliver the next phase of development and projects over the past 18 months.

The industry’s revival follows a period of reduced capital expenditure and investment in exploration, leaving it with a lower mineral reserve profile in many key commodities due to the lull in activity.

Deloitte, when it released its 2018 Tracking the Trends report, identified ‘Reserve replacement woes’ as a key challenge being faced by the global mining industry.

It noted that many mining companies were on the rebound thanks to cost cutting, a focus on fundamentals, and a commitment to portfolio simplification.

However, the turnaround had not yet solved the supply constraints that were plaguing the industry at the time.

The amount of gold discovered in the 10 years to 2016, for example, had declined by 85 per cent, while reserves had fallen by 40 per cent since 2011.

Copper, silver, nickel, cobalt and zinc were other commodities that Deloitte showed were also experiencing supply challenges.

Deloitte partner, consulting David Cormack says this growth phase is typical in the boom and bust cycle of the minerals sector after capital expenditures and exploration budgets have been through a period of decline.

“The incentives to enter the industry again post-bust cycle only happens when there is recovery, then there is a delay to impact,” Cormack tells Australian Mining.

“These are long lead time exploration projects, with drilling and feasibility studies. Then what happens is that everyone comes online and you commence the cycle all over again.”

Australian companies have responded to the upswing over the past year by noticeably increasing their expenditure on projects and exploration.

In the Australian gold sector exploration budgets have returned, and in some case are hitting record territory.

Northern Star Resources, for example, has committed a company record $60 million to exploration in Western Australia’s Goldfields this financial year, primarily to convert a significant amount of its 15.9Moz resources base into reserves.

Newcrest Mining has linked up with a number of junior miners through joint ventures to increase exploration around the Tanami region in search of another major discovery in northern Australia.

“All of the drilling rigs that were idled just a couple of years ago are now all fully deployed,” Cormack says. “So exploration activity is alive and well and has been for probably 12 months plus now.”

The gold industry has not been alone in this upward trend either; the zinc sector in Queensland has experienced a notable upswing in development and investment too.

New Century Resources has restarted the Century mine as a hydraulic mining operation focused on tailings, while Glencore has ramped up activity at its Mt Isa operations.

Cormack says companies are investing in different ways during the latest upswing, with new techniques and technologies being considered to add reserves.

“They are deploying different mining techniques to more effectively mine those deposits,” he says.

“Continuously trying to innovate and bring those techniques into feasibility studies remains a challenge. And then how do they overcome the depth and declining grades but along with the declining grades is more complex geo metallurgy.

“So the way in which they have to get recoveries from far more complex orebodies is still something that they are experimenting with and trying to get right. That’s where things like advanced analytics and data science come into play.”

Cormack points to the growing number of collaborations between miners and METS (mining, equipment, technology and services) companies as developments that are assisting the industry’s transition in this direction.

“Out of necessity mining companies have needed to become more innovative in their fundamental thinking and approaches in their DNA or their cultures. With that we have seen increasing and highly collaborative models and ecosystems come into play,” Cormack concludes.

Deloitte’s leading strategies to replace reserves from Tracking the Trends includes:

Shorten the cycle

To reduce the risk of long-cycle megaprojects, resource companies often engage in short-cycle projects designed to rapidly generate positive cash flow. In addition to reducing CAPEX, these short-cycle investments help to preserve the production capacities needed to expand as demand factors shift.

Build a portfolio of early stage projects

Several mining companies have entered joint ventures with junior explorers. In these types of deals, majors typically offer to share intellectual property (IP), engineering resources, technical expertise, and exploration costs with juniors in exchange for first rights to new discoveries.

Find local capital

To avoid undue risk, blue-chip mining companies typically prefer to invest in near–mine exploration in known geologies. This focus, however, may hamper their ability to succeed in emerging nations. To overcome this hurdle, a new kind of investor may be required — one who understands the risks, regulatory environment, and cultural issues that prevail in less developed regions.

Consider more creative funding models

In a bid to become more nimble operators, companies are on the lookout for more creative funding models that may not require investors to commit large amounts of capital for long periods of time. This is spurring a rise in alternative funding approaches, such as supply chain financing, streaming arrangements, and royalty agreements.

Use analytics to optimise portfolios

One of the greatest difficulties organisations face when trying to structure optimal portfolios is making informed choices about which assets to buy or sell, and when.

To remove some of that subjectivity, leading organisations are increasingly relying on data analytics to rank and score potential investment opportunities.

Leverage new technologies

As geomatic technologies evolve, companies have begun to develop more advanced surveying capacities. New mobile technologies now allow for portable laser scanning; drones are delivering high resolution aerial images; and satellite imagery is being used to detect new ore bodies.

This article originally appeared in the October issue of Australian Mining.

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