TORONTO (miningweekly.com) – Delegates at the Toronto Resource Investment Conference from September 12 to 13 spent much of their time discussing and comparing notes on what has become something of an annus horrblius, a particularly horrible year, for mining and metals. 

Sprott Global Resource Investments investment executive Michael Kosowan acknowledged these grim conditions in his keynote speech on the first day of the conference and then highlighted several other industry afflictions, including the dependence on high-grading and, in tandem, the extraction of lower-grade material to maintain output levels.

“I’ll begin by asking this question: why are the gold majors trading roughly at the same prices they did 12 years ago when gold prices were $350/oz? The short answer is that they are being haunted by the sins of their past,” Kosowan said.

“[These] include but are not limited to: low-grade acquisitions; an inability to control operating costs and the poor accounting of such costs; the loss of focus; capital expenditure overruns; poor assessment of foreign country risk; and poor assessment of the associated tax schemes and royalty regimes of those foreign jurisdictions,” he explained.

HEADING FOR A FALL

High-grading is a critical concern. “This is the act of changing the mine design to extract the high-grade material first,” Kosowan said. “It is an extremely seductive option for the seniors as it raises their short-term profitability. However, like most stimulants, there are often unforeseen side effects that can be debilitating over the long term.”

“We’ve concluded that high-grading will cause the seniors to sterilise as much as one third of their deposits. Not obtaining all of a mine’s resources downgrades its reserves and renders the initial feasibility study null and void,” he said.

“Small wonder there’s now so much suspicion surrounding newly-minted prefeasibility studies. Some of them have as much validity as a fairy tale,” he added.

The impact of high-grading is also evident at legacy mines. Here falling head grades have led to operational expansion and the ramping up of lower-grade production to maintain output levels.

“Head grade over the past 12 years has fallen by roughly 75% from 4 g/t gold to 1 g/t gold. Current production is being fuelled not by bright, new and shiny gold projects but by old ones,” Kosowan said.

“Under pressure to deliver financial results the mining companies have turned to the unthinkable and started robbing themselves: they are mining their own jewellery boxes with little long-term regard for the implications this may have,” he said.

“To maintain production levels [as the head grade falls], operators are simply expanding their mines, which means extracting lower ore grades. This is the road to economic oblivion as it is [a model] completely dependent on an increasing commodity price,” he added.

“But what if those prices don’t continue to rise? Well in that case the model implodes,” he warned.

GOING UNDERGROUND

As an extension of seeking out the easy-to-access lower-grade material, Kosowan notes another flawed trend: the bulk mining of pillars and other low-grade remnants at legacy operations.

“This is an area of study that I specialised in for my Masters’ thesis,” he said. “Salvaging the low grade at various world-class deposits has some economic merit. But at the time of my studies I suspected its days were numbered … I thought the method was going to go the way of the dodo,” he said.

“But the advantage of this method is its cheapness on a per tonne basis and, low and behold, [bulk] underground mining methods are back in vogue again,” he said.

“Some of the world’s greatest deposits are now transitioning from being enormous openpit mines into underground bulk mining scenarios. Here we’re talking about major legacy mines such as Freeport-McMoRan's Grasberg operation, Codelco’s Chuquicamata, or Kennecott’s Bingham Canyon,” he said.

“But these bulk mining methods are capital intensive and longer-term projects. On average, 70% of the capital expenditure needs to be invested before gaining any revenue whatsoever for the company. So companies that undertake this type of model need to have deep pockets and a long-term vision,” he added.

“For example, the Grasberg deep mill and mining operation will take at least 12 years to get fully developed,” he said.

In order to be sustainable at current rates, the mining sector will require a greater number of new, higher-grade discoveries to be brought on stream. But exploration and early-stage development for the seniors is a difficult undertaking due to current conditions and shareholder expectations.

“Shareholders expect seniors to obtain cash flow by producing the commodity efficiently and effectively. They don’t want these companies running around hinterlands chasing geological anomalies and taking geological risk,” Kosowan said.

And this is where the advantage for robust juniors lies. Companies with well-delineated, high-grade projects will become increasingly attractive as the seniors, pushed by their increasingly unviable working models, slowly return to acquiring the best properties available.

“The seniors turn to the juniors because of their prowess in finding new properties. Not only do [the juniors] have the nimbleness to look in different jurisdictions, but they also have the mandate as their shareholders accept the associated risk,” he said.

The juniors most likely to fit this mandate, and most likely to survive during the current doldrums are those with healthy balance sheets and experienced management teams with the acumen to access capital markets, Kosowan said.

They must also hold flagship projects that require lower levels of capital expenditure and possess high margins – most often equating to higher grades and/or a project that is economically feasible when it comes to mining and mining costs, he added.

This was the light at the end of the tunnel for juniors and for those seeking to invest in the sector.

“Bear markets invariably lead to bull markets. Investors aggressively looking to put capital to work in this marketplace are doing themselves a huge favour by buying into outstanding companies when the prices are so low,” Kosowan added. “The timing on this is critical and, quite frankly, the time is now.”