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Mineral exploration economics: The search for base metals in Australia and Canada
Book
reviews
general surveys and ‘institution strengthening’ (commonly support for training), though it has not been without its problems, is generally judged to have been a success. It is said to be too early to pass judgement on the Revolving Fund. However, it is apparent that the scheme, which is much more specifically oriented towards project development than the UNDP, and which it is eventually intended should be self supporting (funded from previous successes, hence ‘revolving’), still stubbornly refuses to revolve. A chapter on Botswana and Papua New Guinea by Johnson and Clark shows how two developing countries have been able to attract and retain the interest and investment of the international mining industry. The routes they have chosen are interestingly different, Botswana offering the attraction of simple licensing procedures and a non-ideological, if sometimes ad hoc, approach to project while PNG demands development, tougher licensing conditions but offers the attraction of a stable and sophisticated legal and fiscal regime for subsequent development. The second theory investigated that exploration productivity is declining - is also considered unproven, the depletion of known deposits appearing generally to have been compensated by advances in geological understanding and recovery techniques. Data problems here become even more acute as the assessment of productivity demands data on the output of exploration as well as the input. Analysis in this area is very much led by the Canadians, partly because Canadian data on exploration are better than most. A paper by Cranstone, which uses the gross value of discovered metal as an output, finds that, leaving aside the mid-1950s (when advances in geophysical prospecting techniques permitted a number of major finds), there is little evidence to support the notion that exploration productivity in Canada is in decline. The point is also indirectly supported by a paper by Martin and Jen which asks whether Canadian ore grades have fallen since 1939 and finds that generally they have not. In an even more data-intensive pap-
302
er, Mackenzie and Woodall attempt a comparative analysis of the net returns from exploration (taking account of development and mining costs as well as the time value of money) in Canada and Australia. As in Cranstone’s contribution, the results show a skewed distribution with a few large finds accounting for the lion’s share of the rewards. The skewedness is particularly acute in Australia. This finding, along with the much greater time it takes to discover and evaluate deposits in Australia and the much lower average ‘expected’ returns from exploration spending in Australia as compared to Canada, the authors put down to fundamental differences in geology, particularly the greater surface weathering in Australia. A final paper in the section, by Eggert and Rose, attempts an evaluation of exploration productivity in the USA. Although it is a brave effort, containing much interesting material in which the analysis is pushed to the limits of what the data will stand (arguably further), it does not support any very
positive conclusion, though the authors hazard that over the last ten years ‘the success ratio [gross value of discoveries/cost of exploration] appears to decline with time’. Completing the volume are a study on exploration in South Africa by Beukes which illustrates well the critical role played by politics in shaping exploration activity (though not perhaps in quite the way we might intuitively expect in as far as uncertainties in the rest of Africa and rising gold prices led to a major surge of exploration in South Africa in the early 1980s) and one on exploration in France and its territories by Chazan. Chazan finds, again perhaps counterintuitively, that the success ratio of exploration by French organizations over the period 1973-82, at 22%, is similar to the ratios achieved in North America over the same period. All in all, this is a first class book. David Humphreys RTZ Corporation London, UK
Penetrating observations MINERAL EXPLORATION ECONOMICS: THE SEARCH FOR BASE METALS IN AUSTRALIA AND CANADA Brian Mackenzie
and Roy Woodall
Centre for Resource Studies, Queen’s University, Kingston, Ontario, Working Paper No 40, 123 PP, 1987 This working paper presents the results of studies undertaken by the Western Mining Corporation (WMC) in Australia and the Centre for Resource Studies in Canada which attempt to evaluate the financial reor likely to be turns achieved, achieved, on ‘economic’ mineral deposits discovered between 1946 and 1978. Essentially, these studies were undertaken to ascertain whether expenditure on exploration for base metals had yielded an acceptable
financial return. Put bluntly, the answer is no, unless a megadeposit such as Olympic Dam (coincidentally 51% owned by WMC) or Kidd Creek should happen to be discovered. Following a very short introduction, the methodology adopted for this study is discussed in Chapter 2, while Chapters 3 and 4 outline the geological setting and data base respectively. The potential before tax value of exploration in Australia and Canada is assessed in Chapter 5 for a set of base case conditions, and for variants on the base. Chapter 6 appraises the after tax value of base metal exploration for both countries. Major conclusions are summarized in Chapter 7. The last third of the paper is given over to appendices listing the deposits evaluated in both countries and describing the tax and royalty regimes in their respective states and provinces. Mineral exports are of fundamental importance to the economic prosper-
RESOURCES
POLICY
December
1988
Book reviews ity of both Australia and Canada. However, this is only the final stage of the high risk, expensive and lengthy procedures associated with the mining industry. Decisions regarding the level of exploration expenditures today may not yield tangible financial benefits for many years, even decades. At the end of the process, mineral prices may have changed dramatically, exchange rates varied, trade barriers been raised or lowered, and domestic governments and their policies (especially tax regimes) replaced a number of times. Any study which attempts to evaluate rates of return to mining in the context of these and other limitations is therefore faced with a formidable task. Nevertheless, Mackenzie and Woodall have produced a document which clearly identifies the assumptions and limitations of their study, and which offers some penetrating observations on the mineral exploration sectors of the two countries under review. The potential value of mineral exploration is defined as the difference between the revenues generated from mineral production and all the costs required to realize that revenue, including an allowance for the cost of capital. However, the time frame incumbent upon such a process is generally extremely long, and this raises the major problem of projecting longterm prices for the minerals being considered (in US dollars, the numeraire currency for trade) and exchange rates. While large bands for both can be expected to incorporate most eventualities, we must ultimately settle for a ‘most likely’ scenario. Thus the rate of return (after tax) for base metal exploration in Australia and Canada can range from a pitiful 1% to a according to the bountiful 30%, assumed price and exchange rate levels.
tions. Mackenzie and Woodall’s main conclusion supports this argument: ‘the economic base metal deposit in Australia typically costs twice as much and takes twice as long to find and delineate as does one in Canada. On the other hand, the economic base metal deposits discovered in Australia are found to be twice as large on average as those in Canada.’ The authors contend that ‘base metal exploration in Australia may be much more difficult and less effective than in Canada’ because of basic
THE KOREAN MINERAL MARKET: OPPORTUNITIES AND MARKETING STRATEGIES FOR CANADA 0. Yul Kwon Studies, Resource for Centre Kingston, University, Queen ‘s Ontario, 1988, 158 pp, C$15.00
Intuitively, we would expect Australia and Canada to possess a relatively high degree of commonality with regard to economic and social development this century. However, there is little reason to assume that this affinity is likely to carry over to the natural resource endowments of the two na-
RESOURCES
1988
POLICY
December
A.D. Owen University of New South Wales Sydney, Australia
Insight into the global economy
Yul Kwon’s monograph on market opportunities in South Korea for selected Canadian mineral exports is a thoughtful and well executed work. Ostensibly it provides an analysis of one country’s need to find new outlets for commodities whose traditional markets face stagnation or possible decline. In fact, this study contains a series of interesting insights into the transformation of the global economy in the last few decades and, as such, many of the author’s observations and recommendations have a validity which transcend the Canada-Korea case study framework. What is arguably the most interesting facet of this work is the light it casts on the intricacies of dealing with the AsiaPacific. Both directly and indirectly, Kwon’s analysis raises challenging questions about the future success of Western nations in this endeavour, and whether they will be able to learn from recent trading experiences in the Pacific Basin, specifically those with Japan. Participants in global trade today, in many respects, face a much more complex environment than their predecessors. Suppliers of primary re-
Geological characteristics
differences in geological characteristics between them. On the evidence they have accumulated, they suggest that ‘an undiscovered population of small and medium-size base metal deposits under the complex weathered zone covering most of Australia awaits discovery by more advanced exploration technology’.
sources must be cognizant of major changes in the politicoeconomic environment which bear directly on every-day commodity transactions. At least two major trends can be discerned in this regard. The first is the evolution of industrial economies toward a high technology and service base with less reliance on primary raw materials. One of the distinguishing features of this transformation is its acceleration, aptly illustrated by the ‘ladder of development’ in the AsiaPacific, where groups of nations appear to be passing through successive stages of industrialization relatively rapidly in response to changing patterns of investment, factor availability and prices. One of the most cogent examples of this phenomenon has been Japan, where several critical shifts in the Japanese industrial base, and related raw materials requirements, have been accompanied by compensatory changes in other Pacific Basin nations, such as the Newly Industrializing Countries of South Korea, Taiwan, Hong Kong and Singapore, and the ASEAN bloc.’ The second global trend with a profound impact on primary resource trading patterns was the oil crisis of 1973 and its sequelae. Rising oil prices have had a major effect on economic development and the mix of resources utilized. Equally important has been the psychological conditioning associated with this event and subsequent energy price dislocation - a realization that system shocks, whether econo-
303
reviews
general surveys and ‘institution strengthening’ (commonly support for training), though it has not been without its problems, is generally judged to have been a success. It is said to be too early to pass judgement on the Revolving Fund. However, it is apparent that the scheme, which is much more specifically oriented towards project development than the UNDP, and which it is eventually intended should be self supporting (funded from previous successes, hence ‘revolving’), still stubbornly refuses to revolve. A chapter on Botswana and Papua New Guinea by Johnson and Clark shows how two developing countries have been able to attract and retain the interest and investment of the international mining industry. The routes they have chosen are interestingly different, Botswana offering the attraction of simple licensing procedures and a non-ideological, if sometimes ad hoc, approach to project while PNG demands development, tougher licensing conditions but offers the attraction of a stable and sophisticated legal and fiscal regime for subsequent development. The second theory investigated that exploration productivity is declining - is also considered unproven, the depletion of known deposits appearing generally to have been compensated by advances in geological understanding and recovery techniques. Data problems here become even more acute as the assessment of productivity demands data on the output of exploration as well as the input. Analysis in this area is very much led by the Canadians, partly because Canadian data on exploration are better than most. A paper by Cranstone, which uses the gross value of discovered metal as an output, finds that, leaving aside the mid-1950s (when advances in geophysical prospecting techniques permitted a number of major finds), there is little evidence to support the notion that exploration productivity in Canada is in decline. The point is also indirectly supported by a paper by Martin and Jen which asks whether Canadian ore grades have fallen since 1939 and finds that generally they have not. In an even more data-intensive pap-
302
er, Mackenzie and Woodall attempt a comparative analysis of the net returns from exploration (taking account of development and mining costs as well as the time value of money) in Canada and Australia. As in Cranstone’s contribution, the results show a skewed distribution with a few large finds accounting for the lion’s share of the rewards. The skewedness is particularly acute in Australia. This finding, along with the much greater time it takes to discover and evaluate deposits in Australia and the much lower average ‘expected’ returns from exploration spending in Australia as compared to Canada, the authors put down to fundamental differences in geology, particularly the greater surface weathering in Australia. A final paper in the section, by Eggert and Rose, attempts an evaluation of exploration productivity in the USA. Although it is a brave effort, containing much interesting material in which the analysis is pushed to the limits of what the data will stand (arguably further), it does not support any very
positive conclusion, though the authors hazard that over the last ten years ‘the success ratio [gross value of discoveries/cost of exploration] appears to decline with time’. Completing the volume are a study on exploration in South Africa by Beukes which illustrates well the critical role played by politics in shaping exploration activity (though not perhaps in quite the way we might intuitively expect in as far as uncertainties in the rest of Africa and rising gold prices led to a major surge of exploration in South Africa in the early 1980s) and one on exploration in France and its territories by Chazan. Chazan finds, again perhaps counterintuitively, that the success ratio of exploration by French organizations over the period 1973-82, at 22%, is similar to the ratios achieved in North America over the same period. All in all, this is a first class book. David Humphreys RTZ Corporation London, UK
Penetrating observations MINERAL EXPLORATION ECONOMICS: THE SEARCH FOR BASE METALS IN AUSTRALIA AND CANADA Brian Mackenzie
and Roy Woodall
Centre for Resource Studies, Queen’s University, Kingston, Ontario, Working Paper No 40, 123 PP, 1987 This working paper presents the results of studies undertaken by the Western Mining Corporation (WMC) in Australia and the Centre for Resource Studies in Canada which attempt to evaluate the financial reor likely to be turns achieved, achieved, on ‘economic’ mineral deposits discovered between 1946 and 1978. Essentially, these studies were undertaken to ascertain whether expenditure on exploration for base metals had yielded an acceptable
financial return. Put bluntly, the answer is no, unless a megadeposit such as Olympic Dam (coincidentally 51% owned by WMC) or Kidd Creek should happen to be discovered. Following a very short introduction, the methodology adopted for this study is discussed in Chapter 2, while Chapters 3 and 4 outline the geological setting and data base respectively. The potential before tax value of exploration in Australia and Canada is assessed in Chapter 5 for a set of base case conditions, and for variants on the base. Chapter 6 appraises the after tax value of base metal exploration for both countries. Major conclusions are summarized in Chapter 7. The last third of the paper is given over to appendices listing the deposits evaluated in both countries and describing the tax and royalty regimes in their respective states and provinces. Mineral exports are of fundamental importance to the economic prosper-
RESOURCES
POLICY
December
1988
Book reviews ity of both Australia and Canada. However, this is only the final stage of the high risk, expensive and lengthy procedures associated with the mining industry. Decisions regarding the level of exploration expenditures today may not yield tangible financial benefits for many years, even decades. At the end of the process, mineral prices may have changed dramatically, exchange rates varied, trade barriers been raised or lowered, and domestic governments and their policies (especially tax regimes) replaced a number of times. Any study which attempts to evaluate rates of return to mining in the context of these and other limitations is therefore faced with a formidable task. Nevertheless, Mackenzie and Woodall have produced a document which clearly identifies the assumptions and limitations of their study, and which offers some penetrating observations on the mineral exploration sectors of the two countries under review. The potential value of mineral exploration is defined as the difference between the revenues generated from mineral production and all the costs required to realize that revenue, including an allowance for the cost of capital. However, the time frame incumbent upon such a process is generally extremely long, and this raises the major problem of projecting longterm prices for the minerals being considered (in US dollars, the numeraire currency for trade) and exchange rates. While large bands for both can be expected to incorporate most eventualities, we must ultimately settle for a ‘most likely’ scenario. Thus the rate of return (after tax) for base metal exploration in Australia and Canada can range from a pitiful 1% to a according to the bountiful 30%, assumed price and exchange rate levels.
tions. Mackenzie and Woodall’s main conclusion supports this argument: ‘the economic base metal deposit in Australia typically costs twice as much and takes twice as long to find and delineate as does one in Canada. On the other hand, the economic base metal deposits discovered in Australia are found to be twice as large on average as those in Canada.’ The authors contend that ‘base metal exploration in Australia may be much more difficult and less effective than in Canada’ because of basic
THE KOREAN MINERAL MARKET: OPPORTUNITIES AND MARKETING STRATEGIES FOR CANADA 0. Yul Kwon Studies, Resource for Centre Kingston, University, Queen ‘s Ontario, 1988, 158 pp, C$15.00
Intuitively, we would expect Australia and Canada to possess a relatively high degree of commonality with regard to economic and social development this century. However, there is little reason to assume that this affinity is likely to carry over to the natural resource endowments of the two na-
RESOURCES
1988
POLICY
December
A.D. Owen University of New South Wales Sydney, Australia
Insight into the global economy
Yul Kwon’s monograph on market opportunities in South Korea for selected Canadian mineral exports is a thoughtful and well executed work. Ostensibly it provides an analysis of one country’s need to find new outlets for commodities whose traditional markets face stagnation or possible decline. In fact, this study contains a series of interesting insights into the transformation of the global economy in the last few decades and, as such, many of the author’s observations and recommendations have a validity which transcend the Canada-Korea case study framework. What is arguably the most interesting facet of this work is the light it casts on the intricacies of dealing with the AsiaPacific. Both directly and indirectly, Kwon’s analysis raises challenging questions about the future success of Western nations in this endeavour, and whether they will be able to learn from recent trading experiences in the Pacific Basin, specifically those with Japan. Participants in global trade today, in many respects, face a much more complex environment than their predecessors. Suppliers of primary re-
Geological characteristics
differences in geological characteristics between them. On the evidence they have accumulated, they suggest that ‘an undiscovered population of small and medium-size base metal deposits under the complex weathered zone covering most of Australia awaits discovery by more advanced exploration technology’.
sources must be cognizant of major changes in the politicoeconomic environment which bear directly on every-day commodity transactions. At least two major trends can be discerned in this regard. The first is the evolution of industrial economies toward a high technology and service base with less reliance on primary raw materials. One of the distinguishing features of this transformation is its acceleration, aptly illustrated by the ‘ladder of development’ in the AsiaPacific, where groups of nations appear to be passing through successive stages of industrialization relatively rapidly in response to changing patterns of investment, factor availability and prices. One of the most cogent examples of this phenomenon has been Japan, where several critical shifts in the Japanese industrial base, and related raw materials requirements, have been accompanied by compensatory changes in other Pacific Basin nations, such as the Newly Industrializing Countries of South Korea, Taiwan, Hong Kong and Singapore, and the ASEAN bloc.’ The second global trend with a profound impact on primary resource trading patterns was the oil crisis of 1973 and its sequelae. Rising oil prices have had a major effect on economic development and the mix of resources utilized. Equally important has been the psychological conditioning associated with this event and subsequent energy price dislocation - a realization that system shocks, whether econo-
303