5.Roderick Eggert_Exploration and Development.pdf

Mineral Exploration and Mine 

Development: Risk and Reward 

Roderick G. Eggert 

International Conference on Mining, 

“Staking a Claim for Cambodia” 

Phnom Penh, Cambodia, 26-27 May 2010

Outline for “Mineral Exploration and 

Mine Development” 

‣ Characteristics 

‣ Where they occur 

‣ How they are financed 

‣ „Best practice‟ in public policy 

Roderick G. Eggert, May 26, 2010 2


‣ . . .are investments 

Development. . . 

‣ They compete for funds with other 

investment opportunities 

‣ The level and location of investment are 

determined by expected revenues and 

costs, adjusted for time and risk 


‣ Geologic 

Factors that Determine Expected 

Revenues, Costs, and Risks 

• Does a mineral resource exist, in what quantities and grades, of 

what metallurgical quality 

‣ Technical 

• Can a resource be extracted and processed, with what 

technologies 

‣ Environmental, Social, and Political 

• Can a resource be extracted in ways that are consistent with a 

nation‟s preferences for environmental quality and impacts on 

local communities And in ways that are compatible with public 

policies and the political environment 

‣ Economic 

• Overall, can a resource be extracted at a profit 



Development. . . 

‣ . . . together represent a multistage 

process of information gathering 


Stages in Mineral Supply 

(1) Grassroots and advanced exploration identifying and 

evaluating a mineral deposit 

(2) Deposit development designing and constructing a mine 

(3) Mining producing ore & concentrate (or other form of semiprocessed 

material) 

(4) Metallurgical processing producing refined metal 

(5) Fabrication and manufacturing transforming refined metal into 

finished product 

The perspective of mineral deposit: the deposit must be discovered 

before it can be mined 

The perspective of a company: it can choose to enter the supply chain 

at any stage of production 


Company Perspective: Where to Enter the Supply Chain 

Grassroots 

Exploration 

Advanced 


Deposit 

Development 

Operating 

Mine 

Lead time until 

mining 

Geologic risks 

Land area 

Costs and 

economic risks 

Profit potential 

Political risks 

Longer Shorter 

(5-15 years of continuous activity from start of grassroots 

exploration) 

Higher Lower 

Larger Smaller 

Lower Higher 

Higher Lower 

Lower Higher (bargaining power switches to 

government once mining begins; exploration is „footloose‟) 


Grassroots Exploration 

Activities 

Typical Land Area 

(1,000 square 

km) 

Typical 

Expenditure 

(million US$) 

Possible 

Outcomes or 

Studies 

Desk studies, area selection, land acquisition, 

regional studies (geology, geochemistry, 

geophysics), preliminary community engagement 

100-1000 

Up to 10s 

Target identification for subsequent detailed 

analysis 


Advanced Exploration 

Activities 

Typical Land Area 

(1000 sq km) 

Typical 

Expenditure 

(million US$) 

Possible 

Outcomes or 

Studies 

Detailed target evaluation (geology, geochemistry, 

geophysics), drilling, trenching, deposit delineation, 

preliminary metallurgy, collection of environmental & 

social baseline data, community engagement 

1-10 

Up to 100s 

- Scoping study (resource estimate, order-of-magnitude 

cost estimate) 

- Prefeasibility study (revised resource estimates, 

preliminary mine design & engineering, preliminary 

cost estimates) 


Deposit Development 

Typical 

Activities 

Typical Land 

Area (1000 sq 

km) 

Typical 

Expenditure 

Possible 

Outcomes or 

Studies 

Detailed drilling, mine planning, metallurgical testing, 

continued environmental assessment, continued 

community engagement 

1 

Varies, can be > US$1 billion 

- Applications for required permits & approvals 

- Feasibility study (reserve estimates, mine & plant 

design, detailed cost estimates, full technical & 

economic assessment, financing) 

- “Go/no go” decision 


Environmental and Social Impacts 

Grassroots 


- Usually minimal effects from airborne geophysical 

surveys and regional reconnaissance 

Advanced 


Deposit 

Development & 

Mining 

- More significant but still moderate effects 

- Road building, traffic, drilling, trenching, etc., can 

affect air, flora, fauna, land, water 

- Most effects can be mitigated at a cost with 

helicopters, remediation after drilling, other activities 

- Potentially more significant effects 

- Environmental: construction, mining, processing, 

waste disposal and tailings affect air, flora, fauna, 

land, water 

- Social: potential influx of people and significant 

community change represent challenges 

- Many effects can be minimized & controlled but 

some change is inevitable and permanent 


Outline: Mineral Exploration and 

Mine Development 


‣ Where they occur. . . 

• . . . Depends on (a) geologic potential and (b) 

the investment climate 




Perceptions of Geologic Potential 

‣ Perceptions based on: 

• Geologic knowledge from non-mining activities (e.g., road 

building, assessment of geologic hazards, etc.) 

• Past and present exploration and mining 

• Research and geoscientific information from public geologicalsurvey 

organizations 

• Geoscientific information as a public good 

• A catalyst (advertising, signaling) 

‣ Exploration of an area is never done „once and for all‟ 

• Different explorers interpret the same data differently 

• Over time, scientific understanding of mineral deposits improves, 

technologies change, economic & political conditions change 


The Investment Climate and Governments 

‣ General considerations (macroeconomic and political 

stability, legal & banking systems, fiscal rules, etc.) 

‣ Mineral policies 

• Role of the state 

• Access to land and mineral resources 

• Security of tenure 

• Local communities 

• Environmental protection (operational, post closure) 

• Commercial considerations (e.g., downstream processing 

requirements, marketing, foreign exchange, repatriation of 

profits, transferability of rights) 

• Mining taxation 


Mining Taxation 

‣ Possible reasons for taxing mining differently 

than other activities 

• Government owns subsurface mineral resource 

• Mining generates differential rents or surpluses 

• Gift of nature, ability to pay, redistribute income, alleviate 

poverty 

• Mining depletes a nonrenewable resource 

• Sustain the benefits of mining after mining ends 

• Invest in other forms of sustainable capital 

• Human health 

• Education 

• Public infrastructure 

• Other industries 


Mining Taxation (continued) 

‣ Types 

• Unit of production (based on weight) 

• Gross value 

• Net income 

• Upfront bonus payment 

‣ Differences among types of taxes: 

• Incentives for exploration and mining investment 

• Risk sharing between company and government 

• Timing, stability, predictability of government 

revenues 

• Ease & costs of implementation 









General Points 

‣ Sources of finance 

• Internal funds 

• Equity 

• Debt 

‣ Most mineral exploration 

• Internal funds (companies with operating mines) 

• Equity (junior exploration companies) 

‣ Most mine development 

• mix of equity and debt 


Equity 

‣ Off Market 

• Venture capital 

• Private placements 

• Joint ventures (e.g., 

mining company funds 

activities of junior 

exploration company 

in exchange for partial 

ownership) 

• Royalty-based 

financing 

‣ Market 

• Initial public offerings 

(IPOs) 

• Subsequent issuing of 

equity rights 

Source: Guj (2006) 


Debt 

‣ Corporate debt: loans to company as a 

whole 

‣ Project finance: loans to project, no 

recourse to other assets of the company 

Source: Guj (2006) 







‣ ‘Best practice’ in public policy 


„Best Practice‟ in Mineral 

Public Policy 

‣ Provision of basic up-to-date geoscientific information 

‣ Optimal allocation of land, incorporating economic, 

social, environmental issues 

‣ Clear, efficient, transparent licensing 

‣ Security of tenure 

‣ Internationally competitive tax regimes 

‣ Adequate supply of qualified professionals 

‣ Appropriate and consistent environmental rules 

‣ Effective stakeholder engagement 

‣ Optimal distribution of benefits 

Source: ABARE (2007) 


„Best Practice‟ in Economic 

Governance 

‣ Consistency, accountability and administrative 

capacity across all sectors of the economy 

‣ Competitive neutrality across all sectors 

‣ Facilitation of flexible business structures 

‣ A non-restrictive foreign investment environment 

‣ A market free from barriers to trade 

‣ Unrestricted access to domestic and global 

capital markets 

‣ Adequate investment in infrastructure 

Source: ABARE (2007) 


Contact information: 

Roderick G. Eggert 

Professor and Division Director 

Division of Economics and Business 

Colorado School of Mines 

Golden, Colorado 

USA 80401 

Phone: +1 303 273 3981 

E-mail: reggert@mines.edu

5.Roderick Eggert_Exploration and Development.pdf

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