How the resource exploitation process works
First you have to find an economic ore deposit. Exploration geologists look at all the previous mines and look at any patterns that exist (e.g. a lot of deposits are found near existing mines). They also utilize scientific knowledge about how ore deposits form (e.g. diamonds can only form under high heat and high pressure; they only end up near the surface if stuff from deep down is ejected upwards, e.g. in kimberlites).
In addition to drilling, geologists may look for things associated with ore deposits. They may go looking for anomalies in gravity, induced polarization, etc. While ore deposits can cause such anomalies, all sorts of other rock configurations can also cause anomalies. So the geologists will drill a lot of holes and find a lot of duds. They most basic method is old school prospecting. You walk around the surface looking for rocks. Certain types of rocks are likely to host valuable minerals. Some rocks obviously contain ore just by looking at it if you are familiar with the different types of rocks. Nowadays geologists will sample surface rock and get the samples assayed for minerals that aren’t visible to the eye (e.g. economic amounts of gold). They may also look for “indicator” materials- stuff that correlates to certain types of ore deposits. And they may look for boulder trains that may lead to a deposit elsewhere.
Most of the really obvious ore has been found. Finding future deposits will only get harder and harder. On the other hand, technology may introduce new technologies that make low-grade deposits economic. We may also discover new technologies to help in exploration.
One thing to note about mineral exploration is that the chance of finding an economic deposit is very, very low. Many geologists will never find a deposit in their entire professional careers.
Pre-feasibility and feasibility studies
In this stage, a mine engineer will evaluate the various technical parameters that determine whether or not a deposit is economic. The more important ones are:
- Size of the deposit.
- Mining method. Underground mining typically costs three times that of open-pit. However, various underground mining methods differ in their cost (the cheaper ones sometimes cannot be used).
- Mining dilution. If the ore deposit is very narrow (only a few meters), mining machines will have to move a lot of waste rock.
- Ore processing / metallurgy. For some ores, the metals cannot be easily (cost-effectively) recovered. Some ores have impurities that cost money to remove (e.g. arsenic, sulphur, etc.).
- Infrastructure. Mines need roads, access to ports (sometimes), power, water, etc.
- Royalties, taxes, etc. Sometimes prospectors and former joint venture partners will have royalties on the property and these need to be factored in.
Other parameters (that are mostly the investor’s job) are:
- Political risk. Some mines may have difficulty due to NIMBY groups. For example, in Australia a lead mine was shutdown after it started production due to residents’ pressure on their politicians.
Some foreign countries are run by corrupt regimes that demand high payments from mining companies. They may escalate these requests in the future (a deal is not a deal). Leaders (sometimes socialist, sometimes not) may appropriate foreign assets. Even in the US and Canada (considered to be the lowest-risk countries), foreign takeovers are often blocked while domestic ones are ok. It doesn’t even make sense because a country can appropriate the assets of foreign countries; it is a good idea for them to follow the host countries’ rules and regulations (though some do not).
- Future commodity prices and exchange rates.
More exploration drilling usually occurs during this stage. If even more ore is discovered (this is a good thing), the mining plan may be changed. Mine construction may be intentionally delayed to avoid building a mine and processing facilities that is not ideal for the deposit.
The feasibility study may determine that the ideal level of investment is higher than what the mining company can afford. So the mining company can sell the asset to another company with more money. Or they can raise money through selling equity, rights offerings, selling royalties on the property, raising debt, etc.
Sometimes there are government-related/government-sponsored entities that will make dumb loans to mining companies (e.g. they don’t charge enough interest relative to the risk). Their mandate may be to help economies develop. In practice, government workers who do their job poorly tend to get to keep their jobs.
Hopefully there are no cost overruns. A companies’ management may have incentives to understate the cost of mine construction to make the economics appear more attractive.
It usually takes 5-10 years (sometimes more!) for a mine to actually start operating. Mining companies are usually very overoptimistic about when a mine will actually start operating.
By this time, commodity prices may be very different and this will affect the economics of a mine.
As the end if a mine’s life comes closer, there is an incentive to find more ore near the processing plant since all the infrastructure is in place and paid for.
Exploration drilling may occur when a mine is operating. Some exploration drilling may be deferred until an underground shaft is built. Drilling very deep is expensive and drills will slowly start going off target the further the drilling gets. Starting underground lowers the exploration cost.
All these things mean that the plan for a mine will likely change several times over the course of its life.