The Key Drivers Behind Resource Growth: An Analysis Of The Copper

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The key drivers behind resource growth: an analysis of the copper industry over the last 100 years Richard Schodde Managing Director, MinEx Consulting 2010 MEMS Conference Mineral and Metal Markets over the Long Term Joint Program with the SME annual meeting in Phoenix, March 3 2010 MinEx Consulting Strategic advice on mineral economics & exploration Overview 1. What are the key drivers? 2. How much copper has been found and mined 3. Trends in declining ore grade – is it good news or bad? 4. Untangling the effects of discovery, technology, costs and prices MinEx Consulting Strategic advice on mineral economics & exploration 2 Key drivers for resource growth • Exploration success – Trends in copper discovery rates over last century – Growth in world reserves & resources • Changes in costs – Impact on what we define “economic” ore – R&D and Engineers can grow the resource • Changes in prices – Higher prices will expand the pool of economic projects MinEx Consulting Strategic advice on mineral economics & exploration 3 Discovery: Most of the metal found is tied up in a handful of deposits Amount of copper found in deposits >0.1 Mt Cu in the World: 1900-2009 Mt Cu 180 150 Other & Unspecified Most of the copper found came from a handful of giant deposits Chuquicamata El Teniente Individual Deposits > 1 Mt Cu Andina 120 Olympic Dam Escondida 90 Lubin Grasberg 60 30 Estimate 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Source: MinEx Consulting Feb 2010 Note: Chart include minor adjustment for deposits missing from the database MinEx Consulting Strategic advice on mineral economics & exploration 4 Until recently, we have been finding it faster than we mine it Amount of copper mined vs copper found in deposits >0.1 Mt Cu in the World: 1900-2009 Mt Cu 180 CAUTION: Not all discoveries turn into mines, and not all resources get recovered 150 Discoveries Production 120 90 60 Estimate 30 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Source: MinEx Consulting Feb 2010 Note: Chart include minor adjustment for deposits missing from the database MinEx Consulting Strategic advice on mineral economics & exploration 5 Copper reserves continue to grow World Copper Reserves: 1900-2010 Mt Cu 1000 Various Authors Tilton & Lagos (2007) 800 Govett & Govett (1976) Brook Hunt (2007) 600 USGS USGS "Reserve Base" 400 200 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Sources: Various MinEx Consulting Strategic advice on mineral economics & exploration 6 Copper reserves continue to grow World Copper Reserves: 1900-2010 Mt Cu 1000 Various Authors Tilton & Lagos (2007) 800 Govett & Govett (1976) Brook Hunt (2007) 550 mt in 2010 USGS 600 USGS "Reserve Base" ESTIMATED RESERVES 400 200 25 mt in 1900 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Sources: Various MinEx Consulting March 2010 MinEx Consulting Strategic advice on mineral economics & exploration 7 Over the last Century copper endowment has grown 25 fold World Pre-mined Copper Reserves: 1900-2010 Mt Cu 3500 Est Cumulative Mine Losses 3000 Cumulative Production 2500 2000 1500 1000 686 577 500 0 1900 1910 1920 1930 1940 1950 Note: Assumes 20mt in cumulative historic production pre-1900 Mining recovers 85% of copper contained in ore MinEx Consulting 1960 1970 1980 1990 2000 2010 Sources: Production data from USGS MinEx Consulting March 2010 Strategic advice on mineral economics & exploration 8 Over the last Century copper endowment has grown 25 fold World Pre-mined Copper Reserves: 1900-2010 Mt Cu 3500 Estimated Reserves 3000 Est Cumulative Mine Losses Cumulative Production 2500 2000 1500 1236 mt in 2010 1000 686 577 500 52 mt in 1900 0 1900 1910 1920 1930 1940 1950 Note: Assumes 20mt in cumulative historic production pre-1900 Mining recovers 85% of copper contained in ore MinEx Consulting 1960 1970 1980 1990 2000 2010 Sources: Production data from USGS MinEx Consulting March 2010 Strategic advice on mineral economics & exploration 9 Over the last Century copper endowment has grown 25 fold World Pre-mined Copper Reserves: 1900-2010 Mt Cu 3500 USGS "Reserve Base" Estimated Reserves 3000 Est Cumulative Mine Losses 2500 Cumulative Production 2000 1670 1500 1236 mt in 2010 1000 No data pre 1977 686 577 500 52 mt in 1900 0 1900 1910 1920 1930 1940 1950 Note: Assumes 20mt in cumulative historic production pre-1900 Mining recovers 85% of copper contained in ore MinEx Consulting 1960 1970 1980 1990 2000 2010 Sources: Production data from USGS MinEx Consulting March 2010 Strategic advice on mineral economics & exploration 10 Over the last Century copper endowment has grown 25 fold World Pre-mined Copper Reserves: 1900-2010 Mt Cu 3500 MinEx data includes Inferred Resources and assigns the current known resource back to the original discovery date – and so is larger 3000 2500 3145 GAP ? USGS "Reserve Base" Estimated Reserves Est Cumulative Mine Losses Cumulative Production Cumulative Discoveries (MinEx data) 2000 1670 1500 1236 mt in 2010 1000 No data pre 1977 686 577 500 52 mt in 1900 0 1900 1910 1920 1930 1940 1950 Note: Assumes 20mt in cumulative historic production pre-1900 Mining recovers 85% of copper contained in ore MinEx Consulting 1960 1970 1980 1990 2000 2010 Sources: Production data from USGS MinEx Consulting March 2010 Strategic advice on mineral economics & exploration 11 Reserve life has slowly declined over the last 60 years Ratio of Reserves/Production - World: 1900-2010 Years 100 111 91 Assuming continued discoveries, the world isn’t going to run out of copper soon 80 60 60 50 years in 1900 36 years in 2010 40 32 20 0 1900 1910 1920 1930 1940 1950 Note: Chart based on “Estimated Reserves” Peaks in 1921 and 1932 due to sudden drop in production MinEx Consulting 1960 1970 1980 1990 2000 2010 Sources: Production data from USGS Reserve data MinEx Consulting March 2010 Strategic advice on mineral economics & exploration 12 Ore grades mined have declined over time Copper ore grade for World and selected countries: 1900-2008 Copper Grade (%) 6% 6.86% World USA 5% Canada 4.0% in 1900 Australia 4% 3% Estimate 2% 1.07% in 2010 1% 0% 1900 1910 1920 1930 1940 1950 Note: Rise in ore grade in Australia from 1972 onwards is due to startup of the high-grade Olympic Dam mine MinEx Consulting 1960 1970 1980 1990 2000 2010 Sources: USGS, Mudd (2009) Brook Hunt, UBS Strategic advice on mineral economics & exploration 13 The average grade for copper discoveries has remained relatively constant. This is dragging down the average ore grade mined Copper ore grade discovered and mined in the World: 1900-2008 Copper Grade (%) 6% Mined Grade Discovery Grade 5% 4% The ore grade mined is converging on the average discovered grade 3% Estimate 2% 1% 0% 1900 1910 1920 1930 1940 1950 1960 1970 WARNING: The definition of what is economic ore has changed over time. The estimated discovery grade is based on the latest available resource figures – which is much larger (but often lower grade) than that originally reported at the time of discovery MinEx Consulting 1980 1990 2000 2010 Sources: USGS, Mudd (2009) Brook Hunt, UBS Strategic advice on mineral economics & exploration 14 QUESTION: Is a declining ore grade bad news or good news ? MinEx Consulting Strategic advice on mineral economics & exploration 15 There is a trade-off between tonnes and grade Rio Blanco copper deposit Grade (%Cu-equiv) … lower grades could signify “good” news as … 10% 8% Lowering the cut-off grade grows the resource = MORE METAL 6% 4% 65 mt @ 1.26% Cu = 0.82 mt Cu 2% 1100 mt @ 0.58% Cu = 6.38 mt Cu 0% 1 10 100 1000 10000 Resource (million tonnes) Source: MinEx Consulting March 2010 MinEx Consulting Strategic advice on mineral economics & exploration 16 There is a trade-off between tonnes and grade Tonnes-Grade data for 48 copper deposits Grade (%Cu-equiv) 10% 8% 6% 4% 2% 0% 1 10 100 1000 10000 Resource (million tonnes) Source: MinEx Consulting March 2010 MinEx Consulting Strategic advice on mineral economics & exploration 17 There is a trade-off between tonnes and grade NORMALISED Tonnes-Grade data for 48 copper deposits Change in Grade (over Base Case) 5 4 On average, by adjusting the cut-off grade, it is possible to double or triple the head grade of the ore body, but at the expense of shrinking the ore tonnes by a factor of 10 3 2 1 0 0.01 0.1 1 Change in Resource size (over Base Case) Base Case defined as the maximum reported resource size for a given deposit MinEx Consulting Source: MinEx Consulting March 2010 Strategic advice on mineral economics & exploration 18 There is a trade-off between tonnes and grade NORMALISED Tonnes-Grade data for 48 copper deposits Change in Grade (over Base Case) 5 Curve of “Best-Fit” 4 On average, by adjusting the cut-off grade, it is possible to double or triple the head grade of the ore body, but at the expense of shrinking the ore tonnes by a factor of 10 3.5 3 2.3 2 1.0 1 0 0.01 0.1 1 Change in Resource size (over Base Case) Base Case defined as the maximum reported resource size for a given deposit MinEx Consulting Source: MinEx Consulting March 2010 Strategic advice on mineral economics & exploration 19 Most of the huge growth in known resources in the last 70 years can be attributed to a reduction in cut-off grades Change in pre-mined resources for 12 giant porphyry deposits: 1929-2008 Mt Cu 400 300 Top 12 Porphyry Mines in 1929 Total 378 mt Cu (61,000 mt @ 0.62% Cu) Remaining Resource 242 mt Cu Reduction in pre-mined resource from using higher cut-off grade 200 100 Mined to-date 136 mt Cu 0 2008 Total 60 mt Cu (3880 mt @ 1.55% Cu) Pre-Mined Resource at higher cut-off grade Adjusted 2008 Chuquicamata Braden (El Teniente) Morenci Utah (Bingham Canyon) Ray Chino Miami Nevada (Ely/Robinson) Inspiration Andes (Potrerillos) New Cornelia Copper Queen In 1929 these 12 mines accounted for 55% of the world’s Cu reserves. In 2008 they still accounted for 10% of world resources Including “speculative” resources increases this to 67 mt Cu Total 47 mt Cu (3068 mt @ 1.55% Cu) Remaining Reserve 37mt Cu Mined to-date 10mt Cu 1929 Sources: Parsons (1933) MinEx Consulting MinEx Consulting Strategic advice on mineral economics & exploration 20 Over the last 100 years, the real price and cost of copper has halved Copper price and (estimated) average operating costs for Western World: 1900-2009 2009 $/lb Cu $7 QUESTION: Is price an input or an output ? $6 Operating Cost Copper Price … Prices are set by supply & demand $5 $4 $3 $2 Estimate $1 $0 1900 1910 1920 1930 1940 1950 Includes, transportation, smelting & refining and marketing costs MinEx Consulting 1960 1970 1980 1990 2000 2010 Sources: USGS, Brook Hunt, CRU MinEx Consulting estimates (for 1900-1974) Strategic advice on mineral economics & exploration 21 Over the same period, unit mining costs have dropped four-fold Estimated average operating costs for copper mines in Western World: 1900-2009 2009 $/tonne ore $160 The lower cost per tonne has more than offset the lower grades mined - leading to lower unit price per lb of copper produced $140 $120 $100 Estimate $80 Key Challenge – In the future will costs continue to fall faster than the grade ? $60 $40 $20 $0 1900 1910 1920 1930 1940 1950 Includes, transportation, smelting & refining and marketing costs MinEx Consulting 1960 1970 1980 1990 2000 2010 Sources: Brook Hunt, CRU , Historical reports MinEx Consulting estimates (for 1900-1974) Strategic advice on mineral economics & exploration 22 Key Technical Innovations Estimated average operating costs for copper mines in Western World: 1900-2009 2009 $/tonne ore $160 Improved transportation Froth Flotation $140 Bulk mining at Bingham Canyon & Chuquicamata … $120 $100 … which opened up the “Age of the Giant Porphyries” $80 $60 $40 Airborne geophysics post-WW2 led to raft of new discoveries Improved recoveries 65% to 85% Better Smelting & Refining $20 $0 1900 1910 Computer controls , modelling and scheduling SXEW Better work practices Low cost mines in new countries Expanding demand led to economies of scale 1920 1930 1940 1950 Includes, transportation, smelting & refining and marketing costs MinEx Consulting Development of a good geological model for Porphyries 1960 1970 1980 1990 2000 2010 Sources: Brook Hunt, CRU , Historical reports MinEx Consulting estimates (for 1900-1974) Strategic advice on mineral economics & exploration 23 Economies of scale and new technology helped drive down costs Cash operating costs for selected open pit mines in USA and Chile 2009 $/tonne ore $120 1905 1915 Cost savings from economies of scale 1 to 50 mtpa = 30% $100 1905 Trend line $80 1929 1996 2007 $80/t $60/t $60 1915 $40 Cost savings from new technology 1905->2007 = 70% 1929 $18/t $20 1996 & 2007 $0 0 1 10 Mining Rate (mtpa ore) Operating costs include transportation, smelting & refining charges # Bingham Canyon, Ray, Chino, Morenci, Robinson, Toprerillos, Chuquicamata and El Teniente MinEx Consulting Strategic advice on mineral economics & exploration 100 Source: MinEx Consulting March 2010 24 SUMMARY • World’s copper resource base grew by x25 over last 100 years • Much of this was through discovery Hard to untangle the partnership between geologists & engineers … say 50: 50 • Technical innovations enabled giant “disseminated” Porphyries to be mined, and then later Cu-oxide deposits 30% 70% • Costs reduced through economies of scale and new technologies • As costs went down, so too did cut-off grades … thereby further growing the resource Halving the ore grade increased ore tonnes by x6 and metal by x3 • Prices are a output – not an input. They are driven by supply & demand MinEx Consulting Strategic advice on mineral economics & exploration 25 Contact details Richard Schodde Managing Director MinEx Consulting Melbourne, Australia Email: [email protected] QUESTIONS ? MinEx Consulting Strategic advice on mineral economics & exploration 26