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EXPLORATION STRATEGIES : Simple Observations, Significant Implications John R Parry Executive General Manager - Exploration WMC Resources Ltd. SMEDG – AIG Symposium : Sydney : April 27, 2001. OBSERVATION 1 : Most of the mineral industry's wealth is captured by a handful of giant deposits.

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Smedg aig symposium sydney april 27 2001 l.jpg

EXPLORATION STRATEGIES :Simple Observations, Significant ImplicationsJohn R ParryExecutive General Manager - Exploration WMC Resources Ltd

SMEDG – AIG Symposium : Sydney : April 27, 2001


Observation 1 most of the mineral industry s wealth is captured by a handful of giant deposits l.jpg
OBSERVATION 1 :Most of the mineral industry's wealth is captured by a handful of giant deposits

Cumulative NPV @ 8% discount rate

BASE METALS

2/3rds of wealth comes from 10% of all projects

129 Deposits with total value of US$32Billion in 1994 dollars

Base Metal Mines discovered in Canada & Australia to 1988

Source : Derived from Mackenzie 1995


Implications giant deposits l.jpg
IMPLICATIONS :Giant Deposits

For Junior Companies

  • Small deposits can give good IRRs, but NPV will be small

  • Finding a giant deposit can be a “Company-Maker”(ie as the Carlin District was for Barrick and Newmont)

  • Need to focus on finding giant deposits, as only these :

    • Are of the right scale to make a significant impacton the company’s business

    • Provide a sufficiently large return to pay for ongoing exploration costs

For Major Companies


Observation 2 within a district most of the endowment is tied up in handful of deposits l.jpg
OBSERVATION 2 :Within a district, most of the endowment is tied up in handful of deposits

Gold Endowment (koz) at St Ives

Junction

Victory

Argo

Revenge

Leviathan

35 Deposits8.1 moz Au

Endowment = Current Reserves + Cumulative Production

Source : WMC Dec 1999


Observation 3 in a given district t he largest deposits tend to be found first l.jpg
OBSERVATION 3 :In a given district, the largest deposits tend to be found first

Gold Discoveries at Norseman (koz)

Royal1940 koz

Mararoa 1160 koz

Crown1080 koz

Bullen270 koz

OK180 koz

Harlequin270 koz

Deposit Size discovered

Year of Startup

Source : WMC Dec 1998


Slide6 l.jpg
OBSERVATION 3 :In a given district, the largest deposits tend to be found first … and for the least explorn $

Gold Discoveries at Norseman (koz)

Yr 2000 A$m

Deposit Size discovered

Exploration Expenditures

Year of Startup

Source : WMC Dec 1998

Note : Excludes “Extensional” exploration


Implications big deposits are found first l.jpg
IMPLICATIONS :Big deposits are found first

For Major Companies

  • Avoid grassroots exploration in mature districts. If you are not first or second, you are probably too late

  • Need to continuously assess the maturity of the district (a good indicator is the discovery cost per unit of metal). At some point in time, brownfields exploration for medium-sized deposits becomes uneconomic


Implications deposit size frequency l.jpg
IMPLICATIONS :Deposit size-frequency

For Major Companies

  • Should have a large tenement package as this :

    • Raises the probability that the largest deposit is on your tenement

    • Facilitates incremental discoveries – even smaller mines feeding into a large central mill can be financially attractive

For Junior Companies

  • Small deposits are often found near giants and there are a lot more of them to find

  • Small discoveries may end up being sold to a larger operator next door (key issue – will you get a fair price ?) or operated on their own


Observation 4 new concepts technology can help reinvigorate a mature district l.jpg
OBSERVATION 4 :New concepts/technology can help reinvigorate a mature district …

Cumulative Copper Resources Discovered in Chile (mt Cu)

Outcroppingore bodies

Porphyry model applied to outcrop

Persistant explorn in known camps

Chuquicamata

La Escondida

New Process Technology SXEW

El Teniente

Covered ore zones

Year Discovered

Source : WMC 1997

… but the pay-off gets smaller each time


Implications be innovative l.jpg
IMPLICATIONS :Be Innovative

  • Innovation can be in several forms :

    • New search methods (Airborne Gravity)

    • New conceptual models (Olympic Dam)

    • New process technologies (SXEW for Cu, Heap Leaching for Au)

    • New financing methods (gold loans, project finance)

    • Strong relationships with local communities & governments

  • Remember that Observations 1 to 3 still apply

  • In a mature district, must have a new concept/technology to be a “new” first mover

For Major Companies

For Junior Companies

  • Can be a fast follower, but must understand the strategic implications/limitations


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OBSERVATION 5 :In terms of finding big deposits, the majors have a better track record than the juniors

Discovery Performance for Majors vs. Juniors : 1989-99)

17%

25%

5%

37%

5%

78%

70%

63%

note : Based on Western World discoveries in 1989-98 of gold and base metals with an in-situ value >US$1B

Source : Metals Economic Group July 2000


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IMPLICATIONS :On average, perception doesn’t match reality for large deposits

  • Risky to rely on juniors to be your de facto exploration team

    • As always, the right partner is critical

For Junior Companies

  • Success of juniors in finding “small” deposits has led to a false impression with respect to large discoveries

For Major Companies


Observation 6 average cost of finding big deposits appears to be rising l.jpg
OBSERVATION 6 :Average cost of finding big deposits appears to be rising

Exploration Cost per Large Discovery : June 2000 US$m

Average for 1989-98 was US$560m per Major Discovery

note : Rise may be due to lack of recent data

na

note : Based on Western World discoveries of gold and base metals with an in-situ value >US$1B

Source : Metals Economic Group July 2000


Implications rising finding costs l.jpg
IMPLICATIONS :Rising finding costs

For Major Companies

  • Corporate view that it is “cheaper” to buy than to find is leading to :

    • General cutback in grassroots exploration

    • Increased reliance on acquiring other company’s discoveries

For Junior Companies

  • More difficult to raise risk money :

    • Risk capital has shifted to the technology sector

    • Increased reliance on majors for funding

General issues for the Industry : On average, exploration doesn’t seem to pay its way

Replacement of existing mines


Summary simple observations l.jpg
SUMMARY : Simple Observations

  • Most of the minerals industry’s wealth is captured by a handful of giant deposits

  • Within a district, most of the endowment Is tied up in handful of deposits

  • In a given district, the largest deposits tend to be found first … and for the least exploration cost

  • New concepts can help reinvigorate a mature district

  • In terms of finding giant deposits, the majors have a better track record than the juniors

  • Average cost of finding giant deposits appears to be rising


Conclusions significant implications l.jpg
CONCLUSIONS : Significant Implications

The observation is that there are plenty of options, however ….

  • A strategy based on exceptions will fail on average

  • There is more than one good strategy

  • If you have a strategy but don’t follow it, you don’t have a strategy

  • Can’t afford to be “average” at exploration

  • Majors must focus on exploring for (and developing) world-class deposits

For a given Company the “correct” exploration strategy will depend upon :

Relationships with others Financial resources Technical capabilities Existing operations Time horizon Attitude to risk