The initial stage of development focuses on the merits of the potential mining project. The question of whether or not can we make a decent return on our investment will be of concern to everyone. And the answer is generally complicated by factors that we cannot control, as well as factors that may not be easily known at this early stage of the project.
We'll look at the set of factors that will enter into the decision, but before doing so, I'd mention that already some thought has gone into the merits of the potential project. The investment in prospecting and exploration would not have been made unless there was a belief that a mine could be a good investment. Thus, we see that the continuum of decision making once again blurs the crisp lines that we've established with our five stages in the life of a mine. Regardless of the exact point in time that these factors are considered, they will be addressed early on.
Different authors organize the factors differently, and in more or less detail to suit the purpose of their discussion. Personally, I like the way Hartman and Mutmansky do it in the textbook for this course, and I'll follow, more or less, their categorization here. There are three broad categories of factors to consider: locational, natural and geologic, and socioeconomic. We'll discuss each of these in this lesson.
Ore bodies are located where you found them, and often are not ideally located by any definition. They may be inside the Arctic Circle, high up in the Andes Mountains of Peru, or in the tropics of Indonesia to illustrate just a few out-of-the-way places. Occasionally, they are near metropolitan areas or small towns. Regardless, you will assess the following:
You must get your product to market, and you must be able to get supplies to the mine. Transportation options suited to the one need may be unsuitable for the other, so both must be independently evaluated. Generally, access to rail is necessary. Where is the nearest railway, and will they be willing to serve a spur to your property? Can you get a right-of-way to build a spur? A highway suitable for tractor-trailer use may be needed as well, or in lieu of a railhead on your property. Sometimes, it will be appropriate to move your product on a waterway, e.g., a river or even the ocean. Can you access a load-out facility to get your product on barges or boats, or do you need to build one? These costs will have to be estimated at this stage, as the costs to get supplies to the mine can raise your production costs. Similarly, your customers will bear the cost of transporting the product in most cases. Although you may be able to mine at a competitive cost, your transportation costs could adversely affect your competitiveness. If you are producing a construction aggregate, your practical limit for transporting the product is on the order of 50 miles. If you are producing iron ore, you may be able to transport it for hundreds or even thousands of miles.
The labor requirements will depend on the size and type of mine, but in general, you will require experienced miners who are familiar with the method, equipment operators, welders, mechanics, electricians, and skilled managers. Electronics and computer technicians, surveyors, engineers, and accountants are normally part of the human resource requirements, as well. Some of these services may be provided on a regional basis to multiple mines, especially if your new mine will be part of a large company with other mines. If you’re evaluating a potential stone quarry in the Atlanta, Georgia area, labor will be readily available. If the proposed project is an underground gold mine in rural Nevada, you may have to bus the workers for approximately two hours from the nearest town to the mine site –and you will do this each day. If the proposed mine is located in the Australian outback, you will probably set up a fly-in fly-out operation, in which you use jet charters to transport your workers. They will then remain on-site for two or three weeks, working every day, and then return to their home city for a week or so of leave prior to beginning the cycle all over again. You get the idea! Labor availability can span these extremes, and be anywhere in between. Regardless, the effort and the cost to staff the proposed operation will be considered early on.
The mining operation will require infrastructure, i.e., electricity, water, roads, buildings, housing, hospitals, schools, and so on. Is this already there, or will you have to create it? How long will it take, and what will it cost? Mining engineers of the 19th and early 20th century were, by necessity, quite skilled at building towns and the necessary infrastructure, as well as opening and operating mines. Companies operating internationally in remote or underdeveloped locations still find the need today to develop the infrastructure. The population in the region of these mining operations often experiences a significant improvement in the quality of life, e.g., availability of clean water, excellent medical care, good schools, and so on. Again, however, an early decision includes consideration of the time, effort, and cost to establish such an infrastructure.
The location and its climate can affect employee satisfaction, which will impact productivity of the workers and your ability to recruit and retain the workforce. These can be significant risks for the proposed project. If the mine is located near an urban area with an abundance of cultural and entertainment opportunities, and the climate is pleasant year round, then your employee satisfaction is likely to be very high. On the other hand, if the mine is inside the Arctic Circle, you may face significant challenges recruiting and retaining a workforce. Of course, you can “buy” some measure of employee satisfaction with high wages and large bonuses.
The technical characteristics of the orebody, the geologic setting in which the orebody is found, and the surface features of the land over the orebody will influence significantly your choice of a mining method and the way that you will lay out the mine and supporting infrastructure. The most important natural and geologic factors that will be assessed include:
The location of your surface facilities, e.g., shops, warehouses, and roads, will be influenced by the topography. Mountainous terrain creates more challenges than a gently rolling countryside.
The depth, size, shape, and attitude will have a major impact on the type of mine and mining operation that you can have. A shallow orebody allows consideration of a surface rather than underground mine. A large orebody allows for larger-scale and potentially cheaper bulk methods, and a long life means more time to recover certain costs. The orebody may be tabular in shape, which lends itself to certain types of mining, or it may be a big amorphous blob, or perhaps the ore is contained in sinuous veins. These shapes, in conjunction with other characteristics, will suggest certain mining methods. And finally, there is attitude. The attitude of the orebody is important. After all, who wants to develop a mine in an orebody that has a bad attitude! Just kidding... attitude is a term for the angular orientation of the orebody, and, in particular, we are interested in the vertical angle of the orebody. If the deposit is flat lying, the vertical angle or dip is zero degrees. As we begin to tilt one end of the orebody downward, the dip angle is measured with respect to the horizon. Steeply pitching ore bodies with dip angles of 70 degrees or more are not uncommon. As it turns out, some mining methods require steeply pitching deposits, while others work best with dip angles approaching zero degrees.
Undoubtedly, we will want to create openings in the orebody or the surrounding rock as part of the mining process. How difficult will it be, and how much energy will it take to break the ore and the surrounding rock? Will explosives be required? Once we remove a section of ore, will the opening be stable, or will the surrounding ore rush in to fill the void? When the ore is removed will the surrounding rock remain stable, or will it fracture and cave-in? The answers to these questions depend largely on the mechanical properties of the materials. Compressive strength, modulus of elasticity, hardness, and abrasiveness are some of the important properties that will determine how challenging it will be to safely and productively operate the mine. We can take core samples and conduct laboratory tests to quantify the characteristics, and we can avail ourselves of any data that others have compiled on similar deposits.
Structures such as cleavage patterns, joint sets, and faults can significantly affect the mineability as well as the stability of the materials, regardless of certain mechanical properties such as strength. The stratigraphy, or layers of rock formations, is important in the design of many mine types. The mineralogy of the deposit and the genesis of the orebody will give us an indication of both mining and subsequent mineral processing challenges. The presence of thermal gradients will likely require expensive cooling of the ventilating air. Water-bearing strata or aquifers will increase the complexity of the mining as we work to protect them as well as to deal with groundwater inflows to the mine. There are other examples that will be considered early in the evaluation process, and this once again illustrates the importance of including geologists on the team.
The ore has physical and chemical properties that will affect the way in which we extract the valuable components from the mined ore. Some copper ores are easier to process than others based on the mineralization, orebody genesis, and so on. These factors will affect the cost of the mineral processing and will be examined before a decision to move forward with the project is made.
This category is intended to capture a disparate group of factors that are often beyond the control of the mining company, and which can occasionally create large problems for the mining company.
The population characteristics are especially relevant to the labor force considerations, which we discussed under locational factors.
Generally, mining companies will want to raise capital to finance the proposed mining venture. The prevailing condition of the financial markets will impact the ease or difficulty of raising capital. Similarly, prevailing regional, national, and global economic conditions can radically alter the demand for mined products as well as the price paid for those products. Sometimes, these conditions can change radically from when a project was begun and when it came online. In recent years, the simultaneous crash of both the commodity and energy markets has had disastrous effects for a number of mining companies.
Governments at all levels can incentivize mining by giving tax breaks for example, or they can restrict mining by delaying permit approvals, among other actions. The degree of government regulation is a consideration, and especially the consistency of interpretation and enforcement of regulations, as these can affect the cost of compliance.
Tax policies such as income tax and depletion allowances will affect the profitability and, hence, feasibility of a proposed project.
Undertaking projects in lesser-developed countries(LDC) presents a higher risk for investors, and this may make it difficult to obtain financing at a reasonable rate, if at all. Governments change and policies can be overturned or reversed in an instant, and what was a welcoming and investment-friendly government can become quite hostile. Civil wars and terrorism can make it difficult to operate, not to mention the difficulty in recruiting and retaining a skilled workforce. Sometimes, governments will expropriate the company’s assets in the country, e.g., the mine, the equipment, and the reserves – this may occur years after the mine has opened. Despite the risk, companies and investors continue to pursue projects in these areas. Why? The “reward” for investing in higher-risk projects is a much higher rate of return on the investment. Thus, in the prefeasibility stage, the analysis would have to support the likelihood of a much higher rate of return. Otherwise, the project will be a nonstarter. It is difficult to account for these factors, not only because they are largely out of the control of the company, but also because they are difficult to quantify and predict. One can use the historical record as well as seek advice from outside experts, e.g., economists, political analysts in the U.S. State Department, and so on. Practically, we can account for some of these risks by performing risk and sensitivity analyses. For example, if we estimate that the likely selling price is $150/ton, and a worst-case scenario is a selling price of $100/ton, we would evaluate the desirability of the project over this range, and report our findings to those making the decision on the project.
Engineers often talk about doing “back of the envelope” calculations. This is an expression for making a first approximation to a solution or answer. It is a process in which we don’t worry about the details but only the biggest factors that influence the result. By necessity, it requires experience and judgment. The answer is nothing more than a rough estimate and is likely to result in a solution that looks like 1, 10, or 100, i.e., an order-of-magnitude estimate, rather than an exact number like 0.67, 13, or 180! Or, to be more specific here, the team will evaluate the foregoing factors with the goal of concluding one of three outcomes: this project has little chance of success – we need to cut our losses and move on; this project shows strong potential – we need to move into the next stage of the project without delay; or, this project has potential, but without doing further analysis, it is difficult to say that we should move this project to the next stage. Sure, there are shades of gray, but you get the idea of what is happening at this stage.
Reasonably, you may also wonder just who are the people making this decision. That’s a good question. Although the full team may include a number of subject experts, e.g., geologists, mining engineers, among others, the decision-makers are likely to be few in number and are likely to include: a mining engineer with decades of experience in the industry and years of experience in evaluating and bringing new projects online. This person probably has a title with the words “vice-president” in it. There will be a financial wizard. Someone with years of experience in the industry, who can probably do complex discounted cash flow analyses in her head. And there may be a third – perhaps a “rising star” in the organization. Someone with several years of experience, highly motivated, and with the potential to head up this new mining project if it becomes a reality. The model will vary depending on the size of the company and the size of the project, but this will give you an idea of the approach.
So, what’s next? Assuming that the conclusion of our “back-of-the-envelope” analysis is that we still want to build a mine, then we will move to the feasibility-study. This is the subject of Lesson 4.2.
The major factors that will affect the desirability and feasibility of a mining project can be divided into three categories. The consideration of the factors will precede any decision to conduct more detailed studies. It is important to understand the three categories, the factors within each category, and in what manner they influence the decision.