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Law makes long-term exploration difficult
By Fred Cawood
I respond to the article in Business Report of January 16 by Nicky Smith: "Race for new gold as ounces run short". Congratulations to Smith for an interesting and stimulating argument. I would like to contribute a somewhat different argument.
Smith's article starts: "The hunt for ounces is on and gold companies are under more pressure than they have been in the past three years to not only replace the ounces taken out of the ground but increase their reserves."
This is certainly true if one observes what is happening with the companies mentioned in the article. It says correctly: "The most common way gold companies had grown in the recent past was through mergers and acquisitions."
Smith goes on to mention the importance of exploration. This is getting to the long-term solution, because mergers and acquisitions do not add to the stock of global reserves - they merely shift the same ounces to different owners.
If one wants to add to the global pool, one needs to find, quantify and evaluate new resources. Before one can do that, a prospecting right will be required.
With the current market prices for gold, it is clear that resource-rich governments with attractive legislative frameworks will receive the most attention from these exploration companies and in the long term, such countries will benefit most.
This brings us to the Mineral and Petroleum Resources Development Act (MPRDA) of 2002. The MPRDA is certainly in line with, and in some respects an example of, international leading practices. That should not stop us in questioning "international leading practice", which is not necessarily "best practice".
In terms of the MPRDA there are three mineral development rights available for exploration. The first is a reconnaissance permission, which is granted for two years, is not renewable and does not give the holder exclusivity to progress to the next stage in the event of a potential resource being discovered.
For obvious reasons, reconnaissance permissions will not prove to be popular with most exploration companies. The second option is a prospecting right, which is granted for a maximum of five years and is renewable once for a further period of three years.
Unlike a reconnaissance permission, a prospecting right gives exclusivity to apply for a mining right. This makes it popular for exploration companies.
The third option, a retention permit, is discretionary in nature. Companies have to think hard when applying for it. Nevertheless, it does make it possible to hold on to a property for a maximum of five years after the expiry of the prospecting right when market conditions do not allow mining to continue profitably.
Where does all this leave the hunt for ounces? The gold sector has its fair share of price cycles, where prices can swing wildly from one boom cycle to the next.
The last significant boom cycle was in the 1980s. If exploration companies had spent their resources on exploration when the gold price was depressed, by now the new stock of ounces would have been ready.
This strategy will benefit both companies and the state, because the world market will take some time to catch up, while companies with surplus stock will benefit significantly.
The irony of starting now with exploration is that the stock that is added could come too late for mining companies to take full advantage of the cycle.
Maybe the solution is to question the legislation. We know that most of South Africa's future gold resources are at depths in excess of 3 000m below the surface. The time frames in the MPRDA make it very difficult to explore for and keep discovered resources until the next boom.
In addition, existing mining technologies must be adapted to mine at these depths, which requires additional spending on research and development. Companies will only do so if they get sufficient time, have security of tenure, are able to hold on to their discovered properties and have exclusivity in upgrading these rights to the mining stage when market conditions permit.
# Fred Cawood is an associate professor at the School of Mining Engineering at the University of the Witwatersrand
Published on the web by Business Report on January 16, 2006. © Business Report 2006. All rights reserved.