An Unusual Success IndicatorAn Unusual Success Indicator
by Dave Forest
December 8, 2009
I'm just going through the notes from an intriguing phone call a few weeks back.
Myassociates and I spent a few hours on the line with the former head ofglobal exploration for one of the world's largest gold miningcompanies.
The object of the call was to answer one simplequestion: what does a major mining company want to see when they cometo review a mineral project for potential acquisition.
Thisis a question every junior mining company needs to ask. Mining is ahugely capital-intensive business. Building an 80,000 ton-per-dayporphyry bulk mine and processing plant costs billions of dollars.Beyond the financing capabilities of almost every junior company.
Becauseof this, few junior mining companies will ever be able to mineanything. In fact, they shouldn't. Digging up ore and extracting metalis an incredibly difficult business. It requires legions of specialistsin several fields: rock mechanics, geostatistics, metallurgy, processengineering.
Few small companies possess expertise in all ofthese areas. And so when small companies try to mine, they usually endup losing money, if in fact they get the operation off the ground atall.
The best model for a small company with good geologicalexpertise is project development. Use management's skill to identifyand prove up an economic ore body. Demonstrate that this is a goodplace to build a mine. Then sell the project to a large mining companythat has all the skills needed to mine profitably.
Back toour call with the ex-exploration manager. Starting off theconversation, he went through several examples of things a major minerlooks at when evaluating a potential acquisition. Some were obvious,others more esoteric. How fine are assay samples crushed? Is the coresplitter level? Are geologists logging core calling each rock type bythe same name? Is there one person in charge of digitally enteringdata? Are all maps at the same scale?
All of this was interesting. But the most intriguing moment came late in the call.
Asa final item, our consultant discussed health, safety and environment(or HS&E). As he launched into water sumps and first respondertraining, attention waned. Although these things are acknowledged asimportant in keeping a camp safe, they're not the main concern forgeologists interested in finding an ore body.
Then he hit uswith a "curve ball". To quote, he said, "When I was with my oldcompany, we found that good HS&E is a leading indicator ofdiscovery success."
Suddenly we were all paying attention again. Did he say discovery success?
Heconfirmed. Companies that have good health, safety and environmentalpolicies are more likely to discover major ore bodies. HS&E was,and continues to be, a crucial indicator of future exploration successfor one of the world's largest gold mining companies.
Althoughthis sounds like a big leap of logic, it makes a great deal of sense.Aside from the obvious benefits of keeping your work force safe andyour work area unpolluted, a team with good HS&E is demonstratingthat it is organized.
The company is capable of making aplan, communicating it effectively to employees, and checking the planis being implemented properly on the ground.
These organizational skills aren't just valuable for HS&E. They're critical for everything a junior mining company does.
Thinkof a junior trying to sell an ore deposit to a major. What are theyreally selling? Information. You can't pack an ore deposit into abriefcase and take it to BHP Billiton's office to show it off. Even ifthe execs come to the site, you still can't see the ore body. It'sburied.
What a potential buyer is looking at is theinformation you've collected. Drilling data, geochemical assays,metallurgical test results. Based on this, they will decide whether togive you hundreds of millions of dollars for a mineral project.
Whichmeans the quality of your information has to be top-notch. If thegeologist sitting on the drill made errors splitting the core, ororienting it, your information could be incorrect, and thus worthless.
If your mapping manager recorded the location of drill holes or grab samples in the wrong place, your information is worthless.
Ifthe assay lab made a mistake in analysis and you didn't have qualitycontrol procedures in place to catch it, your information is worthless.
There are literally thousands of tiny errors like this thatcould kill the value of a project. To avoid them, the team at a juniormining company must be able to design effective procedures foreverything it does: drilling, sampling, assaying, mapping. Everyone hasto execute these plans. And management has to constantly be checking tomake sure protocols are being followed.
A company's HS&Eperformance is a microcosm of this overall system. If they have a goodtrack record in health and safety, chances are they're able to do theright thing when it comes to collecting project data. Giving them amuch better chance of coming up with information of real value.
Not something many analysts look at. I will be.
Here's to being organized,
Dave Forest
dforest@piercepoints.com
Copyright 2009 Resource Publishers Inc.