How Location, Grade, and Depth Affect Mining Success
Not all resource deposits are created equal. According to some sector experts only about 1 in 1000 "anomalies" - areas that contain an element of interest such as gold or uranium - will lead to an actual mine. This means that in the overwhelming number of cases, exploration projects do not result in a producing mine.
As a result, narrowing down the field of projects to those with the highest chances of succeeding is critical to investing in natural resource exploration companies.
Sprott Global is fortunate to have one of the most highly respected economic geologists in the world, Andrew Jackson. Andrew is the firm's "chief narrower" and provides us with some insight into this process.
Andrew worked for 35 years in the mining industry before joining Sprott Global Resource Investments Ltd. From 1991 to 1996 he was the Exploration Manager for North America, Southeast Asia, and Turkey at Billiton/Gencor, the largest mining company in the world in terms of revenues. In 1996, he went to work for Placer Dome, a large mining company specialized in gold and other precious metals. Now, he helps Rick Rule and his team by providing in-depth research on specific mining projects.
Location, Grade, and Deposit Depth
Where is the project site?
Regions such as Nevada or Southern Ontario are readily accessible to mining exploration, says Andrew, because of flat terrain and roads. Costs increase greatly in less accessible places, however; in remote regions such as Irian Jaya in Indonesia, or the far north, he explains, helicopters are frequently required to airlift workers and heavy drilling equipment. This causes operating costs to escalate dramatically.
Development costs will also increase in these types of areas, says Andrew. It is more expensive to build infrastructure, process the ore, and deliver the end product to market. This increases the breakeven point significantly, due to the increased capital required for the initial build and for ongoing production costs.
--> Kilgore is in Idaho, with major access roads to the base and easy access by 4 wheel vehicles. Excellent infrastructure including power and water are close at hand.
What is the grade of the ore?
High grade makes a mine more profitable, says Andrew, because the revenue derived from each ton of ore is higher, while the cost of extraction remains the same. In addition, the extraction process is actually more effective on high-grade ore, so not only is the rock richer, but a higher percentage of the valuable material is recovered.
--> Kilgore is low grade but recovery rates are 85% and higher and their recent metallurgy indicates they can use a very course crush, which means lower processing costs.
What is its location relative to surface?
It is much cheaper to operate a mine near the surface, rather than deep in the ground, Andrew explains. In the case of a shallow deposit, the mining company can essentially dig by exploding apart the ground, collecting the debris and processing the ore that it contains.
When the ore is too deep for surface processing, the mining company can create an underground mine, boring to reach a zone of mineralization at depth, he explains.
An open-pit mine is about 20 times cheaper than underground mining, says Andrew, so underground mining is typically limited to very high grade deposits.
A new method called "block-caving" reduces the cost of mining underground deposits, says Andrew. Instead of drilling out the ore, explosives cause the ore-bearing rock to cave-in. This method, however, is only applicable to certain larger underground deposits and certain shapes, Andrew explains, and is still about three times more expensive than open-pit mining.
--> Kilgore's deposit is very near surface - with a strip ratio of about 1:1.5. Recent drilling success on the Northwest trend confirms mineralization starting almost on the surface.
Thus, as Andrew explains, the risk and cost associated with the location, the grade, and the shape and depth of the deposit give us a preliminary idea of the risks and potential rewards behind these natural resource plays. These are the three immediate, relevant technical subjects to bring up when discussing a potential investment in junior mining companies.
Andrew has put together a video series on mining, designed to help non-technical people understand ore deposits. Watch the latest of this "Ore Deposits 101" series here. These talks are entertaining and easy to listen to and will leave you with an understanding of how ore bodies come to exist, how they are discovered, and how minerals are extracted from them.
Until next time.
Henry Bonner
--> So Henry, Otis Gold's Kilgore Deposit should certainly be on your list of investments? Safe mining friendly region. Easy access, excellent infrastructure, low grade is offset by the shallowness of the deposit, low strip ratio and high rates of recovery. On top of all that - the deposit is open in almost all directions. I hope for my sake and everyone else that the company gains the backing needed to see it through this bear market, for the Kilgore deposit will surely become a mine.