With Commodity Prices Trending Upward, Near-Surface Mine Development and Royalty Model Become Options for Junior Explorers

Posted: Oct 08 2009 By: David Duval

The contemporary wisdom that “bigger is better” has taken a well-deserved beating since the credit crisis unfolded and destroyed some of the world’s largest financial institutions in its wake.

With large-scale project financing options limited or non-existent because of the credit crisis, many of the smaller players in the global mining industry have been forced to review their growth strategies, a trend that could see historic mine development practices making a comeback and less mainstream business models adopted.

Perhaps not since the turn of the 19th century has the appeal of “small” become so attractive. …small mining operations that provide feedstock to portable or centrally located process plants and refineries, a practice that is relatively common in Asia and Africa.

Not being major enterprises with large industrial footprints, long permitting periods, and high capital costs, these businesses can be developed incrementally from ongoing cash flows, substantially reducing the risk to investors. In the “good old days” this scale of development was the rule rather than the exception and most of the world’s major gold camps were discovered and developed on this basis over a century ago….

… the miners recovered gold from alluvial gravels that were eroded from the hard rock vein material. Exploration shafts were then sunk to evaluate the vein material at depth, producing gold in the process to offset exploration costs….

In many parts of the world (including Africa and Latin America) artisanal miners have already gained access to sub-surface vein material by hand sinking small shafts and mining along the vein structures….

Even today, gravity separation is the best proven and accepted technique of concentrating minerals due to its high efficiency and low cost….

Process plants (mills) for gold need not be large and in fact they are often manufactured and assembled in large industrial centers where skilled trades people are readily available. By employing modular construction techniques, equipment can be brought into a mine site by truck, air transport and in the case of tidewater locations, by sea barge. The various modular sections are simply joined together like a kid’s Lego set on the mine site. As the operation expands, new modules can be shipped to the site and added to the existing plant facility.

In order to reduce capital requirements, companies often employ contractors to mine their mineral deposits at a fixed price, locking in costs for the term of the contract. With contract mining, a company need not acquire in-house mining expertise or equipment that would only be utilized on a seasonal basis in any event. For smaller operations, contractors can provide services for a sufficient length of time to develop a stockpile for year round milling operations.

What’s surprising about today is the reluctance of many companies to consider the small scale, staged development of mineral deposits which is much less risky from both a financial and technical standpoint. In gold’s case, some of that reluctance no doubt relates to the belief by analysts that any company producing less than 100,000 ounces won’t get adequate market recognition. But as we’ve seen during the global financial crisis, analysts sometimes make a habit of being just plain wrong.

Nonetheless, in an escalating commodity price environment, the appeal of these modest-sized operations is certain to increase, especially where possibilities exist for multi-sourced production that will boost consolidated output to even more attractive levels. This has been a feature of China’s mining industry for generations and is certain to catch on in the West before too long.

Physical gold output – even on a small scale basis – provides price leverage to companies in the marketplace, especially for situations where the exploration potential leaves room for future production growth.