Sometime ago I read an interesting post by one on another forum I followed.  I thought it would be interesting to some in our forum here - while the context was gold I think it applicable here and very worthwhile:

Investing In Exploration

In a manufacturing business, an entrepreneur buys raw materials from suppliers and then assembles the materials into cars, shoes, candlesticks or some other final product. But in the extractive industries, such as oil or precious metals, the first step isn’t to buy raw materials but to find them. And it’s not easy, because nature has hidden them under the earth’s crust, perhaps in a remote or even dangerous corner of the world.

Understanding the timing of the exploration process is critical to understanding why the big profits are still ahead, and why it is so important to get positioned in the quality companies today, while there is still time to do so.

The process, greatly abbreviated here, begins when a team of geologists -- perhaps working for a big mining company, but more often than not, for a fleet-footed junior Canadian exploration company -- come up with a geological concept. (“Geological concept,” if you’re not familiar with the term, is geology talk for “educated guess.”)

Gathering up picks and shovels, the team spends days, weeks or even months poking through the brush looking for rocks that would suggest their idea has some merit. If they find anything promising, they’ll collect samples and send them to an assay lab for a mineral analysis.

If the assay lab had nothing else to work on, our geologists might get a report back in days. But in fact, assay labs aren’t nearly as numerous as, say, donut shops. And due to the surge in exploration in recent years, there is a large and growing backlog at the world’s few assay labs. So explorers must wait 2 to 4 months or even longer to learn whether their rocks carry traces of a valuable deposit or are just… rocks.

Assuming the assay results are encouraging, the explorers move on to the next phase, trying to verify that an ore deposit is waiting beneath the surface. Of course, they can’t see under the dirt and rock, so they do the next best thing, which is to drill deep holes and dig out samples.

Before you can drill, however, you must get a permit to disturb the ground, a process that, depending on where your property is located, can take two months to a year – or in some ecologically sensitive areas, forever.

Because our hypothetical exploration team is on the ball, we’ll assume they get the permit. Which takes them to the next hurdle: while the shortage of assay labs is acute, the shortage of drills and experienced crews to run them is far, far worse. How much worse? If you want to drill a project in 2007 and don’t already have a drill lined up, the odds of finding one this late in the game are somewhere between slim and none.

Okay, but our team is lucky – or well connected – and so is able to lock up a drill. Now begins the long and expensive process of punching enough holes in the ground to find out what’s really there and to map out the boundaries and orientation of the deposit. The drilling may proceed just a few holes at a time, so that what’s learned from each hole can be used to point where the next ones should be drilled. Of course, at each step, the sample the drill pulls out of the ground must be sent to an assay lab to wait its turn for analysis… and the clock ticks on.

In time, the geologists are able to assemble the assay data into a reliable geological model. Around this time, the focus shifts to verifying that the minerals they’ve found are present in sufficient quantities to warrant the expense of clawing them out of the ground, that expense being influenced by a multitude of factors, not the least of which is how far below surface the deposit is located and in what kinds of rock.

But let’s say it appears to be an economically large deposit – say, a few million or more ounces of precious metals. Now the exploration company has to confirm the metallurgy, a branch of science of great complexity. On ascertaining that you will be able to economically (there’s that word again) separate the shiny stuff from the dirt and rock, you move onto the next square.

Throughout this process, the smarter explorers invest considerable time and energy in softening up the local population and politicians. Get it right, and you might only have to wait a year or two for the environmental and construction permits needed to build your mine. Get it wrong, and you could be looking at delays of a decade or more.

If by this time a mining entrepreneur hasn’t decided to change careers and go into something less challenging, such as trying to build pipelines in Iraq, he still needs to build the mine – which means securing a lot of power and water. And because mine output is not light and easy to ship, all manner of additional infrastructure is needed. Of course, all of this is voraciously time consuming, and none of it is cheap....