Exploration Making a Comeback

But Companies Urged to Embrace Digital Age

One of the dominant themes emerging from this year’s PDAC convention is that exploration is making a comeback but requires a different approach in the digital age.

More than 24,000 people from around the world poured into the Metro Toronto Convention Centre – up from 22,000 last year – to visit company booths and hear representatives from finance, consulting and gold mining speak about the importance of greenfield exploration and how to do it better.

“True value is found at the end of a drill bit,” concluded Mark Bristow, CEO of Randgold Resources, at the keynote session on what makes a successful mining company. Bristow attributes Randgold’s success – its share price is one of the few in the gold sector to appreciate over the past decade - to a dedication to exploration and geologists, even during downturns.

The good news is that exploration spending appears to be on the cusp of a turnaround after years of decline in which non-ferrous exploration budgets dropped, according to S&P Global Market Intelligence, from an all-time high of US$20.5 bn in 2012 to US$6.9 bn in 2016. 

“I believe the industry bottomed out in 2016 and is on its way up, and by 2020 exploration spending will have increased by 40%,” said Richard Schodde of Australia’s MinEx Consulting, who has become one of the world’s leading experts on exploration trends.

But if there isn’t a revolution in exploration strategy to accompany the spending, the industry risks continuing on the path of wealth destruction set in the past decade. The average return on a dollar invested in mineral exploration was 47 cents from 2017-2016, according to Schodde.

That’s where technology comes in. There is a massive opportunity to pull exploration into the digital age by using “exponential technology” (such as AI) to generate wealth, said George Salamis, executive chairman of Integra Gold. Mining lags just about every other industry in this respect.

Integra and Goldcorp co-hosted a “Disrupt Mining” event at the convention, a “shark tank” style competition where each of five finalists pitched their innovations to a panel of judges for a $1 mn prize. One of the co-winners was Kore Geosystems, which offers real-time data on drill rigs, allowing geologists to make on-the-spot decisions about whether to continue drilling, or where to target next. Another finalist had developed a machine-learning algorithm to improve mineral exploration targeting.

“Mineral exploration has not had its ‘Uber’ moment yet, but it is coming,” said Salamis. “Oil and gas had this moment in the 1990s with the advent of 3D seismics. That led to a tripling of discovery rates.”

One of the biggest impediments to reaching this goal is the reluctance of companies to share data said Salamis, who launched the crowdsourcing “Gold Rush” challenge to find new targets at the Lamaque gold project in Quebec last year. IBM was a Gold Rush sponsor.

“Cast open your data to the masses, to as wide an audience as possible, not just the geoscience community,” he said. “There are technology giants that are just begging for an entry point into what we do. They will sponsor you.”

Exploration in 2026

What will be the best exploration strategies in 2026? That difficult question was put to consultant Jon Hronsky of Western Mining Services in Australia during the keynote session at the PDAC’s annual conference in Toronto.

Hronsky says the industry’s “unequivocal failure” to grow by mergers and acquisitions (M&A) - more than 90% of the value of assets purchased over the past decade have been written off - will force companies to reconsider greenfields exploration as a fundamental means of wealth creation.

Not that exploration has fared much better in recent years. Despite a 10-fold increase in spending globally since the beginning of the century to a peak of $30 billion in 2012, the discovery rate has dropped.

“Exploration will have to have a much sharper strategic focus than it has had in the past few decades,” says Hronsky. “In my opinion, there are massive opportunities for improvement.”

For example, explorers must focus on high value, tier one ore deposits that provide a return even during commodity downcycles. Not only are these deposits more attractive from an economic standpoint, they are more likely to gain a social licence to operate because they have footprints smaller than the large, low grade deposits than came into vogue in the late 20th century.

Second, companies must be more predictive in their exploration strategy because deposits are more likely to be concealed by cover than they once were. Consequently, access to geoscience data will become a significant competitive advantage and investment will migrate to those countries that provide it.

“It doesn’t matter how good your predictive models are if you have no data to apply them to,” said Hronsky, whose own targeting work led to the discovery of the West Musgrave nickel sulphide province in Western Australia. “The availability of geoscience data, which varies dramatically for jurisdictions around the world, starts to become a important strategic consideration.”

Yet another factor is the type of cover overlying mineralized systems. The ideal cover for exploration is a few metres of sand over weathered basement, whereas thick cover in areas where topography varies presents much more of a challenge.

Just as the petroleum industry moved gradually from shallow land based operations a century ago, to shore-based drilling, to deep sea exploration, so must the mining industry start looking under manageable cover and proceed from there.

Innovation, for example advances in drilling technology (i.e. coiled tubing) that allow explorers to drill deeper for a fraction of the price of conventional diamond drilling, is changing the definition of which regions are prospective. Even automation at the production end of the spectrum will determine the kinds of deposits that will best reward exploration investment.

But who will pay for all of this activity? Hronsky argues that the failure of recent exploration carried out mainly by juniors with access to risk capital has eroded trust in the sector. In order to restore that trust and regain access to sophisticated risk capital, he says the industry must move towards an exploration aggregator model that links capital to promising portfolios of projects and technical expertise.

The aggregator could take the form of a direct agent, a specialized third party or a senior mining company that lends it credibility to the projects.

Regardless of where the financing comes from, exploration groups must ensure their technical capability matches the requirements of “the next generation of discoveries, not the last generation that has already been made” and their project portfolio is assembled in a strategic way that allows individual projects to relate to, and learn from, one another.

Focus on the high grade, get better at predicting targets, be open to disruptive technologies, create a synergistic project portfolio and adopt the aggregator model of financing: Hronsky’s key takeaways may provide a way for the industry to improve the abysmal discovery rates of the recent past.

Northern Gold Explorers Focus on Adding Bulk

Size matters, especially with regard to gold projects in Nunavut. As the yellow metal continues to languish below US$275 per ounce, gold explorers in this high-cost environment are focusing on adding bulk to their projects, rather than fast tracking them to production.

"Under current gold price scenarios there is nothing to do but make this thing as big as we can, " says Cumberland Resources (CBD-T) president Glen Dickson, of the Meadowbank project north of Baker Lake, Nunavut. Cumberland has a 100% interest in Meadowbank.

Cumberland's decision to return to the grindstone rather than consider development follows the results of a prefeasibility study completed earlier this year. The study reached the disappointing conclusion that Meadowbank was short of the ounces needed to make production worthwhile, despite years of drilling and adding new reserves at the remote gold project.

The conclusion is directly linked to the slump in the gold price, which reduces the amount of gold that can be placed in the reserve category. Gold has lost more than 30% of it's value since 1996, when the price averaged US$388 per ounce, and is not expected to move above US$300 per oz. anytime soon. Gold projects in the far north are particularly sensitive to lower gold prices because the cost of operating there is relatively high.

Undeterred, Cumberland continues to hunt for new resources that can eventually enhance the one-million-ounce reserve base and create economies of scale.

Cumberland's geologists have had some success in this regard. During the latest field season, their drills intersected a new zone, the Vault zone, when eight of ten holes cut shallow gold mineralization under a surface showing about five kilometres northeast of the known Meadowbank deposits.

Results included a 17-metre section grading four grams per tonne at a depth of 55 metres and a nine-metre section grading seven grams just below surface. The Vault mineralization has been traced over a strike length of 850 metres and a width of 300 metres and remains open in all directions.

Cumberland is now developing a resource estimate for the new zone, and has budgeted $1.3 million for further exploration at Meadowbank in 2001.

The new ounces will be a welcome boost to the 11.3 million tonnes averaging 5.73 grams gold - including proven and probable open pit reserves of 5.5 million tonnes grading 5.44 grams tonne (960,000 ounces) - in the four established zones at Meadowbank (Third Portage, Bay Zone, North Portage and Goose Island).

Cumberland is aiming to put at least 1.6 million ounces in the reserve category, says Dickson. Reaching this goal would allow a 10-year mine life with a 4.2 year payback period, based on a long-term gold price of US$325 per oz, about US$60 above the current price. At a daily milling rate of 2,500 tonnes, the open pit mine would produce 157,000 ounces per year. Capital costs are estimated at US$93 million and cash operating costs at US$187 per oz, according to the prefeasibility study.

A similar study is underway at the much larger Meliadine West project near Rankin Inlet, Nunavut, where Cumberland (22%) participates in a joint venture with Comaplex Minerals (CMF-T) and WMC International (56%), the operator. Expected to be complete by the end of the first quarter 2001, the study will update estimates of capital and operating costs and choose mining methods for production.

Meliadine West contains a resource of 23.6 million tonnes grading 8.5 grams gold per tonne, or 6.5 million ounces, in four closely-spaced deposits. WMC has invested more than $40 million in the project, including 110,000 metres of diamond drilling.

Partners Cumberland (50%) and Comaplex (50%) have been less successful at outlining new mineralization at the earlier-stage Meliadine East project along the eastern half of the Meliadine gold trend. The main Discovery zone contains resources of 2.1 million tonnes grading 6.9 grams per tonne, or 400,000 oz. A summer program intersected an extension of this zone, but came up empty handed elsewhere on the property.

Adding new resources is also a priority for partners Miramar Mining (MAE-T) and Hope Bay Gold (HGC-T), who have been working feverishly on their 1180-sq-km land package along the Hope Bay greenstone belt east of Bathurst Inlet, Nunavut.

Eventually, the partners hope to establish a gold mining camp that will produce more than 300,000 ounces per year at cash costs under US$200 per oz.

To this end, the joint venture recently spent an extra $4 million on exploration, in addition to an original budget of $15 million. The added funds were used to test for structural extensions of known gold mineralization at the high-grade Boston and Doris deposits, investigate possible extensions of high-grade zones within the Madrid deposit and drill new targets in the Hope Bay belt and the neighbouring Elu greenstone belt.

The Boston deposit is a shear-hosted gold deposit where the partners drilled 144 holes from underground in the first half of 2000. Resources currently stand at 5.7 million tonnes grading 13.1 grams gold per tonne, or 2.4 million contained ounces within three principal mineralized zones: B2, B3 and B4 The Doris deposit contains an additional 2.1 million tonnes grading grading 17.8 grams gold or 1.2 million contained ounces.

The summer program cut several narrow mineralized intersections. "These relatively narrow, but high grade intercepts in the B2 Zone at Boston confirm indications from our underground drilling and prior BHP surface drilling that there is potential to expand the Boston deposit to the north and south," said Tony Walsh, Miramar's President and CEO.

The joint venture expects to announce a new resource estimate for Hope Bay by year-end. At presstime, the partners were also working out the details of next year's program, which will be "substantial", says Walsh.

The partners have a "conceptual" reserve target of 2-3 million ounces for Hope Bay, or enough to support a 2,000-tonne-per day operation, says Walsh.

Meanwhile, Kinross Gold (K-T) is trying to boost tonnage and grades at Wheaton River Minerals' (WRM-T) George Lake project, 70 kilometres south of Bathurst Inlet. Current resources are estimated to be 6.5 million tonnes grading 9.76 grams gold per tonne, equivalent to two million contained ounces.

Kinross can earn a 70% interest in George Lake by spending $20 million on exploration before Nov. 30, 2004. The latest 40-hole program hit high-grades at depth along the property's Main and East zones, suggesting that these zones continue to plunge to the north.

Although the cost of operating in the far north is high because the projects are remote and the seasonal exploration window is short, the Meadowbank, Meliadine, Hope Bay and George Lake projects enjoy the advantages of ocean access, shallow deposits, uncomplicated metallurgy and relatively high grades. Now all they need is a few more ounces, a higher gold price, or - better yet- a combination of the two.

Queen of Diamonds

The press release announcing Canada’s first major diamond discovery in November 1991 was intentionally spare. You had to know something about diamond exploration to appreciate its significance. Only a handful of Canadians fitted this description and none happened to work for The Northern Miner.  So when editor Jim Borland handed me the faxed release, I composed a small item about a 59-kg sample of kimberlite from the Northwest Territories that yielded 81 tiny diamonds for partners Dia Met Minerals and BHP-Utah Mines and didn’t give it another thought - until the news won bold headlines in Britain and Australia and shares of Dia Met began to skyrocket.  

As awareness grew, people knowledgeable about diamond exploration emerged to explain the find’s significance. South African trained geologist Christopher Jennings, who for years had been trying to convince his superiors that Canada’s ancient cratons probably hosted diamonds, likened it to a one ounce per ton gold discovery over a considerable thickness. Suddenly, everyone was talking diamonds and their indicator minerals. A frenzied and ultimately successful race to prove up economic kimberlite pipes took hold.

The Point Lake discovery was The Northern Miner’s most exciting story since the Hemlo gold find, and I had randomly been given the privilege of covering it. As the beat exploded, fellow staff took to calling me the “queen of diamonds.” Eventually dozens of companies – a few legitimate but most closeologists– were in on the chase and the play was spreading to other parts of the country including Alberta, Saskatchewan and even an unlikely area of Montreal that hosted kimberlitic intrusions. By midday, every day, my inbox would fill with news of claims staked, kimberlites uncovered, or G10 garnets sampled. It was my job to distinguish the charlatans from the legitimate explorers, but sometimes the sheer volume of information would make my head spin. This girl’s best friend was becoming high maintenance. 

I finally cracked and, scattering faxes in my wake, stormed into the office of then editor Olav Svela, insisting on a visit to Point Lake to see the $2.4 billion play unfolding for myself. I think he laughed, but I was only half joking. Shortly after that encounter, an opportunity to pursue a masters degree at U of T arose and I took it. My parting gift from the newspaper? A faux diamond ring. I’ll cherish it always.

Tax incentives for Exploration

The Canadian government has extended the tax credit for mineral exploration conducted within the country by one more year.

As junior mining companies struggle to secure capital during challenging conditions for the sector, the 15% Mineral Exploration Tax Credit (METC) helps to keep investment flowing, Canadian Finance Minister Joe Oliver told delegates of the PDAC conference in Toronto. The PDAC had been lobbying the federal government to increase the METC to 30% in the months leading up to the conference. 

The credit complements Canada’s “Super Flow-Through” system, which allows companies to deduct 100% of their exploration expenses, then pass those expenses on to shareholders who, in turn, can claim them against personal income. With the recent announcement, the definition of “eligible” expenses has expanded to include expenses related to environmental permitting and community consultation

Since 2006, when the METC was introduced, Canadian junior mining companies have raised about $5.5 billion for exploration using the flow through system. In 2013, more than 250 companies issued flow-through shares eligible for the tax credit to at least 19,000 investors.

Above and beyond the enticements offered by the federal government, most of Canada’s provinces and territories offer their own incentives to explore locally. The province of Quebec, for instance, has a basket of incentives for both companies and their investors including:

• 125% deduction of exploration expenses for producers in the north

• Venture capital for exploration through organizations such as the Caisse de dépôt et placement du Québec and SIDEX

• C$250-million fund that makes investments of C$5-20 million in Quebec companies that have reached the development stage (announced in 2013)

• Funding for aboriginal exploration groups such as the Cree Mineral Exploration Board

• Tax deductions up to 150% of the cost of flow through shares for investors

So, if you live in Quebec, earn more than $135,000 and invest C$1,000 in the flow-through shares of a junior company, the after-tax cost of your purchase would be $334. That’s not a bad deal for an investment that has the potential for significant capital gains if the junior makes a discovery.