Timings and cycle motions

In chapter 7 we learned that strong differences can exist between the two cycle motions CW and CCW. This adds another level of complex-ity onto the decision when the optimal time would be to start a mine operation. We will now explore these different motions in a source development context and discuss the re-sults for two different ore types, MVT.TRI and UUN.CIG.

3such as certain machinery, or qualified labour

In terms of the four different cases just de-scribed for the generic commodity cycle, we limit ourselves however. Since cases C and D are not optimizing the positive cash flows over the commodity cycle, we will not entertain an analysis of these with respect to the different motion types. It is far more interesting to in-vestigate cases A and B, since we believe they can make a serious difference to the economics of a project. We will focus on these, hence-forth. An illustration of these results is given in figure 8.3 to which we refer hereafter.

MVT.TRI ore

We have already seen in figure 7.15, page 58 (cf.

table A.23, page 200) that clockwise and coun-terclockwise cycles of this zinc ore have very similar lengths, i.e. the arrhythmia is close to zero (Φ^∗_{T T}=0.13). We can see this clearly on the left hand side of figure 8.3. We notice that

on average CW and CCW cycles enter their boom phases after 2.1 and 2.4 years, respec-tively, while their peaks both happen about 4.5 years after their cycle trough (cf. table A.16, page 192).

In order to maximize the benefit of the coming boom, the mine construction should therefore start right at or after the cycle finds its bottom.

The case for an early development as described in case A is thereby stronger when a CW cy-cle is anticipated since it shows a longer boom phase and has a better price upside (Φ^CW_P =3.13

> Φ^CCW_P =1.84). However, the knowledge of what cycle is coming up next to make a mine development decision is of lesser importance, since both cycles are very similar in average length. Making the project economics work while planning for a CCW cycle, with the po-tential of a CW cycle as an upside, should thereby be the modus operandi.

Figure 8.3: Mine development options for different cycle motions UUN.CIG ore

Compared to MVT.TRI the situation for the uranium ore is quite different. The right hand side of figure 8.3 shows how different the two cycle motions evolve. On the one hand we have the short CCW cycle with a relatively long bust phase (Φ^CCW_bb =0.59) and a relative low price multiple of Φ^CCW_P =1.74. On the other hand is the CW cycle that shows a much longer boom phase, which also starts sooner than in the CCW case. Moreover it shows a price mul-tiple Φ^CW_P = 13.20, which by far exceeds that of the CCW cycle.

This strong arrhythmia combined with a se-rious difference in price multiples makes it paramount to understand what cycle type is coming up next, before a mine development de-cision should be made. While not certain, the cycle motion should be a bit clearer when it reaches the point of sustained positive growth at stage t1. Hence in cases where there is a big discrepancy between CW and CCW cycle lengths (i.e. Φ^∗_{T T} ̸=0, Φpp»1, Φbb<1) the cau-tious optimist approach of (case B) should be taken. Waiting might add value in this case.

In the specific case of uranium, the decision

maker should also carefully assess if a mine should be developed during a CCW cycle to begin with. As we can see in figure 8.3 the rel-ative short boom phase combined with the low price multiple would suggest to pursue a mine development only if the ore body is exception-ally high in grade or when uranium constitutes a by-product and therefore does not influence the overall viability of the project. Otherwise the short boom phase of only three years would probably not be sufficient to justify the project.

Along these lines it appears that such behavior for uranium is actually documented in recent history. For this we turn to figure 8.4. It shows the times of discovery and start-up of some of the most important uranium mines since 1950.

Figure 8.4: Major uranium discoveries and mine start-ups since 1950

As we can see, the majority of the mine developments happened during the presence of a clockwise cycle that also coincided with times of high prices. In fact thirteen of the sixteen mines opened during clockwise cycles.

The remaining three mines were developed dur-ing CCW cycles in the late 1990s. They ei-ther hosted uranium as a by-product (Olympic Dam - IOCG.OD) or were of exceptionally high grade such as McClean Lake (open pit mine

@ 1% U3O8) or McArthur River (underground mine with 20.55% U3O8). Compared to the majority of uranium mines that host ore grades between 0.04% and 0.13% U3O8[3], these

op-erations were therefore profitable even when adverse pricing regimes prevailed during that time.

Hence there is historical evidence for our obser-vation that uranium mine development during CCW cycles is not advisable.

8.1.3 Summary

As we have seen, no generalized recommen-dation for an optimal time for mining devel-opment can be given. The decision making process is asset / project specific but can be supported by employing parameters we de-veloped in the previous chapter. These are summarized in figure 8.5, where we suggest four ratios that should help to guide a decision.

They are Φ^∗_{T T}, Φbb, Φpp and Φ^CW_C .

Figure 8.5: Proposed decision criteria for mine development cases

As defined in chapter 7, Φ^∗_{T T} measures the metal arrhythmia. The more different this number is from zero the more development case B should be preferred over A. The ratio Φ_bbmeasures the difference of lengths between boom and bust for each cycle motion. The higher its value the longer the boom is relative to the bust phase and hence an earlier devel-opment should be chosen (case A). Φpp puts the price multiples of the boom and bust phase into relation to each other. The higher its value the higher the price multiple of the CW cycle is compared to the CCW one, and the more should the mine development be postponed un-til stage t1arrives (case B). The last ratio Φ^CW_C is an empirical ratio of the share of the CW cy-cles over the total number of cycy-cles. It can al-ternatively serve as a probability factor for the likelihood of the arrival of a CW cycle when the decision maker is uncertain of the apparent cycle or if the analyst wants to forecast future

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years seems to be valid for the entire time span since the 1950s. However, we can also see that lead times actually grew from an average of around 10 years in the 1970s to about 30 years for deposits that started operating after 2000.

When looking closer, we notice that almost all of the deposits were discovered while a CW motion was present. These deposits that were found in the 1960s were then developed within about ten years in the subsequent cycle which also turned out to be a CW cycle. The deposits that were discovered in the latter cycle however were not so lucky in that another CW cycle came along. In fact, two CCW cycles followed.

As a result of this, these deposits had to wait for development until the next CW cycle ar-rived some two if not three decades later. This is except for those of course that were of ex-ceptional quality. Hence it appears that delay times in project development can be explained by the different types of cycle motions a com-modity experiences. Consequently it not only matters when a deposit is discovered during the business cycle, but also what kind of cycle type

or the sequence thereof can be observed after its discovery.

In essence, and in particular in the case for ura-nium, a discovered deposit is more likely de-veloped during a CW cycle rather than in a CCW cycle. However, we need to be careful not to generalize these results for other metals and ores and it is suggested to test this hypoth-esis on such.

Nisulfides 11.2 11.5 6.4 Nilaterites 18.6 11.7 13.9

U 14.7 14.2 8.1

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Table 8.1: Selected project lead times from dis-covery to operation after Schodde [38]; cycle motion times from table A.23 (# in years)

8.3 Exploration

We now want to investigate if our insights from the previous chapter can also be applied in improving the exploration process that leads to discovery and development of deposits.

For the discovery of any deposit mineral explo-ration has to be performed first, usually many years in advance. We can distinguish two types of exploration activities.

Brownfield exploration is undertaken around existing mines or known deposits. It is usually a less risky and less expensive endeavor since the type of mineralization is already known and infrastructure is in place.

Exploration for targets in a greenfield environ-ment on the other hand is much more costly and risky, since it is far away from any in-frastructure with the geology less known. No matter the type of exploration, success ratios are very small. Rio Tinto [39] estimates that only 1 out of 100 exploration targets result in a successful discovery. The discovery phase also needs long term commitment and financing since it can easily take 10 years [39] to discover a viable deposit. This is despite the fact that

we have a much better understanding of ore forming process now, than some 100 years ago.

Long term exploration spending data is hard to find and of all the data sets available, the most consistent is available for uranium and gold.

We will investigate these two more thoroughly now.

Uranium

As shown in figure 8.7 on page 90, the ex-tent of exploration spending for uranium fol-lows closely the movement of its prices. This is not entirely surprising since money will be invested in a metal that promises benefits to the shareholders and offers a lucrative return in the long term. We also notice however that the peak of exploration spending always happens past the cycle peaks, which is most pronounced in the late 1970s and in the early 2010s.Overall we see that exploration spending and number of discoveries were higher during clockwise cy-cles compared to their counterclockwise

equiv-5The clockwise cycle in the 1960s remains the exception to this since the uranium industry and its pricing was much more government controlled and not as free as a market as in the decades that followed.

alents⁵. This is most likely a direct result of the amounts of money spend in exploration.

Spending more money in exploration does not directly result in better results, however. As we can see at the uranium exploration peak in 2011, more than twice as much money was spent in exploration than in 1979, while only a third of the discoveries were made. If this is only a result of bad luck, cost inflation, or the fact that the best discoveries were already made in the 1970s, is a question that cannot be answered at this point.

Figure 8.7: Uranium exploration 1960-2016 [40][41][42][43]

Gold

Gold’s exploration spending also tracks the de-velopments of its prices, as well as its cycles.

As we see in figure 8.8, this is the case during the last three cycles, and especially during the last CW cycles. We can also note that explo-ration spending during the last three cycles is generally lower during CCW cycles than during CW cycles⁶. However, the number of discover-ies during a CCW cycle were equal or exceeded

those of a CW cycle. In analogy to uranium it therefore appears that while exploration spend-ing increased substantially, the amount of dis-covered gold deposits actually fell. As with ura-nium we cannot decide if these trends are a re-sult of worsening chances, cost inflation, or if the best discoveries were already made before.

Figure 8.8: Gold exploration 1975-2016 [42][44][45]

Returning to the figure, we can also observe that during the last three cycles most of the discoveries were made before the cycle, explo-ration and price peak.

Summary

In this short review of exploration spending and discoveries we made two major observations.

First, exploration spending and discoveries are cycle and metal dependent. We also realized that monetary efforts in exploration spending is generally higher during CW cycles. Higher spending however is not necessarily rewarded with an equally higher proportion of discover-ies, especially in more recent times.

6This observation has to be qualified since the first CW cycle in the 1960s/70s is not entirely representative for a CW cycle. This is because gold became a freely traded commodity only in the late 1960s and hence its exploration dynamics and incentives thereof were probably much more different than those of the more established metals.