A VMS Venture

Richard (Rick) Mills
Ahead of the Herd

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As a general rule, the most successful man in life is the man who has the best information

According to the Metals Economics Group report, ‘Strategies for Copper Reserves Replacement Study’ a combination of lower grades and higher costs (taxation, royalty and environmental approval) are pushing up the copper mining industry’s capital and operating costs.

The Study found that from 2001 to 2012 the weighted-average head grade at 47 producing mines (with comparable data) declined by almost 30 percent – now this is normal and historically was never a problem, ore head grades decline because companies mine high-grade zones at the onset of operations in order to cover start-up expenditures.

But  grade problems are manifesting themselves, global copper production is coming under stress because the average ore grades of copper in new discoveries and developing projects has also declined over the same period.

Other serious concerns exacerbate declining ore grades, energy costs are increasing, water use is becoming contentious and increasingly expensive and the significant new deposits needed to replace reserves and production at our largest, aging and rapidly depleting copper mines are deeper and in increasingly more remote inaccessible areas.

Capital costs for the building of today’s mega billion dollar mines are shooting skyward, the average capital costs for copper production capacity in new mines increased an average of 15 percent per year over the past 20 years, with much of the increase evident since 2008.

Cash operating costs at major mines also increased significantly, more than tripling over the past 10 years, to an average of almost $1.50/lb in 2012.

But there’s more to running a mine then cash operating costs, much more – there’s the finding or buying of replacement reserves, the building of new mines, the replacement or upgrade of aging equipment and payments for treatment and refining.

Net of administrative costs, a copper mining company had an average total cost of more than $3.30lb to replace reserves and produce copper in 2012.

Globally, 100 significant copper discoveries (defined as a deposit containing at least 500,000 mt of copper in reserves, resources, and past production) were reported in the 1998-2012 period. These discoveries contain almost 400 mt of copper.

That sounds like a lot of copper, and it is, but only one-tenth of all that copper has been converted to reserves and only 15 deposits have reached production. It’s obvious the economic viability of these ‘new’ resources have been influenced by several factors:

• Location
• Politics
• Capital and operating costs
• No social license to operate
• Market conditions