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Risky business: Balancing the risk and rewards in greenfields exploration

Knowing when to drill and when to walk away is essential in greenfields exploration. Explorers weigh in on market realities impeding the search for greenfields , and what it will take to meet the demand for quality finds.

by Dan Zlotnikov on June 4, 2012 discovery

Many are pointing to a serious misalignment in mineral exploration between the demand for quality greenfield finds and the industry focus on brownfields, and are wondering what it will take to get the right balance to satisfy both current market realities and future requirements.

At the surface level, it’s quite simple. On the one hand there is rising need for high quality deposits to meet global demands, and this requires the industry to detect and develop new greenfields deposits. Yet on the exploration side, most of the spending and efforts focus on brownfields, exploring next to known deposits or re-evaluating previously uneconomical projects.

This has industry experts expressing concerns about the long-term future of mining: Brownfields discoveries tend to be smaller in size, lower in quality, and their total number is ultimately limited. If greenfields exploration activity continues to flag over the long term, the industry as a whole may find itself with a bad case of “all dressed up and nowhere to go.”

The concern reaches all the way to the top: at a conference in Sydney earlier this month, Rio Tinto CEO Tom Albanese acknowledged that “it is getting harder and harder to find supply, harder and harder to find resources.” He continued by pointing out that projects approval timelines were getting longer, and the approvals themselves have become less certain. All this led Albanese to make a prediction:

“The next five years is going to be a supply story; the last five years has been a demand story.”

Yet despite the industry’s growing awareness of the issue and its seriousness, it’s equally clear that there are no easy answers or quick solutions for reinvigorating the greenfields side of exploration.

Neil Briggs, whose more than 40 years of mining experience have been split roughly evenly between major firms, a Crown corporation, and junior companies, now works as a New Opportunities Specialist, helping junior explorers raise funds. Briggs says there are a couple of factors at work. First is the recent economic upheaval, which has caused many investors to shift toward lower-risk opportunities.

According to Briggs, “in this lousy market environment, you have to generate some excitement to raise money, but brokers and investors aren't excited about grassroots projects. They want to hear about a project somewhere with all these wonderful numbers. That's what gets them excited, gets the share price up, and allows juniors to raise money.”

This isn’t a new challenge, but Briggs offers a key historical insight: It used to be the majors, not the juniors, who did the greenfields exploration work. This is where the second factor comes into play: A company’s size.

For a large company, Briggs explains, it’s not enough for a deposit to be economically viable to mine; it also has to be large enough to have a noticeable impact on the company’s overall revenues. As the majors kept getting bigger,  so did the size threshold of a deposit they’d be willing to develop.

Today, the majors might “do a very broad regional program, only looking for very big targets. They'll ignore good-looking targets that don’t have the size potential. Some of the companies are so big that to affect their bottom line, you need something that's truly huge,” he says.

The recent comments to investors made by Rio Tinto’s Albanese support Briggs’ position, but Albanese also highlighted a different issue the majors face: Investors are looking askance at massive capital expenditures, and are pressuring the industry’s leaders to instead pay out more in dividends and share buybacks.

“But what that means, and we are hearing it, we know our peers are hearing it, there is going to be less supply coming in,” Albanese said. This further increases the majors’ motivation to focus on only the largest, highest-return projects – the same ones that are becoming harder and harder to find.

Targets that don’t have the requisite size potential frequently will not see any exploration activity. These may eventually be sold off to juniors and end up as profitable, if smaller, projects. But the majors’ focus on larger, much less common, finds  also means further uncertainty for the sector as a whole: Imagine what would happen to copper prices if new deposits of the metal were only found once a decade, but each was twice the size of Oyu Tolgoi.

With the majors’ narrowed focus, it’s the junior companies that must take up the slack of greenfields work. But can they? Limited in capital, most often without positive cash flow, greenfields exploration firms have always been seen by investors as a risky proposition. Even Briggs, who’s been working with juniors for 16 years, is leery of investing in straight-up greenfields projects.

“When structuring a new deal, we try to include a component of work on a known deposit, or a known good showing, with a greenfields project in the same vicinity. You can get money for one and be dangling the carrot of the other,” he says. Hardly a surprise then that so much exploration activity of late has been focused on the less uncertain – but smaller – rewards offered by brownfields sites.

So what is there to do for greenfields companies that don’t have such an investor-pleasing pairing on hand? Is their only option to forge ahead and hope they make a discovery before they run out of money? Fortunately, the answer is “not quite.”

Safety in Numbers

It’s been so long since Brian Cellura has had to put a drill hole in that he takes a moment to remember how much the process might cost. This is a rather surprising admission, given that Cellura is a senior geologist at Miranda Gold, a junior exploration company. But the notion of drilling not being part of the company’s exploration activities is central to the Project Generator approach Miranda is taking.

Suppose potential investors – the same ones shying away from true greenfields projects – were presented with a junior company that was working on not one but ten greenfields projects? Would they consider such an opportunity less risky, and be willing to invest? If Miranda’s example is anything to go by, the answer seems to be “yes.” Founded in 2000, the company now has 16 projects in its portfolio and cash reserves of CAD6.5 million, something most juniors can only dream about.

So how did Miranda get to be such a diversified, well-funded junior? In fact, how did Miranda manage to spread out to so many projects, remain an exploration company, and not run out of money years ago? The answer, says Cellura, lies in that crucial point in a junior’s evolution: The decision to start drilling.

“Drilling is what kills a lot of junior companies. It's the cost that does them in. An average drill hole will cost you upwards of $50,000. So to put a decent drill hole program in, 10 drill holes, you're talking half a million dollars, and that's a big chunk of a junior's budget.” By contrast, Miranda’s cash outlay on a single property tends to be around $20,000.

Cellura explains that Miranda does all the work leading up to the decision to drill – and then looks for a joint venture partner who would take on the actual drilling. Partners can earn a 60% ownership in the project by spending around $10 million on exploration and associated fees, Cellura says. If the project were to go on to become a mine, Miranda would remain a non-operating partner, focusing its efforts on exploring new properties and finding new drill targets.

Cellura adds that it’s also important to know when to let a project go, something Miranda does regularly – and why its portfolio today is just 16 projects, not 60.

“At some point we'll say, it's a bit of a money sink. If we can't get another company interested in, we'll let it go and move on to something else,” he says.

According to Cellura, it’s this willingness to cut loose projects before significant money is expended that negates much of the risk of greenfields exploration. Being able to do so at a rapid pace is also why both Cellura and Briggs feel that juniors have the advantage when it comes to doing greenfields work. Larger companies, despite their greater resources, simply can’t react as quickly to new opportunities.

The majors “go through exercises to ‘prioritize’ the best targets, whereas most juniors just look for an excuse to drill,” says Briggs. In Miranda’s case, being able to skip the drilling stage allows them to achieve truly impressive throughputs.

“The average evaluation period for a project, depending on how good it is, will be two-three months, maybe four at the most. So over a four-month period, because we're rotating projects around, we can get through 20-25 different projects.  That allows us to cherry-pick what we think are the best projects. It's very hard for a major to run at this speed with this sort of efficiency,” Cellura says.

Waiting For The Big Wave

Briggs does offer some good news for the pure greenfields explorers: Having been through more boom and bust cycles than he cares to count, he’s seen rising commodity prices boost greenfields exploration, as investors once more flock to the mining sector. “A rising tide floats all boats,” he says.

Briggs also points out that the definition of what is and what is not pure greenfields isn’t cut and dry: In some of the less developed nations there may be areas with a number of historical mines, but little to no regional exploration work done. A junior might do well to look for targets, “not directly adjacent to the known mines, but maybe within tens of kilometres.”

At the same time, Miranda Gold serves to remind explorers that one can get pretty far before needing major investment. Nor is the decision to try the Project Generator route an irreversible one: Cellura says Miranda Gold itself isn’t dismissing the possibility of eventually transforming from explorer to producer.

“We haven’t yet found the discovery that would do that for us,” he says. Until that day comes, he continues, Miranda will gladly continue defining new areas and feeding its partners new drill targets. In today’s greenfields-shy world, this is likely to remain a much-needed service.

More Cutting Edge Prospects to bottom of related articles.

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