A simple two element analysis should explode that expectation... that economies of scale can offset the issue of rising costs versus declining value.
The point is that when costs are going up and metals prices are going down... you aren't just reducing the value of metal produced due to lower prices, you're reducing the volume in the amount of metal produced, at that margin where former ore is converted into rock that is uneconomic to produce... while the real costs are fixed or rising, they're also rising exponentially relative to the value produced when the metal value and quantity are both dropping...
The other element, though, is in the assumptions about the distribution of the marginally economic versus increasingly uneconomic resources becoming uneconomic.
If the ore body were uniform... then it would be reasonable that it should make sense that the greater the economies of scale in a larger operation, the more they will make up for deficiencies being driven ONLY by declining metals prices...
But, when the good stuff is capped by a mountain of waste... spending more on removing more waste isn't really helping in solving the problem... and, at the margin, where resources are being converted into waste... it makes only less sense to spend far more money on an increasingly marginal resource...
The real world economics of the deposit are thus completely inseparable from the physical reality in the geometry in the distributions of the values...
Uniformity... doesn't happen very often...
But, given that, what the variation looks like obviously matters a lot. Low grade stuff on top... high grade stuff down a thousand feet... defines a vastly different set of costs, and risks in price sensitivity, than uniformity would.
The ideal, of course, would be to have the high grade core of your deposit exposed on the surface... without a large factor in overburden and waste needing to be moved out of the way before you're able to get to rocks worth mining... which, otherwise, has you paying for moving rocks around instead of mining, until you get there.
We went through a similar set of issues in gold mining back in the 1980's, when high gold prices early in the decade (during the Carter inflation) drove mining of much lower grades of rock than had been profitably mined before. When gold prices cratered, those operations working deposits measured in grams per ton rather than ounces per ton were pretty quickly put in care and maintenance... or, they went broke. Most of those have remained dormant, but, during the 2009-2010 mini-boom, a couple of them were dusted off and moved back toward production. Now, of course, prices are down, and we're back in retrenchment mode... even though what was considered as "low grade" resources then, are considered "high grade" ores now...
That's not much different than what you see happening in the oil patch, today... as what was profitable at $120 a barrel... might not be capable of ever making any money when prices are expected to be holding at $50 a barrel and below... longer term. If China's slowing growth means peak copper demand growth rates are now behind us... what does that do to the long term price expectations in copper ?
Copper Fox, with the direction of the project focus and deposit modeling now under Teck's management, "might" be able to find a geometry or sequence in events that allows it to make more sense to think about developing the potential they identify... than following the plan based on what Elmer was doing made sense. But, an improved geometry or development sequence that alters the economics by avoiding years worth of wasted effort in moving sub-economic rocks around before getting to economic rocks... can't alter the fundamental MARKET fact that lower prices dynamically change what makes sense for you to mine... and what doesn't.
If it costs you $50 a ton to move the low grade rocks around... that's OK if you're covering costs and generating a return of $5 a ton... and, if it costs you $100 a ton to move low grade rocks around... that's OK if you're covering costs and generating a return of $5 a ton... etc. But, when the rock goes sub-threshold on the economics of extraction... now you're paying $50 or $100 a ton to move waste rocks around... while getting nothing for it... and getting nothing for it to offset the costs, much less generate a return, is a huge leverage factor. If the heart of the deposit is deep with a low grade blanket on top... the economics of extraction... or removal... of the low grade stuff is what controls the project economics. Period.
Nothing Teck comes up with can alter that equation... if the geometry is exactly that, then it is prices, and only prices, that will control whether or not, and if or when, it makes sense to mine the deposit or a portion of it as a large open pit...
I will not be surprised at all... if Teck comes up with something vastly better than what Elmer did in terms of a more viable geometry, or sequence of events... with it still not mattering at all, or much, as long as prices and costs are trending the way they are. My expectation is that even a "guess" about better potential in altered geometries is going to require quite a bit more exploration... Perhaps 2015 will see a return to some earlier stage reconnaissance drilling, which (with success) might provide some guides to direct future exploration... which might prove up superior alternatives in terms of design.
However, the reality here is that lower prices mean massive leverage in costs tied to moving waste rock... and the only real solution to that problem is for the trend in prices to reverse to the point where todays "waste" is being converted into tomorrows ore, instead of what we have now, with ore they were counting on contributing value today necessarily being converted into a large leverage factor in waste....
There is a non-linear relationship between prices and economic viability.... near the thresholds in viability.
At Schaft Creek, the issue in the geometry imposes an additional non-linear multiplier to that pre-existing non-linear relationship... |
