www.cet.edu.au

Finding the copper mine of tomorrow:

An economist, a scientist and a geologist discuss

resource depletion JOHN P. SYKES12*, DANIEL J. PACKEY1 AND ALLAN TRENCH12

1 Graduate School of Business, Curtin University, 78 Murray Street, Perth, Western Australia, 6000, Australia

2 Centre for Exploration Targeting (CET), The University of Western Australia, 35 Stirling Highway, Crawley, Perth, Western Australia, 6009, Australia

* Corresponding author: johnpaul.sykes@postgrad.curtin.edu.au

Introduction Over the last decade, copper prices have reached nominal and real term historical highs not seen in half a century (Jacks 2013). Whilst most mineral economists agree this is mainly due to rapidly increasing demand from industrialising Asian economies (Crowson 2013; Jacks 2013; Radetzki 2013, 2006; Humphreys 2010,

2009; Radetzki et al. 2008), particularly China (Farooki 2012; Farooki and Kaplinsky 2012), increasingly they also suggest a lagging supply response to also be responsible (Radetzki 2013, 2006; Farooki 2012; Humphreys 2010; Radetzki et al. 2008;). Operating copper mine supply has experienced significant problems -

missing production forecasts by over 6% per year (Humphreys 2010) and falling about 20% short of theoretical production capacity (ICSG 2013). However, problems bringing new mine supply on stream have also been highlighted, with specific projects such as Oyu Tolgoi, Mongolia (Humphreys 2010) and Pebble, USA (Mudd,

Weng, and Jowitt 2013) attracting attention. In particular the growing number of non-technical, environmental and socio-political issues blighting development projects are subject to much discussion (Humphreys 2013, 2010; Radetzki 2013, 2006; Crowson 2012; ICSG 2012; Prior et al. 2012; Cuddington and Jerrett 2008;

Radetzki et al. 2008). What is not clear though is whether these high prices and mine supply issues are a short-term problem or a long-term trend. Scholars take a number of different approaches to this problem. Here we look at the well-established paradigmatic views of the ‘economist’ and the ‘scientist’, before considering

what an exploration geologist may make of the problem.

The other main method for assessing resource depletion – often favoured by resource

scientists – is the “fixed stock” approach, (Humphreys 2013; Mudd, Weng, and Jowitt

2013; Prior et al. 2012; Tilton and Lagos 2007; Tilton 1996; Kesler 1994, Meadows et al.

1972), which compares known resources with levels of demand to estimate the number

of years left until depletion (known as the “static depletion index”). The substantial

growth in copper resources both globally (Edelstein, 2004-2013) and within Australia

(Geoscience Australia 2010), thus contradicts the interpretation of resource depletion

drawn from the “opportunity cost” approach.

The exploration geologist’s view By contrast, Cairns, Hronsky, and Schodde (2010) suggest an important (and fundamentally different) future for exploration in the

copper industry by questioning the economic viability of the resource itself. As large and growing as it is, substantial portions of it may

not be “economic under current or immediately foreseeable circumstances”.

This may due in part to the fact that the various industry reporting codes do not require economic studies on “mineral resources”. For

example the JORC Code (2012) that governs mineral companies in Australia only requires “reasonable prospects for eventual

economic extraction”. Cairns et al. argue along these lines that there has been no real reserve growth in recent decades and thus

depletion is occurring, contributing to rising real prices.

They cite the example of copper resources in Australia, the growth of which over the last decade is almost entirely due to resource

upgrades at one mine, Olympic Dam. Subsequent to their paper, the Olympic Dam expansion project was indeed postponed pending

re-scoping (BHP Billiton 2012), suggesting actual copper “reserve” depletion in Australia over the last decade, rather than the

previously reported growth.

Applied globally this would help explain the paradox of growing resources and increasing real prices – it is the “reserves” that have

shrunk. The recent withdrawal of Anglo American from the world’s largest copper project, Pebble (Anglo American 2013), suggests that

significant questions remain about what sorts of copper resources are likely to prove economic, especially under a “sustainable

development” paradigm.

Such declines in “economic” reserves (representing depletion of economically viable resources) can account for the rising real prices

observed in the recent past, despite a growing “sub-economic” resource. This adjustment of philosophy essentially brings the “fixed

cost” paradigm into line with the “opportunity cost” paradigm.

Exploration geology in the future of the copper industry Cairns, Hronsky, and Schodde (2010) conclude that the copper industry is ‘discovery constrained’ rather than ‘development

constrained’, as both the “opportunity cost” and “sustainable development” paradigms assume. If their hypothesis is correct, it is

important that the exploration industry focuses on discovering new copper “reserves” – economically viable deposits – rather than

merely resources.

This will require a change in thinking to a more economically informed approach to exploration targeting. Problems at supposedly

“world-class” copper deposits such as Pebble suggest that truly world class is not the same as merely big. Schodde and Hronsky

(2006) have advocated this approach before, suggesting a movement to economic (and “qualitative”) definitions of world-class, rather

than the stricter “quantitative” definitions of Singer (1995) and Laznicka (2010), based on the total contained metal in a deposit. Mineral

economics should thus be added to the traditional geological ‘tool kit’ in a revised exploration paradigm to meet the future needs of the

world.

A greater challenge however perhaps lies in incorporating sustainable development within the exploration mindset. Such a shift in

thinking would require a much broader range of expertise, across a numerous fields – but the economic benefits in defining, targeting,

and ultimately discovering a truly “sustainable world class” copper deposit would amply repay the investment in this more systemic

approach to exploration strategy.

The USGS charts an overall

rise in global copper

resources, which has kept up

with increasing mine supply.

The “static depletion index”

has thus risen over the past

decade, in theory showing the

world’s copper resource has

increased, despite a major

increase in copper extraction.

Source: Edelstein, 2004-2013

Forecasts made in

“Limits to Growth”

(Meadows et al. 1972) of

resource exhaustion by

the end of the 20th

century proved far wide

of the mark – with the

world instead

experiencing decades of

falling commodity prices

and increasing resource

growth. Source: Jacks

(2013)”

Above: The growth in Australia’s “Economically Demonstrated Resources” over the last decade is mainly accounted for by

resource expansions for the Olympic Dam open pit. This project was suspended in 2012, casting doubt on the economic viability

of the resources, and therefore whether any “reserve” growth has occurred in Australia over the last decade. Source: Cairns,

Hronsky, and Schodde (2010)

Below: The number of mineral discoveries per year compared to expenditure, showing that although both resources and

expenditure have increased, the number of unit discoveries have fallen. This suggests that much of the resource growth is coming

from brownfields exploration around mine sites, rather than greenfields exploration leading to new deposits (Schodde, 2012).

Real” copper prices (those corrected for inflation) are at highs

similar to those in the 1950s and 1970s, suggesting resource

depletion under the “opportunity cost” paradigm. Source: Jacks

(2013)”

The economist and

the “opportunity

cost” paradigm

Real commodity prices are one of the two main methods used to estimate resource depletion – an

approach advocated mainly by economists (Tilton and Lagos 2007; Tilton 2003, 1996). Economists see

the world’s stock of mineral resources to be ‘essentially’ infinite, and thus of no interest to measure, as

“depletion” does not occur within a timeframe of interest to humanity. What is important is the price the

global economy is willing to pay to use that resource – the “opportunity cost” (Humphreys 2013; Tilton

and Lagos 2007; Tilton 2003, 1996). A resource can thus only become “depleted” relative to others – a

situation expected under this paradigm to drive a switch to the use of those alternate resources.

To economists rising prices indicate resource scarcity. The recent increased copper prices (Jacks

2013) have therefore once again awakened the concept of copper resource depletion in the popular

consciousness.

Looking forward, economists are concerned with whether the “opportunity cost” of a commodity will rise

or fall. Economists assume that market efficiency will develop the best mineral deposits first, and thus

going forward, resource quality will inevitably decline (Tilton 2003).

The assumption of ever declining resources means economists focus on the importance of innovation

and technology in mining, which can mitigate the cost increasing effects of declining resource quality.

Long-term commodity prices thus represent a constant battle between technology and innovation on

one side of the equation, and declining deposit quality on the other (Tilton and Lagos 2007; Tilton 2003,

1996).

Over the long term, minerals economists, such as Humphreys (2010, 2009) see the significance of the

recent “boom” and concomitant mine development problems as structural, rather than cyclical. To

Humphreys, the boom represents a switch to long-term increasing real commodity prices, due to a

combination of declining resource quality, increasing geographic remoteness and increasing energy

prices. Exploration geologists in this paradigm have but a limited role in the future of the copper

industry – their input restricted to the mere outlining of further, ever-poorer quality resources.

A revised 30-year anniversary edition of “Limits to Growth”

(Meadows, Randers, and Meadows 2004), acknowledged the

flaws of the approach taken in that report, and focused instead

on the cost of resources to the environment and society (rather

than just ‘the economy’), due to the declining quality of resources

observed over the previous 30 years. This is known as the

“sustainable development” paradigm. This more nuanced idea of

“sustainable development” is thus able to account for the recent

observation of rising real prices in the face of copper resource

growth. Previous “externalities” (within the realm of

“sustainability”) outside the realm of economic consideration are

now considered, making mine projects more difficult to develop.

For example, Mudd, Weng and Jowitt (2013) state that there are

now sufficient copper mineral resources for decades of

production. These authors and others (Humphreys 2013, 2010;

Prior et al. 2012; Kesler 1994) hypothesise that the restraint of

new copper mine supply is not a consequence of resource

depletion, but is instead essentially a problem rooted in

development – “sustainable development”. Under such

conditions, these authors claim, it is “social, economic and

environmental” factors that will determine the successful

development of copper mine projects.

Again, this paradigm assumes a minimal role for exploration

in the future of copper; with decades of resources already in

place, the challenge is not to find more, but to work out how

to develop those already discovered.

Falling global copper mine head grades. Both advocates of the “opportunity cost” and

“sustainable development” paradigms assume resource quality will continue to fall into

the future. This implies a limited role for the exploration industry, restricted to merely

outlining further, poor quality resources. Source: Crowson (2012)”]

From “fixed stock” to

“sustainable

development” paradigm

Acknowledgements: John P. Sykes acknowledges a Curtin International Postgraduate Research Scholarship and the Centre for Exploration Targeting for funding this research, as part of his PhD programme.

However, this approach notably underlay the infamous Club of Rome “Limits

to Growth” report (Meadows et al.), which in 1972 made (some) alarming

predictions of resource depletion by the end of the 20th century, and

advocated strongly for controlling economic growth in order to stop resource

and economic collapse. Over the subsequent 30-40 years, the dire warnings

of this report were undermined by falling or steady real prices across a broad

range of commodities, and a rapid expansion of resource production and

building (Tilton 1996) – indicating the resources were growing, not depleting.

The scientist and the “fixed

stock” paradigm

“Fixed stock” and “Limits to

Growth”

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