Report On Mining Spring 2009

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Contributing EditorsGrant CampbellElvis Picardo

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PUBLISHER’S STATEMENTPublishing this particular issue of Report on Mining has been an unusual challenge.

Usually, the enthusiasm surrounding PDAC gives our team a line up of firms wanting to participate. As a reader of this magazine I’ve no doubt you’re aware of how the market changed halfway through last year. Our sales manager and inspiration for the magazine, Doug Dulmage, actually had a stroke while watching television and seeing the markets plunge. He has yet to fully recover. So, challenges on all fronts.

It struck me the other day as we were putting the finishing touches on this issue that the market situation was not unlike the bird activity we have in our back-yard. We keep a couple of bird-feeders fully stocked. During the winter months they attract lots of birds, who noisily, one might even say “bullishly jump on board,” eating as much as they possibly can. There is lot of racket and they definitely enjoy the easy food.

Recently their noise levels have attracted a hawk we’ve named Bear who likes to roost nearby watching for opportunity. Suddenly there was no more noise. All the birds were very cautious about approaching the feeders and we were not refilling them nearly as often. Naturally this wasn’t good for the hawk and he’s become a much less frequent visitor. So the birds have started to return – quietly and for shorter periods of time, no longer sitting and gorging themselves. Slowly, as the hawk finds better feeding somewhere else, our visitors will become more confident and bullish again. The cycle starts over.

That’s what I see happening in the markets. As a publisher, I receive easily over 100 e-mails a day providing updates on company activities. Last fall there was seldom anything positive about financial issues. Few firms were able to raise money. Everything was very quiet. That’s changed in the last short while as we’re starting to see companies announcing successful financings. There is a little bit of noise happening out. It’s very good to see!

I’m no expert and certainly discount many who say they are. Plus I’m probably too optimistic for my own good. But it certainly looks to me like opportunity has also begun to return. I expect that each of the subsequent issues this year will be easier to fill. Our team is changing due to what’s happened these past few months. And the companies around us are changing as well. But I expect by this time next year we’re all going to be back singing around the feeder again. Can’t wait!

Terry TremainePublisher

Cover Story6 Northern Dynasty Minerals, Inc. Copper-gold-molybdenum mining by Grant Campbell 10 PDAC: 2009 Award Winners 12 War Eagle Mining Company Inc. Mining germanium to power 21st century technology 14 PDAC unveils new CSR tool

16 Geosoft Closing the discovery gap: exploring deeper into the subsurface 18 Short-term volatility masks long-term potential by Elvis Picardo

On the cover: Northern Dynasty Minerals, Inc.

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Globally significant development

Along with partner Anglo American plc, Vancouver-based junior Northern Dynasty Minerals Ltd. is developing one of the world’s most important mineral resources: the Pebble deposit in southwest Alaska. The Pebble copper-gold-molybdenum project contains more metal than any other late stage project in the world. It remains open in several directions, with other promising mineral prospects within the same land holding, offering excellent potential for expanded mineral resources going forward.

In fact, the United States Geological Survey has listed the Pebble resource lands as the most extensive mineralized system in the world. Not only is Pebble one of very few world-class deposits available to fill the widening gap between global copper supply and demand, it is strategically located on American soil in southwest Alaska.

Although it may not look like it now, the long-term outlook for base metal indicates that demand will far outstrip

supply. The current global economic slowdown is creating a tremendous opportunity for investors focused on positioning themselves for the return of global economic growth above long-term averages.

The primary engine of this global economic growth will continue to be the industrialization and expansion of Asia’s middle class. This fundamental shift will ultimately impact a third of the world’s population – a significantly larger population base than that which drove the last huge industrialization in Western Europe and North America in the 1950s and 60s. The resulting increase in demand for metals over the next 20 to 30 years will dwarf the ramp up we saw a half century ago.

Since 2001, Northern Dynasty has expanded known mineral resources at Pebble by more than 900% to more than 9 billion tonnes.Since 2001, Northern Dynasty has expanded known mineral resources at Pebble by more than 900% to more than 9 billion tonnes.

by Grant Campbell

Copper-gold-molybdenum mining


Location, location, location

Given its potential to produce 25% of the United States’ domestic copper supply for more than 50 years, Pebble has been called ‘the future of mining in North America’. Its location in Alaska provides a politically-stable and resource-friendly jurisdiction with a long history of successful mine development.

Alaska and the United States are known for high environmental standards and rigorous permitting requirements, and also present well-defined and comprehensive processes for mineral development. Compared to other projects, development risk is considerably lower due to the clarity and predictability of a democratic government where the regulatory environment holds few surprises.

The Pebble deposit is located approximately 200 miles southwest of Anchorage. In total, Northern Dynasty and its development partners hold mineral rights to 153 square miles of state land. The deposit itself is 13,000 x 8,000 feet and remains open in several directions. The property is characterized by gently rolling hills, tundra and an absence of permafrost. It is about 1,000 feet above sea level and within 65 miles of tidewater on Cook Inlet.

The project site is effectively serviced by two 5,000-foot runways, and infrastructure planning is well advanced for 89 miles of new road to a Cook Inlet port site, a parallel concentrate pipeline, and a transmission line to carry electrical power from a natural gas-fired generation facility on the Kenai Peninsula.

A strong partnership

In 2007, the Pebble Partnership was created when Northern Dynasty and global mining giant Anglo American entered into a 50:50 partnership to develop a long-life, high-volume mine at Pebble. Under this agreement, Anglo American will fund $1.5 billion of development costs to acquire its 50% interest, after which expenditures will be split on a 50:50 basis. Anglo’s commitment to fund the next stages of development, including a substantial portion of construction costs at Pebble, positions Northern Dynasty for growth and reduces development and financing risk. Northern Dynasty will not face any capital requirements until the project is permitted and construction well underway, meaning shareholders will not be subject to the dilution common for companies at this stage of development.

To date, Northern Dynasty and the Pebble Partnership have invested some $360 million in the Pebble Project, including more than $100 million on environmental and socio-economic studies required for project design and permitting. The Pebble Partnership has developed substantial programs in workforce and business development, stakeholder consultation, and community investment as part of its commitment to design a socially- and environmentally-responsible project consistent with the high standards set out by Alaska and US regulations.

From left to right: Northern Dynasty and the Pebble Partnership have had an extensive field program for the past five years. As many as nine drill rigs were deployed at Pebble in 2008. The Pebble Partnership is scheduled to complete a feasibility study in 2009 and apply for permits in 2010.


Ultimately, Northern Dynasty and its development partners recognize that Pebble must be developed in partnership with local communities and all Alaskans if it is to achieve a social license to operate, in addition to permits granted by regulatory agencies. In that respect, Anglo American’s international expertise in the field of sustainable development is every bit as valuable to the Pebble Partnership as its financial resources and technical expertise.

The path to development

In 2001, Northern Dynasty acquired its initial stake in the Pebble property and over the subsequent three years, expanded the known mineral resource from one to more than four billion tonnes. It also initiated comprehensive engineering, environmental and socio-economic studies to prepare for the permitting stage of development. In 2005, an area of significantly higher grade mineralization was discovered at Pebble and the company re-focused its energies on delineating the extent of this new higher grade area before finalizing mine planning and proceeding to permit.

Having completed some 850,000 feet of drilling in approximately 1,000 holes, Northern Dynasty recently announced a new mineral resource estimate for Pebble: estimated deposit totals 9.1 billion tonnes and contains 72 billion pounds of copper, 94 million ounces of gold and 4.8 billion pounds of molybdenum. It is the largest undeveloped accumulation of metal in the world, on a copper-equivalent basis. The deposit also contains commercially-viable quantities of silver, palladium and rhenium.

The Pebble Project is currently at a pre-permitting stage of development, with a pre-feasibility study targeted for completion by Q4 2009 or Q1 2010. Once completed, the Pebble Project will begin permitting under the National Environmental Policy Act (NEPA), a process expected to take two to three years. Once permitting is complete, Northern Dynasty and the Pebble Partnership will complete a feasibility study with the expectation of beginning construction in 2013 and production in 2016.

A range of options for mining the deposit is currently being considered, including a traditional open-pit, high-volume underground mining (most likely block caving) or various combinations of both. At this stage, it appears that processing will be industry standard froth flotation.


Photos, far left: Northern Dynasty and the Pebble Partnership provide on-site training to maximize local employment at the Pebble Project. Middle top: Since 2001, Northern Dynasty has expanded known mineral resources at Pebble by 900% to more than 9 billion tonnes. Middle: Pebble has undergone more than $100 million in environmental and socio-economic studies over the past five years. Above: Fuel loads.

When the proposed Pebble mine is in full production, it is expected to extract and process up to 320,000 tonnes of ore per day and produce as much as 1.2 billion pounds of copper annually. This would easily make Pebble the largest new copper producer in the world. The project also has the capacity to annually produce 900,000 ounces of gold, making it one of the largest gold producers in the world, and 54 million pounds of molybdenum, placing it among the top three moly producers. Additionally, the proposed mine could produce significant volumes of silver, palladium and rhenium.

Experienced management

Northern Dynasty benefits from an experienced management team with extensive knowledge of mine development and mining operations. Add Anglo American’s management and technical capabilities and the local knowledge brought by the Alaska-based management at the Pebble Partnership, and this is a development team that should have the depth and experience to overcome any hurdle.

The global significance of the Pebble deposit has attracted investment by other credible partners; global mining giant Rio Tinto plc has invested some $200 million to acquire a 19.8% share position in Northern Dynasty, and Mitsubishi Corporation has invested close to $100 million to acquire a 10% shareholding.

The Pebble Project represents a massive store of wealth in the United States and an economic engine for the citizens of the State of Alaska. Northern Dynasty is in the enviable position of being a 50% owner in a globally significant mineral deposit without being required to invest additional funds until the project is well along in the construction phase.

Northern Dynasty Minerals Ltd. should appeal to investors looking for an attractive valuation in the development of a massive mineral deposit that has the potential for long-term capital appreciation. n

Northern Dynasty Minerals Ltd.1020-800 West Pender StreetVancouver, BC CanadaV6C 2V6Toll Free: 1.800.667.2114Phone: 604.684.6365Email: [email protected] www.northerndynastyminerals.com TSX: NDMYear Hi/Low: 12.42/1.92


2009 PDAC AWARD WINNERSHistoric West Coast mine receives Special Achievement

Award at PDAC’s 2009 Annual ConventionBy PDAC staff writer

The Prospectors and Developers Association of Canada bestows its Special Achievement Award

for 2009 on the Britannia Beach Historical Society’s restoration of the old abandoned Britannia Mine site on the heavily traveled Sea to Sky Highway between Vancouver and Whistler. Britannia Mine opened in 1904 and in its heyday in the 1920s, was the largest producer of copper in the British Commonwealth. It operated for 70 years as one of Canada’s most significant mining operations. The site now houses the BC Museum of Mining.

Viola R. MacMillan Developer’s Award

Vancouver-based Goldcorp Inc. receives this award for being one of the world’s lowest cost and fastest growing multi-million ounce gold producers. In 2007, Goldcorp produced 2.3 million ounces of gold at a total cost of $163 per ounce. The company expects to increase gold production by 50% over the next five years.

Britania mine concentrator building

Distinguished Service AwardThe late David Barr is

recognized for his long-time work to improve health and safety in mineral exploration. Barr, who passed away in January 2009, was the exploration manager for Dupont in 1980 when three of his exploration staff were killed in a helicopter crash in northwestern British Columbia. From then on, Barr made it part of his life’s mission to save lives through his commitment to improving health and safety in mineral exploration.

David Barr


Richard Garnett

Environmental and Social Responsibility Award

BioteQ Environmental Technologies is honoured for its metal recovery process that removes dissolved metals and sulphates from contaminated acid water, reducing the environmental liability associated with mine waste water. BioteQ, which was founded in 1997 and went public in 2000, now has eight commercial plants around the world.

Thayer Lindsley Award for an International DiscoveryRichard Garnett and NovaGold Resources are joint recipients

for their work the Donlin Creek, Alaska, site gold discovery. Garnett was technical director of the Anglo American subsidiary that began drilling at the site in the late 1980s. After gold prices fell and Anglo American withdrew, Rick Van Nieuwenhuyse arrived in the 1990s and carried on exploration, first for Placer Dome and then for his company, NovaGold. Donlin Creek has more than 30 million ounces of measured and indicated gold.

Bill Dennis Award for a Canadian Discovery

HudBay Minerals receives this award for its discovery, in 2007, of the Lalor zinc deposit in the Flin Flon Greenstone Belt. The deposit was discovered using HudBay’s advanced geophysical technology that allows exploration to great depths in areas previously thought to have been well explored.

Skookum Jim Award for Aboriginal Achievement in the Mineral Industry

Tli Cho Logistics, an Aboriginal business wholly-owned by the Tli Cho people in the Northwest Territories, receives this award for supplying a range of high quality services to diamond mines in the Northwest Territories. Tli Cho Logistics was formed in 1999 to take advantage of opportunities in training, employment and business development in the NWT diamond discoveries. The company employs approximately 350 employees, of which one-third are Tli Cho.

Recipients were selected by PDAC’s board of directors, based on the recommendations of the association’s awards committee. The awards will be presented at the association’s awards dinner at the Fairmont Royal York, Toronto, on March 2, 2009. The event is sponsored by Barrick Gold Corporation.

Richard Garnett and NovaGold Resources are joint recipients for their work the Donlin Creek, Alaska, site gold discovery. Garnett was technical director of the Anglo American subsidiary that began drilling at the site in the late 1980s. After gold prices fell and Anglo American withdrew, Rick Van Nieuwenhuyse arrived in the 1990s and carried on exploration,

for their work the Donlin Creek, Alaska, site gold discovery. Garnett was technical director of the Anglo American subsidiary that began drilling at the site in the late 1980s. After gold prices fell and Anglo American withdrew, Rick Van Nieuwenhuyse arrived in the


War Eagle Mining

Company Inc.Mining germanium to power

21st century technology

Germanium is a little-known material that is becoming increasingly important in technology advancement.

In recent years, germanium has been used in a variety of applications, including night-vision goggles, solar panels, computer chips, and more. As technology advances and higher performance standards are set, germanium is increasingly used as a component to enable such advancement.

Vancouver-based War Eagle Mining Company Inc. is committed to finding germanium to supply the ever-burgeoning technology sector.

Germanium is most commonly found with zinc deposits and also in certain types of coal deposits and it can be extracted from materials such as fly ash, which is collected as part of the coal-burning process.

In addition to its Tres Marias exploration project in Chihuahua, Mexico, War Eagle is engaged in research with an organization associated with the University of Seville in Spain, where fly ash from the Elcogas SA coal gasification power plant in Portellano, Spain, is being tested to determine the optimum type of re-agents and conditions for extracting germanium from the fly ash.

While the project is in the early stages, War Eagle hopes that such research will eventually lead to methodology that may be suitable for use on a commercial basis. If such extraction is commercially viable, it could open up new possibilities for fly ash and also lead to less fly ash going to landfills and ponds as waste.

an organization associated with the University of Seville in Spain, where fly ash from the Elcogas SA coal gasification power plant in Portellano, Spain, is being tested to determine the optimum type of re-agents and conditions for extracting germanium from the fly ash.

that such research will eventually lead to methodology that may be suitable for use on a commercial basis. If such extraction is commercially viable, it could open up new possibilities for fly ash and also lead to less fly ash going to landfills and ponds as waste.


Because of the higher cost of germanium, its use has been limited to more critical industry applications such as solar panels on the space shuttle and military applications, rather than widespread commercial applications. A number of research projects have been undertaken to reduce the cost of using germanium through technological processing improvements (such as decreasing the waste and breakage associated with slicing thin wafers of germanium for use in the most efficient type of solar cells), and increasing the effectiveness of products using germanium (such as solar cells and computer chips).

Solar cells, for example, can be made more effective by increasing concentrations of sunlight onto smaller solar cells based on gallium arsenide and germanium substrates. The resulting solar cells (although more costly) take up significantly less space than required by conventional solar panels.

SiGe computer chips and related technology have led to increasingly advanced speed processing, information transmission, and night vision applications because germanium has a much higher absorption rate for light and performs much more effectively than silicon at both lower temperatures (near absolute zero) and higher temperatures.

For more information about War Eagle’s fly ash initiatives, please visit War Eagle’s website at www.wareaglemining.com or call the company at 1.800.877.1626. n

War Eagle Mining Company Inc.#1010 - 789 West Pender StreetVancouver, BC, Canada V6C 1H2Phone: [email protected]: WARPINKS: WARGFYear Hi/Low: 0.49/0.045

As a semi-conductor, silicon-germanium (SiGe) chips are much more efficient than silicon-only chips. SiGe chips are produced by introducing germanium into the conventional silicon chip on an atomic scale using nanotechnology techniques.

SiGe technology can boost performance and reduce the power consumption of transistors and circuits. As a result, cellular phones made with SiGe chips can have longer battery life and increased functionality. A single silicon-germanium chip has the capacity to hold an extraordinary number of very high-speed circuits.

With solar panels, germanium is also much more efficient in converting sunlight to energy. It is thought that while silicon-based solar cells on Earth have a maximum efficiency of 20%, germanium solar cells can convert more than 40% of sunlight into electricity.


PDAC UNVEILS NEW CSR TOOLe3 Plus now available to help companies manage their

corporate social responsibility obligationsBy PDAC staff writer

The Prospectors and Developers Association of Canada is pleased to introduce its e3 Plus – A Framework for Responsible Exploration initiative at this year’s

convention after two years in development.e3 Plus brings environmental protection, social

responsibility, and health and safety issues under a single umbrella and provides guidance to help exploration companies improve their corporate social responsibility (CSR) performance and reduce the risks to their projects.

CSR is a model of corporate behaviour that recognizes companies’ duty of care to all its stakeholders: employees, customers, local communities and shareholders. This holistic approach acknowledges that society increasingly requires businesses to account for and measure the actual or potential economic, social and environmental consequences of their actions.

e3 Plus – A Framework for Responsible Exploration is PDAC’s latest tool and represents an evolution of thinking in the area of CSR and sustainable development that is rooted in the protection of the environment, then grew to encompass social responsibility, including human rights and health and safety.

e3 Plus provides a voluntary benchmark that exploration and mining companies can tailor to their own needs and circumstances. The first phase of e3 Plus consists of the Principles and Guidance and toolkits in the areas of health and safety, social responsibility, and environmental stewardship (see diagram at right). The Principles and Guidance is designed to explain what is expected of us and why; the three toolkits show how do we do it.

Over the last decade, the exploration industry has witnessed the growing importance of CSR and ever-evolving expectations about CSR performance, especially in projects in developing countries and parts of northern Canada.

As the issue has become ever more important for the industry, it has reached the top of PDAC’s agenda as the association prepares its members for the challenges ahead.

Most Canadian exploration and mining companies operating in Canada and overseas have been implementing CSR practices at their operations’ sites for some time, but CSR expectations are constantly changing, and industry is continually challenged to keep pace.

At left: The Britannia Mine concentrator building. Below: Clean water from the Ragland mine, Quebec.


It is here that PDAC sees its particular role: clarifying expectations about CSR and industry’s CSR achievements, offering good practices benchmarks against which members can measure their activities, and providing tools and training to help continuously improve industry performance.

The first of these tools was e3 Environmental Excellence in Exploration, launched in 2003, as a program to foster environmental excellence. Later, the content of this online tool expanded to include important social considerations such as human rights, ethical practices, and community development.

Following PDAC’s involvement in a series of national roundtables on CSR and the Canadian extractive industry in developing countries, the association developed a framework to encompass CSR principles and guidance, e3, and a health and safety toolkit for use anywhere in the world.

Rather than subsume e3 into the framework and lose a brand familiar to the industry, the CSR committee elected to designate the new program e3 Plus to stand for excellence in health and safety, excellence in social responsibility, and excellence in environmental stewardship; the ‘plus’ demonstrating a significant expansion of the original program. With the completion of the first phase of e3 Plus, PDAC moves on to the second phase that will include performance objectives, reporting criteria and verification.

e3 Plus Principles and Guidance

• Adopt responsible governance and management

• Apply ethical business practices

• Respect human rights

• Commit to project due diligence and risk assessment

• Engage host communities and other affected and interested parties

• Contribute to community development and well being

• Protect the environment

• Safeguard the health and safety of workers and the local population

e3 Plus brings environmental

protection, social responsibility,

and health and safety issues

under a single umbrella.

PDAC believes CSR will continue to have a major impact on the exploration and mining industry for many years. As its members seek to enhance their performances, they can look to the association to provide the tools and resources they need, and to represent their interests in the national and international arenas where CSR is discussed.

PDAC has been in the vanguard of industry response to CSR. The association is a member of national and international groups, including the International Council for Minerals and Metals, that have been researching and developing CSR guidelines. n

As the economic downturn curbs investment, explorers are delaying drill projects and they’re taking more time to really look at the data before spotting drills.

Spending more time on analysis and modeling may be just what’s needed to close the widening gap between rising mineral exploration costs and declining discovery rates, according to researchers at McMaster University’s School of Geography and Earth Sciences.

Improving discovery rates is possible, says Professor Bill Morris of the School of Geography and Earth Sciences at McMaster University, but only if explorers begin to integrate geoscience information in such a way that they can see through rock and overburden to find buried deposits.

“The reality is that the old days when prospectors would go out there and find a mineral deposit on the surface are gone,” he says. “We have to expand our search into deeper areas and use newer technology to enhance our search capabilities.”

That shift in exploration methodology will require training, more efficient use of exploration data, and interdisciplinary cooperation: while geophysics may be the most obvious tool for exploring the subsurface, it cannot be used in isolation.

“The new frontier is the integration of geoscience information,” says Morris. “Geophysics will take you so far, but geophysics on its own will never give you a complete answer.”

In Canada, the federal government is taking the threat of declining discovery rates seriously by committing $25 million over five years to find new base metal

reserves in established mining communities. One of the main components of the Geological Survey of Canada’s Targeted Geoscience Initiative (TGI), now in its third phase, is the integration of industry and government data collected over the years to conjure up new images of old camps with the hope of discovering previously undetected ore.

The TGI also aims to produce new geological, geophysical maps and geochemical maps of the target areas, create three-dimensional representations of areas with the highest base metal potential, and come up with new and improved methods to map hidden and deep-seated base metal deposits.

In the Flin Flon mining camp of northern Manitoba, for instance, the TGI completed a 2-D high-resolution seismic survey to help identify buried VMS deposits after the GSC’s geological mapping in the area suggested a different structural model

for the mining camp that was best tested by seismic tools. The Flin Flon deposits have high acoustic impedance relative to typical host rocks because of their mineral make-up (pyrite, pyrrhotite, sphalerite, and chalcopyrite).

“Before we turned up, the exploration techniques were pretty standard,” says Simon Hammer, TGI’s program manager in Ottawa, who explains that seismic has not been traditionally been used in mineral exploration, especially in relatively urban areas such as Flin Flon that have background noise. “The fact that the major stakeholder in the area then decided to follow up with 3D seismic clearly indicates that we were able to influence their exploration strategy.”

Another TGI target area, and one of the focuses of Morris’s research, is the Bathurst lead-zinc mining region in New Brunswick, an old camp that desperately needs new life. The area’s main mine, Brunswick, is expected to close by 2010 and maybe even earlier given current metal prices, sucking about $100 million per year out of the local economy and putting 800 people out of work. Junior Blue Note Mining is also preparing to shut down the Caribou and Restigouche lead-zinc mines after less than a year of commercial production.

The VMS deposits of the Bathurst camp lie in an ancient back-arc basin broken and twisted by multi-generational folding, faulting, and thrusting of several geological blocks and slivers. But the complex geology is difficult to map because most of the surface is covered by vegetation and glacial overburden, says Hernan Ugalde, a research scientist at McMaster working closely with Morris in partnership with TGI.

That’s where geophysical surveys integrated with geochemical and drilling data will play a crucial role in assessing the near-surface and subsurface geology and potentially pinpointing new mineralization.

To that end, Hernan is running detailed gravity surveys (100-200 m spacing) over three VMS deposits in Bathurst - Chester, Caribou and Armstrong B – to test a theory that there is a correlation between the vertical gravity gradient and the presence of mineral deposits in the Bathurst camp.

The push from government and academia is a good first step, but the private sector must also get smarter and more efficient about how it

Visit www.earthexplorer.com to read more exploration articles. Learn more about

Geosoft software and solutions at www.geosoft.com.

Vegetation and glacial overburden make it difficult to map the geologyof the Bathurst Camp

Caribou Deposit: Magnetic Refinements (Worms and Euler Deconvolution)

The Bathurst Camp in the lead-zinc mining region in New Brunswick

deals with exploration data in order to make new discoveries, the McMaster researchers say. Junior companies in particular are missing the opportunity - for lack of knowledge and/or manpower - to use technology in their favour.

“It’s the difference between brute force and finesse in exploration,” says Morris. “Should you put more money into boreholes, or should you be spending a little more money and time trying to formulate a model?

Morris says the process of creating an exploration model has become much easier and more efficient with the advancement of exploration software, such as Geosoft, which provides a platform for integrating different datasets (e.g. magnetic, geochemical, topographic), bringing them all together as a single resource.

The ability to view these images in 3-D through GIS is also a crucial breakthrough, he says, because ore deposits are, by nature, three dimensional. The latest versions of Oasis montaj and Target, Geosoft’s borehole data visualization software, allow geoscientists to work seamlessly between their Geosoft and GIS (ESRI) files without leaving the Geosoft environment.

Increased access to data and the technology to process high volumes of data in meaningful ways are two main ingredients in the new search for mineral deposits. Training is the third. As part of its mandate, TGI3 is placing significant emphasis on training university students in the broad range of skills they will require to serve the mining sector, including providing them with summer jobs in the field.

Morris agrees that the industry badly needs an influx of qualified people that can make sense of data. With lots of user friendly software available, almost anyone can generate images, but only skilled personnel can separate what is meaningful in the data from what is not.

“You need direction from people with training who know how to integrate the data and understand what is behind those purple dots that you are chasing,” he says. “It is in our nature to push the data set as hard as we can, to extract as much information as we can. But you’re doing that at the expense of reality in some cases.”

Closingthe Discovery gap:

Exploring DEEpEr

Closing the Discovery Gap: Exploring Deeper into the Subsurfacewww.reportonmining.com www.reportonmining.com

into the subsurface

Discovery Gap ad.indd 1 1/19/09 11:43:50 AM


SHORT-TERM VOLATILITY MASKS LONG-TERM POTENTIAL

By Elvis Picardo, CFA

Last year, in the space of six short months, the outlook for commodities went from boom to doom and gloom. While the financial environment improved marginally in the second

week of February 2009, there is little doubt that the outlook for global growth and commodities is currently the murkiest in decades.

A year ago, there was little hint of the carnage to come in the last half of 2008. Although the credit crunch had already been bubbling below the surface for six months, there was optimism that it would be a short-lived affair and investors would soon be back to their profligate ways. In fact, by mid 2008, it seemed as though the historic commodity boom of the preceding five years would be resistant to the problems that were rapidly manifesting themselves in the global economy. Large speculators were holding onto their commodity positions, secure in their view that demand from emerging markets led by China and India would more than offset faltering growth in the developed nations. In June 2008, the TSX Composite reached a record high, as crude oil closed in on $140 per barrel.

Then Lehman Brothers went bankrupt. September 15, 2008, the day Lehman filed the biggest

bankruptcy in history, marked the start of the period when the year-long credit crunch erupted into a financial crisis of mammoth proportions. Over the subsequent two months, panicked investors and under-margined speculators stampeded out of practically every asset class including commodities, triggering trillion of dollars in losses and sparking unprecedented market volatility.

The enormity of the crisis and the plunge in asset prices, combined with a torrent of dismal economic data, has led to widespread concerns about whether the global economy is headed for a depression. The magnitude of the worldwide decline in equities – the MSCI World Index plummeted over 50% from May to November 2008 (Figure 1) – and commodities like copper, widely regarded as a reliable gauge of global economic health, certainly seem to suggest that investors are expecting a global Depression-like scenario or something close to it. The Baltic Dry Index of shipping costs for commodities is another indicator predicting a similar dire outlook. From a peak of close to 12,000 in May 2008, the index plummeted more than 90% over the following six months to a two decade low of 663.

But markets tend to overshoot on the downside as well on the upside. My view is that while commodity markets will remain volatile this year, current depressed prices are setting the stage for a substantial rally over the longer term, based on two key factors:

• Commodity prices are presently factoring in an extremely pessimistic outlook for global growth. An improvement in the growth environment could therefore have a magnified upside impact on commodity prices.

• Central banks and governments around the world are pulling out all the stops in a bid to prevent deflation from setting in. But these extraordinarily stimulative actions may be setting the stage for inflation in the longer term, which would be positive for physical assets such as metals and minerals.

IMF forecasts contraction in 2009, rebound in 2010

In an update to its World Economic Outlook released in January 2009, the International Monetary Fund (IMF) projected that global growth will fall from an estimated 3.4% in 2008 to 0.5% in 2009, the lowest in the post-WWII period. That forecast represents a large downward revision of about 1.7% from the IMF’s previous estimate released in November 2008 for global growth of 2.2%.

Figure 1: MSCI World Index vs. CRB Index and Baltic Dry Index (Feb.1999 – Jan. 2009 monthly)

Source: Bloomberg


With the US, Europe and Japan simultaneously in recession, output in the advanced economies is expected to contract by 2% in 2009 (Table 1), the first annual contraction since WWII. The forecast for emerging nations is relatively better, although growth in emerging and developing nations is forecast to slow from 6.25% in 2008 to 3.25% in 2009 (Figure 2). While China and India are also forecast to slow down appreciably, they are expected to remain the fastest-growing economies in 2009, with China projected to grow 6.7%, down from 9.0% in 2008, and India expanding at 5.1%, compared to 7.3% in 2008.

The IMF predicts a gradual recovery in 2010, with global growth rebounding to 3%, aided by continued efforts to ease the credit crisis as well as expansionary fiscal and monetary policies. The IMF notes that while downside risks continue to dominate, there are also upside risks to its forecast, especially if global financial conditions improve faster than expected, thereby boosting consumer and business confidence.

Next year’s anticipated recovery may help limit the downside for commodity prices in the first half of 2009, and may spur gains in the second half if there is greater conviction about the economic rebound. Recovery in 2010 is expected to be led by emerging and developing economies that are forecast to collectively expand 5%, while advanced economies are forecast to grow by 1.1%.

Given that demand from developing nations was one of the prime drivers of the 2003-07 commodity boom, this could aid a recovery in commodity prices going forward.

Markets should stabilize as fear of financial Armageddon recedes

The 2003-07 bull market and commodity boom were marked by a tremendous sense of complacency and massive appetite for risk. In the second half of 2008, this complacency gave way to apprehension and near-total risk aversion. Popular measures of risk such as the CBOE Volatility Index (VIX) and TED Spread, which measures the difference in yields between three-month US T-Bills and three-month Eurodollar LIBOR, reached record levels on October 10, 2008. My proprietary Financial Armageddon Indicator Level (FAIL®), which combines the VIX and the TED Spread to provide a measure of the concern regarding a global systemic collapse, also reached its highest levels since October 1987 on October 10, 2008 (Figure 3).

Other measures of risk also point to massive risk aversion since September 2008. A massive flight to the perceived safety of US Treasury Bills sent short-term yields close to zero in Q4

2008, and also enabled US government bonds to become one of the best-performing asset classes this decade. Spreads on corporate bonds and sovereign debt also surged to record levels. As well, the reversal of the carry trade, which involved borrowing low-interest currencies such, as the Japanese yen, and investing the proceeds in higher-return assets including commodities, has resulted in the yen rising 20% against the US dollar since September 2008 to a 13-year high.

Figure 2: Global GDP Growth

Source: IMF World Economic Outlook Update, January 2009

Figure 3: VIX vs. FAIL® and Gold (Feb. 1999 – Jan. 2009 monthly)

Source: Bloomberg

Table 1: IMP’s Growth Projections

Source: IMF World Economic Outlook Update, January 2009


But a modest appetite for risk seems to be returning, as risk metrics decline and financial markets stabilize. The VIX index has fallen by 50% from its October 2008 high, while the TED Spread has declined steadily from its record 4.64% on October 10, 2008, to less than 1% currently. Ten-year US Treasury yields, which reached a record low of 2.04% on December 18, 2008, are trading over 3% for the first time in 11 weeks. As the fear of a systemic financial collapse recedes in 2009, I expect volatility and risk spreads to contract significantly, which would be positive for perceived risky assets such as commodities.

The China FactorNo discussion of commodities would be complete without

considering the impact of China. As shown in Figure 4, the Chinese economy has been a major contributor to commodity demand during 2003-2007.

China’s accession to the World Trade Organization in 2001 set the stage for the consequent manufacturing boom and new infrastructure investments, both of which led to surging demand for metals. While the former was primarily the result of China’s emergence as the low-cost maker of choice for manufactured products, the latter was driven by the nation’s rapid urbanization, with the share of the population living in cities increasing from 30% in the early 1990s to about 40% currently. According to the World Bank, by 2007, more than 50% of Chinese steel and 44% of copper demand was generated by the construction and infrastructure sectors.

The World Bank also notes that China stands out as the country where metal intensities – the quantity of metals used per unit of GDP – have increased the most over the past 10 years. Chinese metal intensities are as much as 7.5 times higher than in high-income countries, and four times as high as in other developing countries, an anomaly that is primarily the result of China’s high investment rate and large manufacturing base. The World Bank expects China’s metal intensity to stabilize and then decline over the long term, like other Asian countries such as Japan and South Korea that followed a similar manufacturing and export-intensive development path. But the projected decline in Chinese metal intensities is still years away. The World Bank expects global demand for metals to grow at about 4% annually through 2015, before slowing to around 2.5-3% between 2015 and 2030 as a result of lower Chinese metal intensities.

In the near term, the signals emanating from China are encouraging. In the first week of February 2009, the country’s benchmark CSI 300 index recorded its biggest weekly gain since September 2008 on optimism that the government’s stimulus measures will revive the economy. The index has gained 43% since China unveiled a ¥4 trillion (US$ 585 billion) stimulus package in November 2008.

Commodities may be building a baseThe recent performance of the TSX Venture index and the

TSX Diversified Metals & Mining Index (Figure 5) provides further evidence of a return to more normalized risk appetite levels. While the London Metal Exchange index of six primary metals is up 13% from its recent low set in December 2008, the TSX Venture index is up 33% and the TSX Diversified Metals index has surged 65% from their lows set in the same month.

This degree of outperformance primarily reflects the disproportionate extent to which commodity and resource stocks had been hurt last year by the toxic combination of plunging commodity prices and tight credit conditions. As commodity prices stabilize and the credit crunch eases, there may be significant upside from current levels for quality companies with relatively strong balance sheets.

Faced with a precipitous decline in asset prices, surging unemployment, and a collapse in consumer and business confidence, central banks around the world have had little choice but to resort to monetary and fiscal stimulus in a bid to avoid deflation. Under these circumstances, inflation is being viewed as a much lesser threat, to be combated at a later stage if necessary. But as noted earlier, these stimulative measures may themselves be setting the stage for inflation down the road. If inflationary pressures develop, physical assets such as metals and minerals can be expected to appreciate in price.

Figure 4: China’s contribution to global commodity demand

World Bank


In a recent research report, I noted that 2009 may be the first down year in nine for gold. The precious metal has more than tripled in price since 2000, making it perhaps the best-performing asset since the turn of the Millennium. Gold’s safe-haven appeal enabled it to gain close to 6% last year amid the global meltdown in financial assets. In my opinion, however, the sharp divergence in performance between gold and other assets, including other commodities (see Figure 6) this decade has resulted in it trading near historically high multiples in relation to other assets such as stocks (using the Dow Jones Industrial Average as a proxy), crude oil and silver. As Figure 7 demonstrates, gold is also trading near historic highs in relation to copper. Given these high multiples, and the possibility of lower safe-haven and physical demand this year, I forecast gold to average about US$835 in 2009, which represents a marginal 4% decline from last year’s average price. Other factors that may weigh on the price of gold in the near term are a mildly deflationary environment and an easing of geopolitical tension.

Despite continued volatility in the short term, I believe the long-term outlook for gold and other commodities is positive. While it may be too early to state with any degree of conviction that the worst is over, 2009 may well be the year when a sense of guarded optimism returns to the marketplace. And as growth prospects for the global economy begin to improve, commodities should be one of the major beneficiaries of a recovery in investor sentiment and risk appetite.

Elvis Picardo is Vice President - Research, and a strategist and analyst at Global Securities Corporation in Vancouver, BC. The opinions expressed herein are his own. n

Figure 6: Gold vs. CRB & Copper (Feb. 1999 – Jan. 2009 monthly)

Source: Bloomberg

Figure 5: TSX Metals & Mining vs. TSX-V & LMEX (Feb. 1999 – Jan. 2009 monthly)

Source: Bloomberg

Figure 7: Gold to Copper Ratio (Feb. 1999 – Jan. 2009 monthly)

Source: Bloomberg


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