Major miners around the world are facing up to a growing problem of falling grades. The problem is worst in the copper industry, but iron ore is not immune and, as the cash costs of mining continue to rise, the combination threatens the economics of some major projects.
In making a detailed assessment of most mining sectors, the link between mineral grades, costs and profitability will be to the fore. The most important metric for investors is the 'cut-off grade' - the minimum grade that can be mined profitably from a given deposit. The measure is essential in determining the economic feasibility and mine life of a project.
The issue of declining grades will be familiar to anyone with a stake in big bulk miners such as Rio Tinto (RIO) and Vale SA. And, while the problem is most commonly associated with the copper industry, it is becoming an increasingly significant factor in iron ore and steel production.
Earlier this year, Luiz Mello, technology director of Vale SA, said the Brazilian diversified miner was mulling over a range of operational strategies designed to lessen the impact of declining grades. It's too early to say if Vale will be able to develop effective technologies to offset a decline in grades, but investors could always opt for companies that are developing viable deposits with potentially more favourable assays. In June, we highlighted one such area in West Africa, located just above Cameroon's southern border with Equatorial Guinea. The ore belt has already attracted the interests of China's government, in addition to big industry players such as Xstrata (XTA) and Sundance Resources.
The impact of reduced mineralisation is even more noticeable within the copper industry. Despite the economic slowdown, preliminary statistics from the 2012 International Copper Study Group indicate that global demand for refined copper is expected to exceed production by around 240,000 tonnes - a third successive annual deficit. While new mines and the expansion of existing facilities should reverse this trend next year, the demand/supply dynamic will remain tight despite an estimated 7.6 per cent rise in production to 18.1m tonnes.
Geologically, copper is sparsely concentrated within the earth's crust - at least relative to iron ore. A commercially viable copper deposit will contain ore concentrations of between 0.5 and 6 per cent, which can be up to 1,000 times the average contained within the crust. Commercial deposits of iron ore have sometimes been achieved through concentrations as low as three times the crustal average.
Central and South American mines boast the greatest recoverable copper resource due to abundant tonnage, but the region's ore grades are in decline, averaging around 0.95 per cent. Africa, on the other hand, has relatively modest deposits, but an average grade of 2.4 per cent brings far more of the ore into play.
Larger mining companies are usually in a better position to pursue a low cut-off grade through economies of scale and operational improvements. Xstrata, for example, has profitably run its Lomas Bayas and Fortuna de Cobre projects in Chile, with copper grades as low as 0.2 per cent
Of course, there are related factors to consider. Investors need to review the planned depth of a mine, together with the mineral concentrations within the strata. It stands to reason that removing and transporting overlying waste rock from deeper deposits will usually entail greater costs than near-surface deposits, particularly if the miner is forced to invest in dedicated roads and infrastructure.
Mines, in general, and copper mines, in particular, can often achieve a lower cut-off grade if they contain significant commercial by-products such as gold and uranium. Galileo Resources, (GLR) a South Africa-focused rare earths producer, whose investment case we highlighted in June, is funding part of its early development work through residual stockpiles from a disused open-cut phosphate mine from which it hopes to extract rare earth-bearing and Niobium-rich materials below the surface.
