Is Processing Leading Exploration to Extinction? [Coal Asia Vol. 38]
Is Processing Leading Exploration to Extinction?
By Ian Wollff
The author is an expatriate principal geologist of about 28 years experience in the Indonesian exploration & mining industry, and is employed by an international consultant company.
Introduction
The debate surrounding the legislation requiring minerals to be processed into refined products and metals has tended to focus on the commercial viability of such processing industries. This article looks at the impact of processing requirements on the exploration industry.
First we must understand that exploration is a separate industry to those of mining and processing. We see this type of relationship elsewhere, for example we recognize that an architect business is separate from a building construction business and a building management business, yet we do not see the government preparing legislation to command architects that they cannot design, unless they also build and manage their buildings.
Second we should realize that the exploration industry needs to constantly work hard to replenish the non renewable ores that are dug up out of the ground. Without exploration the mining industry will eventually shrivel up and die, and with that the people’s welfare is in jeopardy. Exploration geologists can confidently state that there is more ore, coal and oil out there to be discovered, but it will take more skill, persistence and resources to find.
Understanding the nature of geologists and the roll of exploration with regard to the ore processing policy is vital to the survival of Indonesia’s exploration industry.
Exploration Geologists – an endangered species
Exploration geologists acquire formal university training in the basic nature of the earth’s geological processes, including the special processes that result in concentrating certain minerals into ores, or coal, oil and gas etc. Once the geologist is engaged in the industry, further specialized skill sets are acquired to fine tune the exploration process. The industry’s standard rate of success in discovering a new deposit is tiny. Most exploration geologists can spend their entire 40 year career without ever discovering a new viable ore deposit. At best, most exploration geologists can hope to take part in a team that works to support the original discovery and turn it into a viable mine. The personal drive for such exploration geologists is largely a deep seated respect for the science, adherence to a puritanical professionalism and the earnest belief that the outcome of a meaningful discovery will bring uplifting opportunities for the local people and the wider community, plus advance the country towards a developed society. The wealth gained from the mine can ultimately be managed by the politicians towards the greater welfare of the people. The daily life of an exploration geologist can be very hard, as ore deposits are located far from their home or the nearest town. Often the exploration geologist is required to work in very small teams in remote camps with few comforts, being far from friends, family or the internet. Personal relationships with family, girlfriends or wives can be stressed, and it is common for geologists to move their career away from exploration into something else. Senior exploration geologists are essential for a viable industry, as it is the experienced professionals that can best direct the industry towards success, or determine when the activity is headed in the wrong direction, or even if the project should be stopped.
The upswing of the cyclic mineral industry encourages students to become geologists, and expands the opportunities for such geologists. But the downswing brings disappointment and unemployment, presenting a classic case of survival of the fittest. However when the government gets involved, the exploration cycles can become more extreme. For the past 30 years Indonesian government policies and regulations have encouraged exploration. But when the Government turns policy against the exploration industry, then the exploration geologist can sense extinction, as has happened in neighboring countries. With no geologists looking for the next ore discovery, then the Indonesian mineral industry is on a one-way path to its own extinction.
Exploration Strategies – an end game
Exploration is an activity of looking for something that is either well hidden or not there, but we think it might be there. When people play video games they find better scores when they develop strategies for such games. Similarly geologists have developed strategies to improve their chances of achieving a discovery of a hidden ore body.
The first strategy is typically to understand that certain ores are formed through special geological processes, and these processes occur in certain styles of geological setting. For example coal develops in fresh water sediments, and gold typically develops in volcanic settings. The next phase of exploration is to try to focus down to a preferred smaller area. Typically a suitable geological target area may consist of hundreds of thousands of hectares, and the geologist may use such techniques as historic references, stream geochemistry, satellite imagery and regional surveys to select a few tens of thousands hectares for the next phase of semi detailed exploration. This staged process of further focusing to smaller areas continues until separate prospects are identified, and are rated for the next level of detailed exploration. At each step of the focusing process, different techniques and geological skills are applied, while the cost of exploration tends to increase. The Indonesian Contract of Work system acknowledges this process through its progressive relinquishment requirements and land rent scheme etc. The final strategy is typically to drill and sample the ore body or coal seam such that an economic business model can determine if the deposit is viable.
The first phase of drilling often does not result in a viable discovery. The investor and exploration geologist are challenged to try again with a different strategy to find the hidden ore. Just as some video games demand a changing strategy throughout the course of a multi level game, then so does exploration often need to have several “lives” before success might be achieved.
If this final step of exploration and mining is to produce ore for export, then the viability and success of the project may be easier to define, and exploration can be justified. However if the requirement is to add a metal processing factory to the project, then viability is much more difficult to define, as we are dealing with many more variables to determine viability. One significant factor is timing, with the short time to develop ore export linked to short term predictions in price and commodity supply and demand. However if processing plants are required, then the time to develop a saleable product is longer with predictions on price and demand, competition etc more difficult to predict. Many projects with short term ore export growth can lead to more immediate benefits for government and communities, whereas fewer long term processing plants may take longer to deliver visible benefits to fewer communities. Indonesia should consider both survival strategies, rather than selecting only one.
Should the Government insist on its present processing plan, then we may see only a few large plants being built that need to be justified by a single phase of exploration to derive long term reserves. There may be no further market capacity for more processed ores and thus no further need for exploration for the next 30 years or more. The exploration strategy for such minerals will incorporate this rational from the onset, and so we may see the extinction of exploration for some commodities.
Some Indonesian ore deposits occur as scattered small deposits, that are rarely big enough to justify their own processing facilities. The Indonesian regulations allow for centralized processing plants to be built. Indeed this is what happens with the present gold industry. In such cases (manganese, lead etc) the viability depends on a third party building a processing plant or smelter. The exploration strategy may need to first determine what kind of processing plant is to be built, as the different ore types often require specialized mineral processes. Thus smelting plant for copper ore from Freeport may not be available for a copper ore from Central Kalimantan, due to the occurrence of different trace elements etc. We may see more exploration projects terminated early due to incompatible processing and smelting constraints, excessive ore transport costs to the smelters, or complex local regulations on royalty and domestic shipment of ores. The increased project risk for these scattered ore types may lead to less exploration and for the industry to become endangered or extinct. However we might hope to see the owners of the processing plants and smelters stimulate exploration to ensure the ongoing supply from numerous small mines to feed their plants. The development of such process plants and smelters would need to recognize the insecurity of local supply through limited exploration success, and may require the importation of such ores to underwrite the risk element. Therein the price of such domestic ores delivered to the process plant may need to be competitive to the imported ore, again reducing the explorer’s incentive, and ultimately to an extinction of the industry through the introduction of a more competitive ore import business strategy by the smelting companies.
The Mines Department’s new mineral processing requirements may appear to have little immediate impact on the exploration industry for coal where processing is not needed, for gold where processing into gold bars is a well established norm, and perhaps tin, where relatively cheap processing is available. The processing legislation and accompanying business scenario has been factored into the exploration strategy of these commodities. The number and skill of these industries specialist geologists has developed over time to be “sustainable” for these industries needs.
Investors in Exploration – Evolving
There are two main species of commercial investors, a few large mining companies hunting for large scale targets over long periods, and those of a multitude of small investors with appetite for a short term risk and high reward profile. Both types of investors take a similar survival strategy for the mineral cycle of boom and bust, and that of country risk.Significant investment is made available mostly when there is a win situation for the company, as spending big on exploration in bad times can quickly lead to extinction of the company.
When a country becomes less attractive for exploration then both foreign and domestic investors survive by hibernating or moving to other countries. Should Indonesia become a sunset industry for exploration, then some geologists may migrate off shore and other nations may experience exploration as a sunrise industry. Ultimately discoveries will be made in other countries, which will then compete directly with Indonesia for world market share. With the recent government forced down-turn in nickel ore export in Indonesia, we now see new nickel laterite export growth from the Philippines. The outcome is that the international nickel ore buyer’s position is now strengthened through having diversity in sources of supply, and Indonesia’s survival is under greater threat due to its own policy.
More recently evolving is a third type of investor, that of the rare State Enterprise. For these new players losses are underwritten by the Government, allowing for a different outlook on risk. We see Indonesia’s State Enterprises commencing exploration in Myanmar, and for China State Enterprises to invest in Aluminum smelters in West Kalimantan. The numbers of such investors are very small but typically well financed. We may expect some limited growth in this direction. However the personal reward system for the exploration geologist is typically more restricted, where the nature of the geologist’s development may further emphasize status and professional achievement over financial success.
Is processing a single viable strategy for long term growth?
We see that Vale and Aneka Tambang have nickel smelting plants while Weda Bay and others have serious studies to build other plants. However the nickel players are divided as to the capacity of the international nickel market for new processed nickel supply. Perhaps China has its own national interest to maintain its mineral processing industries, wherein there is no guarantee that China or others will import processed nickel in preference to lateritic nickel ore.
We see the potential for alumina refineries in Indonesia, and like moths drawn to the light bulb are blinded by the added value. The brightness of this added value depends on the price mechanisms, and we are yet to see the battle for survival between the owner transfer price fixers and the Indonesian government’s commodity price controllers. Perhaps we also tend to wear dark sun glasses when considering that the waste products and pollution will now be disposed in Indonesia, rather than China or elsewhere.
The Indonesian Government has a Domestic Market Obligation (DMO) for the coal industry, and considers this logic to partially apply to other mineral commodities.As with coal, if producing companies are to limit their finished product output to meet Indonesia’s requirements only, then in many cases the scale of production will not be commercially viable without massive subsidies. Indonesia domestic consumers will always import metal products through specialist needs, price and ease of acquisition.
Should the processed metal become uneconomic in the changing world market, then Indonesians may be obliged to subsidize these industries through higher commodity prices than the international market. Should a process factory be closed for safety or environmental reasons, then the well being of the mines supplying these Indonesian processing plants may also suffer. We have seen Aneka Tambang profits decline significantly in the past when a part of the nickel smelter needs major overhaul. There may be survival strategies for the mining industry and the Indonesian consumers where the export of ore may support a less viable or faltering processing industry, as we have seen with Gunung Bayan’s coal upgrading plant. Adopting strategies of both ore export and processing can lead to a stronger industry survival strategy, and thus support the geologists and miners etc. However ore export and processing should not be restricted to a linked business model. Indonesia’s motto of “Unity in Diversity” (Bhineka Tunggal Ika) is recognition of a fundamental truth that all forms of diversity can lead to a stronger Indonesia. Thus more diverse forms of business models will provide a sounder survival strategy for each of the exploration, mining and processing industries.
These unresolved issues about what happens after the processing plants are built must be considered amongst the risk factors before embarking on the mineral processing policy. For the companies building the processing plants, the long term loss of exploration may not figure as a significant risk within the 30 year life of the plant. However the Government should consider the longer term life cycle of the country without a significant exploration industry. Without an ongoing exploration industry, Indonesia will eventually become an importer of ore to feed its processing plants.
Conclusion
1. Some species can act as indicators of a healthy environment, such as the canary in the coal mine. This article draws attention to the well-being of the geologist in the exploration industry, as it seems the present regulations on mineral processing may ultimately snuff the life out of the mining industry. Indonesia needs a credible government “white paper” on the full impact of the processing regulations.
2. Indonesia has a processed nickel industry and a nickel laterite ore export industry. Indonesia has both a copper concentrate export and copper processing industries. Many countries have this duel approach to deriving national wealth from the natural resources, for example Australia has aluminum smelters, alumina refineries and bauxite ore exports. One industry does not, and should not, exclude the other industry. De-linking processing from ore export will provide a more diversified and stronger Indonesia.