economics of the Minerals industry
that the opposing forces have been fairly evenly balanced. In
that regard, however, the past is not necessarily a good guide
to the future, if only because there have been wide and pro-
longed fluctuations around the long-term averages. While all
mineral products are subject to some common influences, the
historical behavior of their prices has differed widely, reflect-
ing both their different end uses and the varying influences on
the nature and locations of their production.
Capital expenditure Requirements
The industry’s requirements for capital spending vary with
the location and nature of each mineral deposit. In addition to
construction of the mine itself and of the associated process-
ing plant necessary to produce a marketable product, usually
an associated infrastructure is needed. This will naturally be
less when the mine is situated near an established town or an
existing mining district, with existing supplies of water and
power and established transport links, than when located in
virgin territory. Even in the former instance, existing facilities
will probably need supplementing and upgrading. Although
mining may not be the most capital intensive of industries, it
is one of the leaders.
The lead times before a mine produces any income can
be considerable, especially if full account is taken of the
period from initial exploration to commercial production.
Even the lead time from first discovery to a decision to invest
will normally exceed a decade for a large mineral deposit.
The expenses of prefeasibility and feasibility studies in fully
delineating the deposit, developing a viable extraction and
treatment process, and carrying out the requisite environmen-
tal assessments will normally be capitalized. Construction
itself is likely to be spread over several years, and it normally
takes about 2 years from start-up for a large mine to reach and
sustain its design capacity. There has, however, been a near-
universal tendency for the scale of mines to increase over time.
Unlike many productive enterprises, the mining indus-
try not only has a heavy burden of capital expenditure before
starting production but also large continuing needs over the
life of its mines. This is an inevitable feature of the deplet-
ing nature of mineral deposits. In addition to normal capital
spending on replacement equipment and maintenance, the
industry has to meet the capital costs involved in extracting
ore from increasing depths and more remote sections of the
deposit, and in maintaining production in the face of declining
ore grades. Without such continuing capital expenditure, an
individual mine’s output would soon tail off and decline.
So, too, replacement investment is needed in each
mineral-producing sector. Although mine closures are likely to
be bunched in periods of weak market conditions, some take
place even when markets are buoyant. When total demand is
static or even falling, new capacity is needed to offset losses
from mine closures and from reductions in the output of some
continuing operations. As the overall demand for most min-
eral products rises over time, the gross annual additions to
capacity normally need to exceed the net additions—and in
many instances by a substantial margin. The balance depends
on the typical life and size of mines, which are a function
of the nature of the underlying deposits, and on the rate of
demand growth.
Additional capacity can come from expansions of exist-
ing facilities on known mineral deposits or their extensions,
or from the exploitation of previously undeveloped deposits.
Usually mining companies only prove sufficient ore to justify
43
their initial capital expenditure. As mining progresses and the
operators obtain a better understanding of their ore deposits’
characteristics, they will often delineate additional material
that can justify mine expansion. The expansion of existing
mines on known ore deposits usually accounts for a substan-
tial share of annual changes in net capacity. At one extreme,
such expansions may involve no new capital spending, per-
haps by the use of different explosives in the mine or a new
reagent in the processing plant, while, at the other extreme,
substantial capital expenditure is needed to deepen or extend
the mine. A common feature is the introduction of the latest
available technology, allowing improved productivity and off-
setting underlying cost increases.
economies of Scale
As mines expand and become larger, they can exploit econo-
mies of scale. The larger the mine, the more it can reduce its
fixed costs per unit by spreading them over an increased out-
put. It can justify investment in larger items of equipment,
such as shovels and trucks, or in more capital-intensive min-
ing methods than smaller mines. It can also support the mining
of much-lower-grade ores than smaller operations. Indeed, it
is only by operating on an ever-increasing scale that the min-
ing industry has been able to offset the costs of extracting and
processing leaner ores in more remote locations. From time
immemorial there has been an inexorable trend toward more
capital-intensive and larger-scale mining methods. This trend
accelerated across the board from the late 1980s, resulting
in reductions in the number of mines for each product and
a strong rise in their average size. Open-pit mines tend to
operate on a much larger scale than underground mines, and
their relative expansion was favored for many years because
of their ability to exploit technical economies of scale to the
utmost.
That ability was enhanced by the growth of debt-based
project finance in the post-war decades. Historically, the risks
involved in mining inhibited companies from relying unduly
on debt finance. That necessarily meant a dependence on
equity markets and internally generated funds that tended to
constrain companies’ abilities to optimize the scale of their
mines. The scope of the local market was often a further limi-
tation when transport costs acted as a constraint. Thus mines
tended to start off relatively small and expand when market
conditions and finances permitted. In the past two decades,
however, the availability of project finance on a large scale
and the existence of a global market enabled companies to
develop at a technically optimum scale from the outset.
Increasing scale is a mixed blessing. The larger the mine,
especially if open pit, the greater its environmental and social
impact on the surrounding neighborhood. Moreover, the larger
mines’ needs to minimize their fixed costs per unit of output
reduce their flexibility to respond to changing market condi-
tions. That can potentially lead to a greater volatility of prices
than in markets with a larger number of smaller operations.
In practice, most mines tend to maximize their through-
put during periods of low prices, often by raising the average
grade of ore mined. If mining companies aim to maximize the
net present value (NPV) of their ore deposits, they might logi-
cally reduce their cutoff grades when prices weaken, but their
objectives are more complex. They also need to watch the prof-
itability of their capital investment, which is different from the
implied value of the mineral deposit. Corporate survival will
tend to take precedence over theoretical maximization of NPV.