Craig Hutton - Mining Economics Explained: A Guide for Boards, Executives, Managers and Investors

Mining Economics Explained

A Guide for Boards, Executives, Managers and Investors

Craig Hutton

Copyright 2022 Craig Hutton

Published by Craig Hutton Publishing at Smashwords

First edition 2022

All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage or retrieval system without permission from the copyright holder.

The Author has made every effort to trace and acknowledge sources/resources/individuals. In the event that any images/information have been incorrectly attributed or credited, the Author will be pleased to rectify these omissions at the earliest opportunity.

Published by Craig Hutton using Reach Publishers services,

P O Box 1384, Wandsbeck, South Africa, 3631

Edited by Tony van der Watt for Reach Publishers

Cover designed by Reach Publishers

Website: www.reachpublishers.org

E-mail: reach@reachpublish.co.za

Craig Hutton

craig.m.hutton@gmail.com

Chapter 1. Introduction

Chapter 2. Lessons of the Last Commodity Super

Chapter 3. Economic Value and Investment Return

Chapter 4. Risk and Uncertainty

Chapter 5. Mining Economics and Strategy

Chapter 6. Economic Optimisation Modelling

Chapter 7. The Structure of Costs

Chapter 8. Supply and Demand Dynamics

Chapter 9. Business Economics and Sustainability

Chapter 10. Case Study

Bibliography

The opportunity to work with great people and great minds started in the South African gold mining industry. Early in my career the industry experienced a massive change in mindset with respect to the business of mining and the primacy of the orebody. In the process, the role of the geologist was being elevated from useful to critical. Until then, the mining industry had been dominated by mining engineers who held sway.Mining was about tonnes, or in the South African vernacular, stof.

In 1994, a new era dawned as the gold mining industry saw and was still to endure the worst of falling gold prices as central bankers sold their gold holdings. To survive, a new way of thinking was demanded and along came a young, at the time, mining engineer who understood the importance of the orebody. His name, Bernard Swanepoel. By prioritising the orebody as the single most important area of focus and relentlessly pursuing cost discipline, he built the worlds fifth largest gold mining company in less than a decade.

Dan van Heerden, also a mining engineer, understood the significance of understanding and focusing on the economics of an orebody, and who was an early pioneer of the development of the ore optimisation algorithm utilized in this book. The focus was firmly on maximising cash flows from orebodies being mined. Out went mining to the pay limit and in came mining to the cut-off grade that yielded maximum cash flows. These two gentlemen had a profound influence in the formulation of this book.

Professor Richard Minnitt, who taught Mining Economics at the Witwatersrand University and whose work forms a bedrock applied to mining economics in this book, is another stalwart and whose work hopefully finally finds widespread adoption. Others who must be considered who have contributed to the collective knowledge base include Isobel Clerk, the world-renowned geostatistician and whose very practical approach to statistics and real-world challenges has shaped a keen understanding of ore deposit estimation. Carel de Jager retired but who served as the Technical Investment Review Manager for Anglo American plc and with whom the author worked closely over many years and who always provided challenging feedback and provided great professional support and mentoring. Dr. Gordon Smith, Executive Head Technical Anglo Platinum, whose pioneering and lasting work on strategic planning and the implementation of project value tracking is show-cased in this book. Hakkies Griesel, who took the risk of being an early adopter and entertained the applied knowledge in this book. As a result, the knowledge of these concepts was converted into a sophisticated modelling technique combining algorithms that provide an automated platform for rapid recalculations to determine the optimal economic scale of mines and also for determining the current optimal economic efficiency of ongoing operations. Finally, for the many long hours of robust discussion with Andy Clay of Venmyn Rand fame. Andy has a wealth of experience with over 40 years in the minerals, oil and gas, and finance industries and has authored hundreds of public reports and valuations as a registered Competent Person and Competent Valuator and Qualified Reserves Evaluator.

Craig Hutton, the author and veteran of 35 years in the iternational mining arena, holds qualifications in geology, economics and finance, as well as a Masters degree in Business Administration. The theoretical grounding combined with over 25 years of experience in applied mining economics serves as the foundation to the writing of this book.

He started his mining career with Anglo American as a student geologist in the late 1980s. He soon realized that he would need to do more than just study and practise geology if he wished to advance his career in management. So began his education and immersion into mining economics.

Craig has prolific international experience across all major commodities, having travelled to most mining jurisdictions in the world while practising mining economics. He has worked for major mining companies such as Anglo American plc, Placer Dome, Harmony Gold Mining Company and a plethora of small and mid-caps in his long mining career. He scaled the ranks starting as a junior geologist to being appointed as Group Chief Executive Officer of African Consolidated Resources. In addition to deep mining business knowledge Craig has a well-established knowledge of financial markets and capital fund raising.

Given his considerable appreciation for the significance of the primacy of the ore deposit, his considerable business acumen and an unrelenting focus on maximising investment returns, his craft was distilled over decades and much of this knowledge is contained in this book.

This knowledge base provided Craig with the keen insights to identify and then successfully deliver 3.5 million ounces of gold mineral resources with over 1 million ounces of ore reserves from the former Rio Tinto mine, Pickstone Peerless, in Zimbabwe. In just 14 months Craig directed and coordinated the Preliminary Economic Study, Prefeasibility and Feasibility studies that yielded a final result valuing the project at US$ 250 million in 2013 for a company with a market capitalization of just US$ 30 million at the time. The speed of the completion of these studies is testament to the power of the modelling techniques packed in the pages of this book.

Craig continues assessing mining opportunities internationally, working as the Head of Industry and Mining for an international metals trading business. It is Craigs hope in writing this book that he will make a meaningful contribution to maturing the field of mining economics.

This book is dedicated to my wife who afforded me the kind patience and support over the course of writing this book. The many late nights and sacrifices encountered supporting me, I remain forever grateful.