Risk and value management in mineral exploration

The mineral exploration industry remains in crisis and is presently undergoing some fundamental structural changes that are being driven largely by diminishing rates of discovery of large and profitable orebodies, poor performance by many mining companies, increasing discovery cost per unit metal, competition for capital from other high-risk industries, and a general loss of confidence in mineral exploration as a value-adding economic activity. Exploration is a high-risk business, often involving the expenditure of large sums of money for seeming little return. Exploration must be an economic activity to justify the business. Exploration is an investment in replenishment and growth of a company' asset base - it is not the only growth opportunity available and competes with others such as acquisition, expansion, new technology and other diversification. Therefore exploration must deliver realisable value in competition with these other alternatives. Exploration is a high risk/high uncertainty business, so effective risk and uncertainty management is critical. Explorers must be better attuned to the commercial realities of their business, and quantifying risk, value and progress are essential tools for the business of modern exploration. Strategic planning, risk management and reporting should be from a commercial rather than a solely technical perspective. Every exploration decision should be based on the potential to add value (ie risk × value) and upon a clear statement of what is not known (ie uncertainty). This represents a shift to decision-making and reporting on expected outcomes. Risk and value can be measured by well-established probabilistic risk management theory. This is well used by the petroleum exploration and R&D industries - so why not minerals? Every time a decision is made in exploration, there is embedded a subjective judgement as to the probability of success that accompanies that decision. Quantifying the chance of success must sharpen the decision process. This especially applies to the essential ability to rank and compare projects from different regions, different geological models and different stages. Making better decisions can reduce risk and deliver value. SRK has been developing a system that is based on progress through the principal exploration stages, by assigning risk and uncertainty, and estimating the cost at each stage. Working back from the value range of the company's exploration target, we can generate a range of Expected Values (EV) at each principal exploration stage. This staged risk/value management system clearly shows that the risk is highest at the drilling stage, but this is where most value is created. Uncertainty ranges on risk and value/cost variables can be readily handled by stochastic methods, such as Monte Carlo type simulations. Our studies show that often companies spend too much on the low risk/low value stages, and are often risk-averse in the high value-creating stages, ie drilling. If negative EV's are generated at any stage, then the company is gambling - if positive, it is investing in exploration. Negative values arise if the risk is too high at all stages, expenditure at the early stages is too high and, critically, the time taken to progress to drill testing is too long. There is a strong reluctance in mineral exploration to quantify risk. However, we have also found that the process of discussing, defining and understanding how to quantify risk and describing uncertainty is where real value lies for the industry - if it wants to be successful.