Prime Meridians – How To Own The World

This week in Pierce Points:

Two bigs oil and gas finds re-energized mature basins. The Mediterranean and North Sea discoveries could holds Tcfs of natgas.

And two major miners announced big shutdowns. Glencore is closing two copper mines, and Peru’s Volcan may follow suit in zinc.

Madagascar set back its exploration sector. The country is looking at imposing carried interests and higher royalties on new projects.

The world’s platinum deficit jumped 134% in 120 daysExperts are now forecasting a 445,000 oz shortfall, up from 190,000 oz in May.

How To Own The World

Most of the news has been bleak of late in the resources sector. So it was surprising this week to see a major miner embarking on one of the most aggressive expansion campaigns the mining industry has been in years.

The company is BHP Billiton. And the project is metallurgical coal in Indonesia — where the company just opened one mine, and is already in plans to start up another.

BHP’s management told press that the Haju coal mine in Central Kalimantan has now commenced production. With the project being 75% owned by the major, in partnership with local coal producer Adaro Energy.

The mine opening itself is not overly surprising. After all, the project was green-lighted years ago — when the outlook for the global coal sector was much rosier than today.

But here’s the surprising part. In conjunction with the announcement about Haju’s commissioning, BHP said that it is commencing construction on another coal mine in the Kalimantan complex.

Management said that ground-breaking is now advanced on this project — to the point where first production from the new mine is expected as early as 2017.

This is shocking in the utmost. Especially given that Indonesia’s reference coal price has hit fresh all-time lows a total of five times over the last month — currently selling for $58.21 per tonne.

But BHP sees something in the Kalimantan projects that likes — namely, the chance to own the world market.

Management gave some insight into its long-term vision for coal here. Saying that exploration around the company’s new mines has already identified 1.3 billion tonnes of coal resources — with “further exploration planned”.

This suggests that the overall potential for coal resources could run into the multiple billions of tonnes. Which would make this one of the largest new coal projects identified anywhere globally.

Beyond the sheer scale of resources here, Indonesia has also proven to be one of the lowest-cost coal production centers on Earth. Giving BHP’s project a tantalizing combination of size and profitability.

That’s exactly the sort of formula that’s historically allowed firms to dominate the global resource business. Think Vale in iron ore, or Codelco in copper. Companies with these sorts of assets can set worldwide prices, and survive lean times that see most of their competitors go bust.

Beyond the immediate implications for the coal market — which are significant, as a major source of low-cost supply starts to come online — this week’s announcement is a fascinating window into how the world’s largest mining companies think about exploration and development. Showing us some critical things about what’s needed to attract top firms to a project.

First, having an established mining sector in the area is a must. Indonesia is a well-worn coal mining country — and BHP thus sees the opportunity to build things out quickly, without regulatory or infrastructure hangups.

Then we need potential for huge scale — underpinned by one or two proven discoveries. The 1.3 billion tonnes BHP has found already are simply proof of concept. The more important thing is what these deposits are telling geologists about the potential for finding a few billion tonnes more.

Of course, this sublime confluence of scale and workability isn’t easy to find. It’s simply hard to make a giant new discovery in a place with a long mining history.

But there are some special situations globally that may fit this bill. Chile, for example, has large swaths of land in prime mining districts that have never been explored because of long-standing land tenure rules. Parts of Colombia with proven geology are just now opening for business as political conflicts are resolved.

Haiti, Botswana, Myanmar, even the Canadian Yukon all fit this bill to some degree. Keep an eye out for other spots — they might just yield the next billion-dollar project with attraction for the world’s major miners.

Here’s to one for the ages,

Dave Forest / @piercepoints / Facebook

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