Geology for Investors: Is Going Deep Worth It?

Over the last few weeks, we’ve spent some time upskilling our geological knowledge.

Zeroing in on the ‘practical side’ of geology and how it can bolster your investment decision-making.

Today will be the final edition of this series.

I’ll focus on the last of the ‘BIG THREE’ aspects of drill hole results, which you should be paying attention to: depth.

Going deep, is it worth it?

I pulled a recent drill result from an ASX-listed explorer based in WA to give ourselves a working example of the ‘depth factor’ in exploration:

42 metres Au @ 2.21 grams per tonne from 784m

Overall, a decent gold hit, but note the depth… This is extremely deep!

Many investors will overlook the actual depth of the drill hit, focusing exclusively on the grade and perhaps the width.

But depth matters too!

One aspect is the strip ratio… Deep deposits require miners to remove a significant amount of overburden, or barren rock, to access the ore below.

High strip ratios contribute to increased extraction costs and reduced mine viability.

However, if mineralisation is extremely deep, as in the example above, miners have the option to go ‘underground.’

At a certain point, mining becomes more economical as an underground operation. This enables miners to access the ore zone without removing the overburden.

However, this style of mining
comes with its own economic pitfalls

Extracting ore via blocks and tunnels deep below the surface is typically more hazardous, with rockfalls and seismic activity posing a significant risk to workers operating at the ‘coal face.’

Underground mining also involves a high degree of technical challenges for mining engineers.

One aspect is the high temperatures caused by geothermal heat within the rocks… As a general rule, temperatures rise 3°C for every 100 meters of depth.

That means most underground mines often exceed 40°C.

Air conditioning is a major consideration (and expense) for underground operations.

But Buckle-Up: The Future of
Mining is going Underground

I recall a chat I had with an experienced mining engineer a little while ago, and he agreed with this critical point: the future of mining is underground.

That actually led to an investment recommendation for my paid readership group last year, a mining service company called Perenti [ASX: PRN].

A company that provides underground mining contract work.

So, why is mining set to move underground?

The answer is simple…

High-grade deposits located near the surface have already been extracted over the course of decades, driven by strong demand for minerals in our modern industrialised economy.

This means mining has two choices to find and extract the next generation of deposits: either mine the extremely low-grade deposits close to the surface or explore deeper.

In my mind, the latter is much
more likely for a couple of reasons.

Deposits close to the surface are mined using an open-cut method.

As these deposits get deeper, MORE rock needs to be extracted for the same volume of metal (higher strip ratio).

It is expressed as a ratio, such as 3:1, meaning three units of waste are removed for every one unit of ore.

This ratio is a key indicator of a project’s economic viability, as a lower ratio generally means lower costs and higher potential profit.

So, as the strip ratio rises, it becomes more economical to shift to underground mining.

But there’s another factor that’s probably going to drive a preference towards underground mining in the years to come:

Permitting is becoming a
major RISK for companies.

We’re entering an era where governments and local communities are pushing back against new mine developments.

After all, who wants a mine in their own backyard!

Community pushback is delaying or halting significant mine developments worldwide…

Examples of this are happening everywhere, even in China, where governments are now tightening their grip on once loose environmental standards.

In fact, some countries, such as Mexico, have banned all forms of surface open-cut mining, one of the most common extraction techniques used in Australia.

And I suspect that trend will continue in the years to come.

But from a permitting and environmental perspective, underground mining is far more acceptable.

Another key reason why I think more mining is set to shift underground in future.

And if I’m right, this could totally flip how junior mining investors will need to interpret early drill hole results.

Enjoyed the insights?

Be sure to check out our latest presentation, which details how to apply this information to real-life recommendations.

Until next time.