Explore or acquire? The dilemma

CIM Bulletin, Vol. 95, No. 1058, 2002

H.O. Seigel, University of Toronto, Toronto, OntarioJ.C. Gingerich, Noranda Inc., Toronto, OntarioE.O. Köstlin, Anglo American Corporation, Johannesburg, South Africa

To satisfy their continuing need to replenish or expand their ore reserves, mining companies are faced with the dilemma of arriving at a proper balance between the dual avenues of discovery through in-house exploration and of acquisition of properties that are relatively proven or are even in production. The returns from exploration activities may be spectacular, but are unpredictable. The allure of an acquisition lies in its promise of quick and risk-reduced addition to reserves. However, it is historically clear that quantum increments in shareholders’ values have arisen primarily through major exploration discoveries, rather than through major late-stage acquisitions. Late-stage acquisitions can prove highly profitable, sometimes based upon the planned use of superior mining or metallurgical technology, but more often occur as the result of unexpected windfalls. At the other extreme, they can become expensive failures through inadequate due diligence, or unforeseeable factors. Citing numerous case histories and industry statistics, it is concluded that a judicious combination of both exploration activity and the acquisition of prospects is the most advantageous strategy for adding new ore reserves. A skilled exploration staff is essential for success, be it through exploration discoveries or through opportunistic acquisitions, preferably at their early stages. In the future, it is anticipated that there will be fewer opportunities for acquisition because of reduced funding for junior exploration companies, leading to increased competition and higher costs for fewer properties, both in the advanced exploration and mining stages.

Keywords: Ore reserves, Exploration, Acquisition.