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Chapter 6

Mineral Supply Exploration, Production,


Processing and Recycling
Philip Maxwell

Some introductory remarks


Short-run and long-run supply
The mineral supply process
Supply curves
Resources and reserves
Mineral supply individual products, main products, co-products and by-products
Key determinants of primary mineral supply
Individual and main products
By-products
Co-products
Secondary materials the economics of recycling
The supply of new scrap minerals
Old scrap mineral supply
Total mineral supply

SOME INTRODUCTORY REMARKS


In Chapter 1, we quoted from MacKenzie (1987, p 6) practice to classify mineral commodities in three
who notes the importance of geological endowment in categories metals, non-metals and energy minerals.
influencing the supply of minerals. Mineral deposits There are approximately 50 metals, 50 non-metals and
are: seven or eight energy minerals in this taxonomy. We
initially unknown (they must be discovered and also noted that it is possible to recycle metals and some
there is a cost involved in doing this) non-metallic minerals from old-scrap and new-scrap
sources. This has the effect of postponing, and possibly
fixed in size (they are a finite stock and, with
even preventing, their eventual depletion.
depletion, are eventually exhaustible)
Despite consistently increasing consumption over the
variable in quality between and within deposits
past century, the issue of adequate mineral supply has
(this is determined by grade, depth of deposit,
been a relatively infrequent source of concern. Where
mineralogy and other factors)
they have occurred, such discussions about mineral
fixed in location (geological factors have often supply typically take place from both short-term and
created these deposits in remote locations and they long-term perspectives.
need to be moved to intermediate- and end-use
markets). Short-run and long-run supply
As we also noted in Chapter 1, following agencies such Using a standard textbook approach, Tilton (1985,
as the United States Geological Survey, it is common pp395 - 399) defines the following periods:

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chapter 6 Mineral Supply Exploration, Production, Processing and Recycling

The immediate run is an interval so short that mining methods have become more efficient
mining companies do not have time to alter their there have been continuing technical developments
rate of production. in mineral processing
The short run is a time when mining companies economic systems, such as the Soviet Union, have
have time to vary their output but not their capacity. collapsed (with Russia exporting substantially greater
The long run is a period when new mines can be amounts of specific metals such as aluminium)2.
developed and processing facilities built and firms The issue of mineral supply in the very long run
can also expand the capacity of existing operations. has attracted even less attention over the past two
The very long run is a period in which the: centuries. Some notable contributors include Jevons in
constraint imposed by existing known deposits his 1865 Essay on the Coal Question, and more recently
no longer holds and firms have the time to conduct commentators such as Meadows and The Limits to
exploration and find new deposits. New technology Growth school in the early 1970s.
induced by the exhaustion of known deposits and Authors such as Tilton (2003) and Krautkraemer (1998)
higher metal prices may also permit the exploitation provide useful surveys of the associated discussion.
of new types of deposits. Perhaps the most notable theoretical contribution has
A conceptual diagram showing the relations between been by Hotelling (1931) in his paper The economics of
these periods appears in Figure 6.1. exhaustible resources.
Even with dramatic recent increases in mineral demand
from China, with the state of current technology and
expected advances in it, there is a general consensus that
the world has enough minerals for the next 50 years.
After that, the situation is less clear. In his analysis of this
issue, Tilton (2003, pp 65 - 78) argues that four groups of
factors will influence the situation geology, the demand
for primary mineral commodities, changes in technology
and input costs.
While acknowledging this broad debate, the main
focus of this chapter is more concerned with the short
run and the long run, seeking to highlight the distinct
features of mineral supply in these periods and, in
conjunction with the preceding discourse on mineral
demand by Peter Howie, building the foundations for
the discussion of mineral market outcomes described
by Phillip Crowson in the next chapter.
Fig 6.1 - An interpretation of the relevance of different time periods
to mineral supply.
The mineral supply process
Limitations to mineral supply have often been an issue
A straightforward view of new mineral supply,
in wartime particularly during strikes and there was also
following MacKenzie (1987), is a process involving
a short period in the early 1970s when the Organization
exploration, project development, mining, processing
of the Petroleum Eporting Countries (OPEC) cartel
and transportation to the market. The flow of minerals
constrained world oil supply. In 2011, there was major
supplied in a given period generally involves the
concern when Chinese producers threatened the supply
depletion of a finite mineral stock. One can view this in
of rare earths to other downstream users, particularly in
terms of the following equation shows the relationship
Japan and the United States (US).
between current mineral reserves, previous mineral
Whenever oil and other mineral prices such as coal, reserves, recent mineral consumption, and additions
iron ore, copper, nickel and rare earths rise to high to supply through recycling and new minerals which
levels, as has been the case on several occasions over the become available because of technological change or
past 50 years, commentators also become concerned. changes in mineral prices.
Unsurprisingly, they seldom debate this issue in
Mineral Mineral New Amount
an active way when mineral prices have remained
reserves reserves mineral of mineral
relatively stable or moved lower in real terms1. When
this period = last period - consump- + recycled
this has happened, it has been in large part because:
tion last last period
geologists have utilised advancing technology to period
ensure that mineral reserves remain at manageable New
levels + mineral
reserves
1 For a discussion of these movements see, for example, Peter Howies estimates of Real
Prices for Selected Mineral Commodities, 1870-1997 in Tilton (2003, pp 124-137). 2 See Corts (1999) on this point.

68 Mineral Economics
chapter 6 Mineral Supply Exploration, Production, Processing and Recycling

While the worlds minerals are ultimately fixed in (A) Price


S
supply and are technically non-renewable, it is possible
to recycle many of them. Significant percentages of
P2
current supplies of metals such as aluminium, copper,
nickel, lead, zinc and gold come from the recycling of
old and new scrap. If the demand for a mineral falls P1
away, it is even conceivable that recycled materials
could meet all new mineral demand and it would not S
be necessary to produce newly mined material.
The worlds mineral stock is also affected by new Q1 Q2 Quantity per
discoveries; by technological advancements in mineral time period
processing, which make previously uneconomic
deposits profitable; and by variations in prices, which S1
may add to or reduce the size of current mineral (B) Price
S
reserves. S2

Supply curves P1
In addition to geological endowment, a variety of other
factors also influence mineral supply. They include
S1 S
whether a mineral is an individual product or joint S2
product, the price of the mineral, input costs, transport
costs, government policy, institutional efficiency, Q1 Q Q2 Quantity per
technological change, the impact of strikes and other time period

disruptions and market structure. Fig 6.2 - A typical supply curve: (A) price changes and quantity changes;
(B) changes in other factors and quantity changes.
We utilise the familiar supply curve framework
in explaining the relevance and importance of the
Reasonably standard definitions of resources and
above key determining factors. Students in economics
reserves (following Tilton, 2003, p 19) are as follows:
principles classes learn about supply functions and
curves in the early weeks of their course. The typical Reserves are those quantities of a mineral
initial presentation of supply is as an upward sloping commodity in subsurface deposits, that are known
and profitable to exploit, given existing technology
curve on a diagram, such as Figure 6.2, where price
and prices.
per unit is plotted on the vertical axis and quantity
produced per period is on the horizontal axis. As prices Resources include reserves, together with deposits
rise, producers will be encouraged to produce more that are:
because it is profitable to do so. As price falls, they will economic, but not yet discovered
produce less. expected to become economic as a result of new
In this presentation, price is a variable and all of the technology or other developments within the
other factors that affect the quantity supplied are held foreseeable future.
constant. If their values change, the supply curve will The major mineral-producing nations use their own
shift to the left or right as in Figure 6.2b. generally similar definitions of resources and reserves.
The most popular early classification system is probably
RESOURCES AND RESERVES the McKelvey Box of the United States Geological
Survey, which became widely used after 19704.
At any given time, the level of estimated resources and
reserves provides a benchmark for the status of mineral The JORC Code is the standard mineral resource
supply. Our discussion begins from this base, before classification system in Australia and New Zealand.
considering the nature of mineral supply using the This is the product of an ongoing collaborative effort
within the Joint Ore Reserves Committee of The
above supply curve model.
Australasian Institute of Mining and Metallurgy, the
Mining companies publish information about the Australian Institute of Geoscientists and the Minerals
mineral reserves and resources associated with their Council of Australia. The first edition of the JORC Code
projects, while national agencies such as the United was published in 1989 and the most recent version,
States Geological Survey, the British Geological Survey as this chapter was compiled, appeared in JORC
and Geoscience Australia3 generate parallel estimates (2012). Following a continuing period of international
for individual nations and the world as a whole. cooperation there is now widespread consistency in the
3 A relevant recent reference is to Geoscience Australia (2011). 4 This system has subsequently been updated and modified.

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chapter 6 Mineral Supply Exploration, Production, Processing and Recycling

mineral classification systems used in Australia, New At current levels of technology and factor (input)
Zealand, Canada, South Africa, United Kingdom and prices, increments to new supply are possible with new
the US. capital investment, but only at higher prices. These are
The information in Figure 6.3 outlines: shown in Figure 6.4c. Technological advancement in
exploration, mining methods, mineral processing and
the framework for classifying tonnage and grade recycling, as well as changes to mineral demand, will
estimates so as to reflect different levels of geological affect the level of Reserves and potential future supply.
confidence and different degrees of technical and In a JORC view of the world, only Proved Mineral
economic evaluation. Reserves appear in the Reserves rectangle.
Because the geological and modifying factors change
on a continuing basis, statements of Reserves and Mineral supply individual products,
Resources regularly change. main products, co-products and
It is interesting to consider further the relationship of by-products
a framework for Resources and Reserves such as the Because of their geological occurrence, it is sometimes
JORC Code, to a supply curve model for newly mined profitable only to recover one mineral commodity (an
minerals. The diagrams in Figure 6.4 illustrate one individual product) from the primary material mined or
attempt to do this. They are adapted from the work of drilled. In Australias major mining regions, companies
Chavez-Martinez (1983), as reported in Harris (1985). produce bauxite, coal, gold, iron ore and diamonds as
Looking at Figure 6.4a, we see that in a given period, individual products. Some of the lower value-to-weight
the market will clear at a price of P1, where q1 of the minerals such as gypsum, limestone, sand, gravel,
mineral, say copper or iron ore, is mined and produced. manganese, salt and talc also are extracted in this way.
This corresponds in Figure 6.4b to the marked amounts On other occasions, there is joint production. Here
of cumulative production and current reserves. miners extract mineral commodities as main products,

Fig 6.3 - The general relationship between Exploration Results, Mineral Resources and Ore Reserves in the JORC Code (source: JORC, 2012).

Price Price Price

S0 S1 S

P3

P1 P2
D0
Cumulative

Potential
production

Reserves

D1
supply

q1
Quantity per Quantity of stock Changes in supply
unit time

(a) (b) (c)

Fig 6.4 - One view of current new mineral supply, mineral reserves and potential mineral supply.

70 Mineral Economics
chapter 6 Mineral Supply Exploration, Production, Processing and Recycling

co-products or by-products because this is more This specification follows Tilton (1985, pp 393-
profitable. These may include combinations such as 395) and includes most of the important influencing
silver, lead and zinc; copper and gold; gold and silver; variables. It implicitly assumes that there are sufficient
nickel and cobalt; copper and molybdenum; or tin, reserves of the mineral available for exploitation.
tantalum and lithium. It is important also to appreciate Let us briefly reflect on the influence of these factors.
the meanings of each of these terms.
According to the standard theory of the firm, a company
Following Tilton (1985, p 393): will maximise its profits by producing at a point where
a main product is so important to the economic the costs of the last (marginal) unit of output just offsets
viability of a mine that its price alone determines its own price. When the price of a mineral rises, a mining
the mines output company will tend to increase its supply. When it falls,
a by-product is so unimportant, its price has it will reduce supply. The industry will respond in the
no influence on mine output same way. Where the global price of a commodity is
When prices of two or more (minerals) affect expressed in terms of another nations currency, eg US
output, the (minerals) are co-products. dollars, exchange rate variations have a similar effect
We typically think of co-products and by-products to changes in price on an existing or potential mineral
being extracted from base metal mines in locations producer.
such as Mount Isa and Broken Hill. A topical example Remember from Figure 6.1 how in the short run
of a major Australian mine that produces co-products capacity constraints in existing mines will inhibit the
and by-products is Olympic Dam in South Australia. ability of supply to increase as prices rise. A company
Some details for the 2010 - 2011 financial year appear can employ more workers and expand its operations
in Table6.1. within current mining tenements, but its ability to
Using average market prices, the total revenue from increase supply will be limited. With the need for
Olympic Dam exceeded A$2B in this period. Copper regulatory approvals, and major capital investment
production accounted for about 70 per cent of the total, for mines, mills and supporting infrastructure, such
while uranium was responsible for a little more than capacity constraints can apply for several years.
20 per cent. Copper was clearly the main product, but Input costs, particularly wages and energy costs, are
uranium oxide, worth almost A$500M, was also an important factors affecting mineral commodity supply.
important co-product. Even though the mine produced When they rise, it becomes more difficult for producers
more than 100000 oz of gold and nearly 1Moz of to make profits. While wage levels of mining workers
silver, both of these metals made only small percentage are high, their relatively small numbers often make
contributions to mine revenue and profits. Both were the effects of rising wages less important than changes
by-products. in energy prices. These are particularly important, for
example, in transforming bauxite into aluminium.
KEY DETERMINANTS OF PRIMARY MINERAL Producing aluminium requires so much electric power
SUPPLY that it has sometimes jokingly been described as frozen
electricity.
Individual and main products
During the past century, the positive impacts of
A standard way to consider the supply function of a
technological change on mineral supply through
newly mined mineral commodity such as coal, bauxite,
more sophisticated mineral exploration, better mining
iron ore, gold, nickel and copper, when it occurs as a
methods and innovations in mineral processing have
main product, is in the following terms:
been substantial5. They have more than offset the
f (own price input costs technological depletion of higher-grade deposits and the subsequent
Mineral change
supply = disruptive government market
5 An interesting discussion of revolutionary mining technologies developed since 1900
events activities structure) appears in Bartos (2007).

Table 6.1
Mineral production at the Olympic Dam mine in South Australia year ended June 2011 (source: BHP Billiton (http://www.bhpbilliton.com)
for production details and Infomine (http://www.infomine.com) for prices).
Product Units Amount Estimated price per unit Estimated value ($ mill) Estimated per cent
Copper cathode tonnes 194 100 $8250 1601 70.4
Uranium oxide tonnes 4045 $30 000 485 21.3
Refined gold ounces 111 368 $1400 156 6.9
Refined silver 000 ounces 982 $34 000 33 1.5
Estimated total sales 2276 100.0

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chapter 6 Mineral Supply Exploration, Production, Processing and Recycling

movement to lower grades. With positive impacts of state-based geological surveys that maintain significant
open cut mining and the implementation of carbon- databases and departments of mines that administer
in-pulp leaching and associated advances in mineral the operation of the minerals and energy sector. Federal
processing, it has become possible to produce gold and state authorities have financed these activities by
from open cut deposits containing much less than 1 g/t. using competitive taxation and royalty systems.
Profitable extraction was previously possible only at Significant policy changes may, of course, affect
much higher grades. this situation. For example, the introduction of more
A major innovation in the copper industry has been in stringent environmental regulations can adversely affect
the solvent extraction electro-winning (SX-EW) process. mineral supply. If such regulations are less onerous in
Electro-winning contributed less than three percent other mineral-rich nations, mining company executives
of the total copper production in 1980 in contrast will be tempted to invest in these regions. The Mabo
to approximately 18 per cent of the world copper judgment in the Australian High Court in 1992, and
production in 2009 (International Copper Study Group, the subsequent passage of Native Title legislation in
2010). The SX-EW has allowed the recovery of copper the Australian Parliament in 1993, are examples of how
from mine tailings, as well as a higher percentage of
new policy may potentially influence mineral supply.
metal to be ultimately recovered from orebodies. The
process cut the tonnes of waste per tonne of ore mined The end of the colonial era in the 1960s and 1970s was
by over 35 per cent in 1995 in comparison to its level in associated with the emergence of state-owned mining
1970 (Olewiler, 2002). industries in many of the newly independent nations.
A variety of disruptive events such as strikes, Political leaders wished to use the economic rent
accidents in major mines, major equipment failure in from the resources sector to build other parts of their
mineral processing plants, natural disasters such as emerging societies. Where foreign companies were
bush fires, floods and cyclones (known elsewhere as allowed to operate in these countries, they began facing
hurricanes or typhoons), civil disturbances or even requirements:
terrorist attacks can disrupt mineral supply. to purchase supplies from domestic producers
During 2004, for example, when the price of oil to process ores or concentrates within the national
rose from around US$30/barrel to US$55/barrel, the boundaries
disruptive impacts of events in Iraq were one source of to allow host governments to become part owners
concern about oil supply. Threatened supply disruption of the mines.
associated with strikes by oil workers in Venezuela and Another common practice was, and continues to be,
Nigeria during the year added to this impact. Another the requirement to engage citizens of the host nation
good example occurs in the cobalt industry, where the in professional and managerial roles within resource
Democratic Republic of Congo (DRC) dominates new
companies. Working visa limitations for expatriates
mine production. Internal disruptions (including civil
facilitate the impact of this. After the mid-1970s falling
war) in the DRC caused surges in cobalt prices during
mineral prices, as well as a lack of investment and
the mid-1990s. Together with Russia, Canada has been
human capital, led to the decline of the mineral industry
the major nickel producer for the past century. Strikes
by workers in its key nickel-mining region around in many of these nations.
Sudbury have disrupted world supply on several Other favourable government policies that sometimes
occasions. Because such disruption drove up prices, apply to encourage new mineral production include
Australian producers derived considerable benefit. commitments to build infrastructure such as roads,
Northern Australia has a cyclone season every year ports and communications systems. Another policy is
from about January to April. Even though they are in to offer low interest rate loans. Where mines or mineral
remote and often quite arid areas, large operating mines processing plants are struggling, government may also
are sometimes badly affected by the aftermath of these provide operating subsidies. Many commentators agree
major storms. This occurs unexpectedly in areas such that flow-through shares in Canada have increased
as North West Queensland, the Northern Territory, grass-roots mineral exploration, which accounts for
the Pilbara, the Kimberley and even as far south as the 75per cent of all exploration spending there.
Goldfields region of Western Australia. Market structure also has an important influence on
The activities of governments also have an impact the supply of individual and main products. This is a
on mineral supply. Assuming that a country has a particular focus of attention in the next chapter. When
significant mineral endowment, its mineral policy has there are few mineral producers, they exert greater
a central effect on its ability to supply minerals. Hence influence on supply and price. While the influence of
the clear and stable regulatory framework in Australia state-owned mining corporations has declined since
has served the nation well as far as its mineral sector the early 1980s, there was a significant trend towards
competitiveness is concerned. It has been assisted by greater concentration in many of the major minerals
strong government support of organisations, such as sectors from the mid-1990s.

72 Mineral Economics
chapter 6 Mineral Supply Exploration, Production, Processing and Recycling

The number of buyers is also an important influence mine capacity in the short run, and the size of
on market structure and the competitive state of reserves in the long run.
particular mineral markets. Few buyers tend also to In the very long run, new discoveries and technologies
exert large amounts of market power. Interestingly, the may drive down production cost, and, therefore, the
combination of few buyers and sellers can sometimes prices that producers are willing to accept. A standard
generate market outcomes similar to those where view of the position of competitive producers, following
there are many buyers and sellers. The simple matrix Tilton (1985) appears in Figure 6.5. By contrast, firms
in Table 6.2 provides a rudimentary view of how these in producer markets set prices for given periods of
influences tend to apply. time, often annually. If this is the case (again following
Tilton, 1985) we might expect a set of horizontal cost-
Table 6.2 based curves such as those that appear in Figure 6.6.
Market structure and competition a rudimentary view.
Price Immediate Short Long
Number of buyers run run run

Small Large
Number of sellers Very
long run
Small Market power on each side tends to offset one Strong market power
another, and outcomes may be competitive on selling side
Large Strong market power on buying side Competitive

It is instructive to reflect on how different mineral


commodities have traditionally fitted into this matrix.
Quantity
It has been typical to consider the gold and copper Output
constraint
Capacity
constraint
Constraint of
current reserves (tonnes per period)
sectors as relatively competitive, while there are few
Fig 6.5 - Mineral supply curves during different time periods
buyers (steel producers) and few sellers (major iron ore in competitive markets.
companies) of iron ore, as well as many of the minor
minerals. Over time, as their size has grown, the markets
of several minerals have become more competitive. As
Phillip Crowson notes in the next chapter the major
Long run
non-ferrous metals, as well as gold and silver, now trade
in quite competitive terminal markets. His discussion Very long run
Short run
extends the discussion of the importance of market
Immediate
structure for mineral supply across the resources sector. run
Where producers exert large amounts of market
power, they tend to set prices so-called producer
prices or list prices. Such prices will typically Output Capacity Quantity
Constraint of
guarantee producers a healthy profit. They may be constraint constraint current reserves
(tonnes per period)

based on some multiple of total costs of production, or Fig 6.6 - Mineral supply curves during different time periods
alternatively on some other criterion that will return a in producer markets.
greater than normal profit to the producer. At the other
end of the scale lies a competitive outcome where firms These representations imply certain assumptions
are price takers and adjust their output to generate about the way in which the quantity that producers
optimum profit. They will produce when they can supply will respond to price changes. The usual way to
make a surplus, but will cease operations if they cannot assess such responsiveness is in terms of the elasticity
cover their average variable costs. An alternative view of supply. This is a parallel concept to the elasticity of
regarding this standard textbook result is that this is not demand, discussed in the last chapter.
necessarily true in the mining industry because of high Economists typically focus on own-price elasticity
closure costs due to environmental considerations and of supply. The simple formula for this for a particular
other factors. This has been one of the arguments about mineral in a given period (say a year) is:
why the price of mineral commodities, such as zinc and
lead, have remained so depressed over long periods, % change in quantity supplied
Es =
% change in own price
producing an inadequate rate of return to investors.
As prices rise, higher cost producers will begin Supply is elastic when Es is greater than one, and it
producing, though production constraints apply is inelastic when it is less than one. As production
because of: approaches capacity constraints, and the mineral
current output and inventory levels in the very short supply curve becomes vertical, own-price elasticity of
run supply approaches zero. Where the mineral supply

Mineral Economics 73
chapter 6 Mineral Supply Exploration, Production, Processing and Recycling

curve is horizontal, as is the case for producer pricing may double the recovery rate of a previous by-product,
well before capacity constraints are approached, own- increasing its contribution to revenue and profits and,
price elasticity is effectively infinite. With the passage thereby, changing its status to that of a co-product.
of time, the elasticity of supply tends to increase. Hence Price movements can also have this effect. Consider,
the own-price elasticity of supply will be greater in the for example, the situation of the Murrin Murrin nickel
long run than it is in the immediate run or short run. mine in Western Australia. In promoting this new
project in the mid-1990s, the Directors of Anaconda
By-products Nickel argued that nickel and cobalt would be
Because mineral by-products are so unimportant to a co-products. At the time the price of cobalt stood at
mine and their price has no influence on their output, around A$60/kg, while nickel was selling for A$10/kg.
their supply functions differ from those of individual or Assuming the mine produced at full capacity (40000t
main products. Crowson (1998, p 81) has argued: of nickel metal and 2500t of cobalt metal), the mine
That many metals and minerals are produced partly would have generated annual revenue of A$350 M
or solely as by-products introduce great rigidities in 1996 had it been operating at full capacity. About
to their supply. It means that their output will not 57 per cent of revenue would have come from nickel
always respond to changes in their own prices, but and 43 per cent from cobalt. In such a scenario, most
is often more influenced by the prices of the main commentators would accept that these metals were
products with which they are associated. co-products. By 2010, however, the average price of
cobalt was A$45/kg, while nickel stood at A$21.50/kg.
This argument holds true in several parts of the
Of the annual mine revenue, over 88 per cent came
Australian mining industry, as well as in mining in
from nickel and less than 12 per cent was from cobalt.
many other parts of the world. There are many good
Though its revenue stream was significant, cobalt was
examples of by-products from main product mines.
a by-product and indeed this has been the case for just
As well as the situation at Olympic Dam already
about all of the years of the mines operation.
mentioned, the Escondida mine in Chile produces
copper as its main product and gold and silver as by- Against this background it seems reasonable to argue
products. Nearby Collahuasi produces copper as its that the mineral by-product supply function would
main product and molybdenum as a by-product. At take the following form:
Antamina in Peru, copper and zinc are co-products, Mineral = f (by- main product specific
while silver and lead are by-products. In Canada, at by-product product price by-product
the Voiseys Bay operations, copper and cobalt are by- supply price input costs
products at the large nickel mine. Other examples of by-
technological disruptive government market
products occur where exotic metals such as selenium
change events activities structure)
and tellurium are produced with copper; indium and
germanium with zinc; bismuth with lead; and gallium
If one draws by-product supply curves in the usual
with bauxite. In many large gold mines, silver is a by-
way (see Figure6.7), with price on the vertical axis
product. and quantity on the horizontal axis, immediate-run
Because of the relative unimportance of by-products, and short-run curves are initially elastic but then quite
only the costs that are specific to their production affect quickly inelastic as they come up against output and
their supply. Companies allocate the joint costs of capacity constraints. There is greater initial own-price
producing main products and by-products only to the elasticity of supply in the long run and very long
main products. This means that the average cost of by- run, though again this changes when the by-product
product production is typically very low. It may even constraint is reached.
approach zero, if in producing the main product, the
Price Long run
company naturally separates out the by-product, which Immediate
run
Short
run and
very long run
then requires no further processing.
Yet the price of a by-product does influence its
production in one notable way. If the price of the by-
product falls below the production costs specific to its
production per se, the producer will have an incentive to
discard the by-product as waste rather than process it to
By-product
a saleable product. constraint

Technological change can, of course, change the C1

status of a by-product to that of a co-product or even O


Output Capacity Quantity
reverse the main product/by-product relationship. For constraint constraint (tonnes per period)

example, the introduction of a new processing method Fig 6.7 - Supply curves for mineral by-products.

74 Mineral Economics
chapter 6 Mineral Supply Exploration, Production, Processing and Recycling

Co-products The estimates for ten key minerals appear in Figure6.8.


Recycling rates for materials such as chromium
We have noted above that when the prices of two or
(88percent), lead (mainly for batteries) at 80per cent,
more minerals produced by a mine affect its output,
iron and steel (77 per cent), magnesium (57 per cent),
they will be co-products. The price of the co-product must
nickel (largely from stainless steel), aluminium (both at
cover its specific production costs and an appropriate
46 per cent) and copper (35 per cent) are all significant.
share of its joint production costs with other co-products. Recycling of metals such as gold and silver is also
The range of factors that affect the supply of a important.
co-product from a mine lies between those that influence
main products and by-products.
Therefore, it seems reasonable to argue that the
mineral co-product supply function would take the
following form:
Mineral =f co-product specific
co-product (own price prices co-product
supply input costs
technological disruptive government market
change events activities structure)

Co-product supply curves will have a similar look to


Fig 6.8 - Estimated rate of recycling of key metals in the United States, 2009
the main product supply curves depicted in Figures6.5
(source: United States Geological Survey, 2011)8.
and 6.6, though the sharing of joint production costs
may mean that they are a pushed-down version of While many of the above percentages are high, it is
these curves until the various output, capacity and important to realise that they are derived from two
known deposit constraints are reached in the immediate broad categories so-called new scrap and old scrap.
run, short run and long run respectively. The authors of the United States Geological Survey
(2011, p 61.1) advise that metal new scrap comes from
SECONDARY MATERIALS THE ECONOMICS preconsumer sources, while old scrap originates from
OF RECYCLING post-consumer sources. Hence:
Newly mined minerals, which deplete finite mineral ... when metals are converted into shapes bars,
resources, have traditionally made up the majority of plates, rods, sheets, etc new scrap is generated in
mineral production; however, in recent times, recycling the form of turnings, stampings, cuttings and off-
of minerals, particularly metals, has also become specification materials.
an important alternative source of supply6. This is Because new scrap supply occurs before minerals are
particularly the case in developed nations where public used by consumers of final products, it is secondary
policy makers are encouraging recycling more and supply in an unexpected way. Old scrap, by contrast,
more. is much easier to appreciate. It comes from products
While authoritative data about mineral recycling are that have reached the end of their useful lives from
not available on a world basis for all minerals, the US old cars, computers, household appliances, car batteries
Geological Survey provides annual estimates of its and many other products. The availability of old scrap,
importance for most key minerals in the US (see United as a percentage of total mineral use, will depend on the
States Geological Survey, 2011). Although these rates lives of products in which it has been an input, the cost
may not carry entirely across to Australia and other of recycling and the rate of recovery of the mineral in
nations, they do provide some indicative ideas about question.
the importance of the use of secondary materials in Suppose that the supply (and consumption) of a
mineral supply, given that the US is a major mineral mineral grows at an annual rate of three per cent per
consumer7. annum over a quarter of a century. After that period, the
6 During the Cold War, another source of mineral supply for nations such as the US products in which it has been an input, becomes obsolete
the United Kingdom was from strategic stockpiles. The US and British governments and can be recycled. Suppose further that it is profitable
subsequently disposed of these stockpiles. Nations such as Japan, through the government to recycle half of the metal in these worn out goods. It
agency, the Japan Oil, Gas and Metals National Corporation (JOGMEC), still maintain is a straightforward exercise to calculate that about
strategic stockpiles of important minerals.
7 The US economys GDP has recently stood at around 25 per cent of world GDP,
23 percent of mineral supply at the end of this period
implying that the US is responsible for a significant amount of mineral consumption. can come from old scrap material. It is interesting to note
Given the nature of the intensity of use of mineral commodities during the stages of in Figure 6.9 that, for the six metals whose secondary
economic development, it seems reasonable to argue, however, that consumers in the
US are unlikely to be consuming equivalent percentages of mineral commodities. 8 Recycling rate for titanium is from 2007.

Mineral Economics 75
chapter 6 Mineral Supply Exploration, Production, Processing and Recycling

Old scrap mineral supply


Consider the case of refrigerators. Over a given period,
for example a year, there will be a flow of minerals to
secondary supply, resulting in these units coming to the
end of their service lives. Usually there is also a stock of
old scrap material containing different minerals that has
built up over time and has not yet been recycled. This
may be because the price of newly mined minerals has
been less than the cost of recycling from this old scrap.
Although subject to less of a supply constraint
because the stock of old scrap may be large, the
Fig 6.9 - Estimated rates of recycling new and old scrap for six selected cost of processing material is considerable for most
minerals in the United States, 2009. minerals. This is because it needs to be collected and
then processed. Where collection and processing are
supply is separated into new scrap and old scrap, only cheap, and consumption of a mineral has been growing
lead (and then aluminium) stood out as having a highly slowly, the supply of a mineral from old scrap can be
significant rate of old scrap recycling. significant.
The supply of new scrap minerals This is the case for the recycling of lead from motor
vehicle batteries, the main current use of the metal. With
This supply will be relatively cheap to recycle and
the removal of lead from paint and as a petrol additive
reasonably elastic until it comes up against a capacity
contributing to slower percentage rates of growth in
constraint. As Tilton (1985, p 402) notes, with respect to
consumption than for other major metals, it is easy to
metals, the factors affecting this constraint are:
appreciate why the percentage of lead recycled from
current overall metal consumption old scrap has been so high.
the distribution of this consumption by end uses
It is possible to construct indicative short-run and
the percentage of consumption resulting in new long-run supply curves for secondary materials from
scrap for each end use. both the flow and stock of old scrap, and then add them
Some supply of new scrap takes place in reasonably to derive an old scrap supply curve see Tilton (1985,
competitive markets, though vertical integration pp 403 - 405). Such curves will be upward sloping in the
strategies for other minerals may ensure that producer usual way and relatively inelastic. One representation
pricing continues to prevail in this area. of a short-run supply curve based on Tilton (1999)
A reproduction of Tiltons view of the supply of new appears in Figure 6.11.
scrap in competitive markets appears in Figure 6.10.

Price Availability
constraint
Short
run

Immediate
run

Long run and


very long run

Quantity
Fig 6.10 - The supply of new scrap minerals in competitive markets. Fig 6.11 - A short-run supply curve for old scrap minerals.

What stands out in this representation is the similarity TOTAL MINERAL SUPPLY
of the immediate run, short run, long run and very long
The total mineral supply that becomes available in any
run. One would assume that the recycling cost would
period is the sum of new mineral supply and secondary
be pushed down over time by small amounts. Although
supply9. The newly mined supply of a mineral may
not shown in the diagram it is also possible to assume
occur as:
that the capacity constraint could be pushed out a bit
by technological advance in the long run/very long run. 9 This overlooks minerals held in stockpiles, though these could also be included. They are
However, the message of this diagram is one of elastic important, particularly for some precious metals, such as gold, but of limited relevance for
low cost supply that is subject to a capacity constraint. most minerals.

76 Mineral Economics
chapter 6 Mineral Supply Exploration, Production, Processing and Recycling

an individual product (A) By-


a main product Price Old product
scrap Main
a by-product product

a co-product.
P0
Secondary supply can emerge from the flow of old
scrap or the current stock of old scrap material available. P3
Capacity
constraints

The concept of new scrap is usually added to this. P2


P1
The usual way of visually representing a total mineral
supply function is horizontally to sum supply curves Quantity
from lowest cost to highest cost production for each (B) Total
of the components of new supply and secondary Price Supply
supply. Conducting this exercise for a metal that curve
occurs significantly as a main product, a co-product, a
by-product, or as new scrap and old scrap will be a P0
complex exercise. Two good examples of such minerals
P3
are gold and silver. By contrast, for a mineral such as
coal, which occurs only as an individual main product P2
and is largely not recyclable, this exercise will be much P1
more straightforward. Quantity
As one moves from the immediate-run to the longer- Fig 6.12 - A long-run supply curve for a mineral produced as a by-product,
run views, we have seen that the factors that affect each from old scrap and as a main product: (A) old scrap, by-product and main
of the different forms of production are likely to change. product supply curves; (B) total supply curve.
Hence, the shapes of total mineral supply curves
will differ depending on the time period specified It has, therefore, become common practice to
immediate run, short run, long run or very long run. distinguish between cash costs and other costs within
They will also differ depending on whether the market the mining industry. They refer to all fixed and variable
is competitive or dominated by a few producers who costs sustained in cash rather than as ledger entries
when operations are taking place. They include all
exert strong market power.
site costs of mining such as stripping, processing and
Consider, for example, the construction of a short-run concentrating, but also incorporate sales and marketing.
total mineral supply curve for a mineral that occurs as
Industry analysts produce average short-run cash-
a main product and a by-product and that it can be
cost and total-cost data for different mines for various
recycled from old scrap. A metal such as cobalt is one
mineral sectors. They have not typically included
example of such a mineral. Even with the strong position
data on recycling. As an example, an indicative short-
of the Democratic Republic of Congo and Zambia there
run operating cost curve for newly mined nickel
are enough producers and users elsewhere to suggest
might look like the curve in Figure 6.13. Such curves
that a reasonably competitive market exists for this
provide an approximation for a short-run supply
metal. Cobalt also began trading in the London Metal
curve for newly mined production10. They provide
Exchange in 2010. The three components of short-
useful competitiveness benchmarks for new and
run supply are shown separately in Figure 6.12a and
existing producers. Yet because these data are usually
summed horizontally in Figure 6.12b.
commercially sensitive and collected by only a few
It is interesting to compare the shape of a mineral organisations, they are not widely available in the
supply curve, such as that in Figure 6.12b, with that of public domain. Indeed they tend to be prohibitively
the cost curves produced by a number of prominent expensive to observers who do not depend on them to
industry consultants. These are based on cash costs. generate significant income streams.
In discussing the behaviour of firms economists In summary, the discussion in this chapter has sought
commonly distinguish between their fixed costs and to introduce the topic of mineral supply in a fashion that
variable costs. The latter vary with output, while the integrates with the preceding review of the elements
former are the same regardless of the level of output. of mineral demand. We trust that you find them, in
Yet this distinction is often blurred in the mining combination, a useful foundation for Phillip Crowsons
process as Crowson (1998, p 125) notes. Operators of discussion of Mineral Markets in Chapter 7.
many mines seek to spread their costs over as great an
output as possible. Also annual purchase contracts for
10 It should be acknowledged that the sum of producer marginal cost curves, rather than
fuel and supplies blur the distinction between mining average cost curves, are the components of an industry supply curve for producers in any
and its associated first-stage processing. competitive industry.

Mineral Economics 77
chapter 6 Mineral Supply Exploration, Production, Processing and Recycling
.

$9,000
$8,000

Average Cost per tonne $7,000


$6,000
$5,000
$4,000
$3,000
$2,000 Mine 3 Mine 4 Other mines
M1 M2
By-
$1,000 product

$0
0 100 200 300 400 500 600 700 80

Fig 6.13 - A hypothetical total average cost (supply) curve for newly mined nickel in a recent time period.
Quantity (kt)

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78 Mineral Economics