ROYALTIES & STREAMING
Get Your Head Round Energetics, says Royal Gold's Founder
Financial models are as flawed as the assumptions that go into them, says Stanley Dempsey, who proposes a radical new way to rank mines and industrial operations
What if mines are not about money? What if there was a new, truer, universal benchmark that industrial operations could all be ranked and measured against?
It's a radical premise, especially coming from Stanley Dempsey, a lawyer and merchant banker who founded Royal Gold, a $5bn gold financing group listed on the New York Stock Exchange.
“I've always been attracted to the idea of looking at the energy input and output of a mine,” says Dempsey, 78, “to get a common understanding of what it really costs to build a mine.”
Having spent decades in mining and finance, trawling through assets, Dempsey has come to the conclusion that money-based metrics are flawed, he says from his office in Denver. Exchange rates swing around, taxes bob up and down and commodity prices are impossible to predict, so financial models are as faulty as the assumptions that go into them.
But is there a better way to measure an operation's underlying economics?
Working as a young lawyer on an aluminium plant in the US, Dempsey started thinking about “input-output” analysis, he says. “It is interesting to think of all of the 'things' that come through the front gate of a plant, and what comes out the other end.”
Alumina and electricity were pumped into the facility, whilst heat and aluminium were noisily pumped out. Fix an energy metric on each component and Dempsey's team of engineers could have modelled the plant's energy efficiency.
The idea is not totally new. In the 1970s, ecologist Charles Hall was looking at the energy that animals burn during migration, before widening the idea to look at the net energy impact of oil wells in the US,
including dry wells drilled. Society, Hall argued, was making huge investment decisions based on financial hunches about prices decades into the future, without any reference to where the highest underlying energy returns could be had.
As fuel prices fell in the 1980s and '90s, Hall's concept fell out of favour, but Dempsey had been working alongside ecologists on the Henderson mine in Colorado. It was the first example of ecologists being brought inside a mine's decision-making process. “They showed us things we didn't know,” Dempsey remembers, “and vice-versa. The collaborative effort really worked. It got a lot of national attention.”
Energetics, or the idea of modelling energy flows, could also be lifted from ecology to be used in the mining industry, Dempsey argues. A mine's largest costs, from electricity to explosives, could all be converted into energy units, stripping out variable financial assumptions.
Mines with an energy return over their life-cycle of less than, say, 3-to-1 could simply be left on the drawing board. The metric could be used to tweak and inform everything from the mining rate (should we buy a new digger to speed up production?) all the way up to international mineral policy (should we build a new railway to unlock a new basin?), giving everyone from investors to policymakers a new insight.
Dempsey's idea could lead to some controversial conclusions. One study in 2010 found that coal mining boasts a huge energy return of around 80-to-1, easily outdoing wind farms or nuclear power. There are also huge complications, from working out the best methodology for measuring 'energy invested', to deciding how far up the supply chain any measure of 'sunk energy' should go.
“I'd like to challenge all those new mining engineers out there to see if they can figure this out,” says Dempsey, chuckling, as a quacking duck ringtone pings on his mobile phone. “I am sure there are plenty of problems with my approach, but I don’t think that the laws of thermodynamics are one of them.”
And what advice would Dempsey offer youngsters running the industry today? “I'd really drill down on each part of the technology, from what happens with people sitting in a tent in the Yukon drilling a hole when a helicopter can't come in with their food, all the way down to the mine, the mill, the ocean transport.”
“Don't just go to the mine and look over the side of the pit and say, 'Boy, those trucks are big.' Really make this your heart and soul and know everything you could know about the industry.”
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