Two questions that frequently arise in communities where mining is economically important are how much gold (or other commodity) is left out there in the ground and how long can we continue mining it? The reasons for concern are fairly obvious: Millions of decisions about business investment, government finance and personal choices depend upon it. The concerns are heightened by the industry’s reputation for a history of “boom-and-bust” cycles.
The direct answer to the basic question of how long can the cycle last is: We don’t know. Anyone who tells you they know is either deluding themselves or trying to sell you something – or both. That doesn’t mean we have to throw up our hands in despair, however. There are some reasonable ways to approach the question, starting with breaking the question down to deal with its complexity.
The mining industry generally faces three specific kinds of risks: geological risks, ordinary business risks and political risks. When we ask how long the mining industry can continue operating, I think most people are thinking about geological risks (i.e., how much gold, silver or whatever mineral is left in the ground). However, while having minerals in the ground is a necessary condition for a successful mining industry, it is not a sufficient condition. The other factors are equally important, and they are things we can do something about.
Geological risk arises because we simply don’t know how much gold, silver and other minerals are out there. Over the past twenty years, when we have divided known “proven and probable reserves” by annual production rates to see how long we can continue to produce at current rates, we have consistently come up with a composite mine life of eight to 10 years. This fact is surprising to some but, in reality, very little of Nevada has actually been explored seriously enough to determine if there are mineral reserves to sustain production further into the future. This isn’t because mining companies are lazy or stupid (although I know geologists who would argue about that). It’s because exploration is expensive – it costs tens of millions of dollars to get government permits, drill targets and analyze data for even a modest size project to demonstrate the existence of “proven and probable reserves” to the satisfaction of financial regulators. The question mining companies face is why pay a lot of good money today to find a mineral that you can’t mine for many years in the future? Most companies won’t and are happy to find just enough reserves to replace those they are mining now.
Over the past decades, experience has shown that geological risks in Nevada are pretty small. Another way to look at it is to compare Nevada with other major gold fields around the world, such as the Witwatersrand Basin in South Africa, the Hemlo deposits in Canada, or Siberia in eastern Russia. Since the Industrial Revolution (i.e., ignoring artisanal mining that has taken place in these places for millennia), large-scale mining has been going on in these areas for over a century – much longer than Nevada. And, in the cases of South Africa and Siberia today, the major risks today are normal business and political risks, not geology.
If geological risks in Nevada are relatively low, you might ask, what about these other risks? When it comes to political risks, Nevada is also a relatively low-risk environment. It has consistently had strong ratings in the Fraser Institute survey of mining companies on issues like mining laws, property rights, legal system and regulatory environment, for example. And, as noted in previous columns, the deregulatory efforts of the Trump administration have strengthened Nevada’s position.
The area of business risks, however, is a bit more problematic although not imminently threatening. Foremost of these risks for the mining industry has always been commodity price risk. Fortunately for Nevada, the price of its major commodity – gold – has historically been much more stable, for a variety of reasons, than other minerals that are influenced more by business and technological cycles. For this reason, gold mining is less risky than mining copper, molybdenum, lithium, etc.
There are, of course, other business risks facing Nevada’s mineral industry although, for the most part they are similar to the risks facing other businesses, and these risks come from all directions. For example, mining is an energy intensive industry, so energy costs are critical to its profitability. Fortunately, on this score, the U.S. is in the midst of an energy boom so energy costs have been fairly stable and supplies seem secure.
Another current area of concern for mining and related manufacturing industries is the price of steel and more specifically, steel tariffs. Because the industry uses a lot of steel in equipment and supplies, tariffs — which are taxes on steel users — present a threat of increased costs. While the mere threat of tariffs and supply disruptions are a concern, we have yet to see the end result of the talk.
Nevada’s major industry for many years has been gaming, which we think of as “risky” because it involves gambling. However, there isn’t much risk in gaming. The public puts money down on a table or in a machine and the house is guaranteed by the law of averages to keep a portion of it.
Not so with mining – it’s actually risky, and the law of averages is not in the miner’s favor. But the brave keep on muckin’.