Mining Industry Primer

Industrial activity of extracting valuable minerals or other geological materials from the earth for further use in manufacturing a broad range of products.

Author: Kseniia Tokarieva
Kseniia Tokarieva
Kseniia Tokarieva
Experienced financial professional with eight years in audit and financial reporting, holding an MSc in International Money Finance and Investment from Durham University, along with dual bachelor's degrees in Finance and Economics with financial applications from Southern Methodist University.
Reviewed By: Himanshu Singh
Himanshu Singh
Himanshu Singh
Investment Banking | Private Equity

Prior to joining UBS as an Investment Banker, Himanshu worked as an Investment Associate for Exin Capital Partners Limited, participating in all aspects of the investment process, including identifying new investment opportunities, detailed due diligence, financial modeling & LBO valuation and presenting investment recommendations internally.

Himanshu holds an MBA in Finance from the Indian Institute of Management and a Bachelor of Engineering from Netaji Subhas Institute of Technology.

Last Updated:October 2, 2023

What is the Mining Industry Primer?

Mining is an industrial activity of extracting valuable minerals or other geological materials from the earth for further use in manufacturing a broad range of products, including metals and minerals, oil and gas, building materials, foodstuffs, and other goods.

More specifically, farmers use mined materials in the form of fertilizers and feedstock, metallurgical companies use iron ore to produce metal products, cement producers use limestone and clay to make cement, and other producers use granite in the production of countertops.

Other examples of valuable minerals or other geological materials that are being mined include coal, copper, gold, silver, titanium, lithium, carbon, uranium, silicon, and many more.

Mining is a vital part of the global economy. Apart from being responsible for producing various products, it also employs thousands of people around the globe.

The mining process is extremely complicated and involves many stages:

  • Search for minerals or other geological materials
  • Evaluation of minerals or other geological materials
  • Construction of a mine
  • Mining and processing of minerals or other geological materials
  • Closure of the mine followed by the reclamation of land

The four different mining types used to mine valuable minerals or other geological materials are:

  1. Surface mining, including
    • Strip mining
    • Mountaintop removal
    • Open-pit mining
  2. Underground mining, including
    • Room and pillar mining
    • Narrow vein stopping
    • Large-scale mechanized mining
  3. Placer mining
  4. In-Situ Mining

There are two categories of mineral resources: fuel and non-fuel. The fuel minerals are coal, uranium, oil, and natural gas. Coal is used as a fuel to generate electricity. Uranium is predominantly used as a fuel in nuclear reactors. Non-fuel minerals include limestone, iron ore, titanium, and granite.

The biggest companies in the mining industry as per market cap at the end of 2022 were:

The Mining Process

The mining process involves several steps to get the final product. The process can take a long time to complete and cost millions of dollars.

1. Search for minerals or other geological materials

The search for minerals or other geological materials, also known as the exploration process, seeks concentrated deposits of minerals or other geological materials for mining.

Geologists play an important role during the exploration process. They study maps, satellite photos, and aeromagnetic surveys to identify valuable mineral or other geological material deposits.

Note

Minerals or other geological materials deposits tend to form in clusters. As such, prospective mining areas may be near other known mineralization areas or existing mine sites.

Before the company can proceed with a more thorough examination of the prospective area, it must ensure that it is open to mining and that no one has claimed the right to it.

Once the company claims the rights, the geologists collect rock and soil samples for further analysis in a laboratory.

If the results are satisfactory, they proceed with drilling out a bigger sample to identify how many valuable minerals or other geological materials the rock contains. This step of the process is also known as core drilling.

Suppose the results of the initial core drilling are positive. In that case, the company usually performs additional drilling to confirm the initial drilling results and develop a 3D model detailing the location of the deposits.

2. Evaluation of minerals or other geological materials

When the company finds deposits of minerals or other geological materials, it must evaluate whether the benefits of investing millions of dollars in mine construction outweigh the costs.

During the evaluation step, the company will assess how much it will cost to construct and operate the mine, how much will the selling costs be, what will the associated environmental costs be, and whether the company will generate net income.

3. Construction of a mine

The company will proceed with mine construction after successfully completing the exploration and evaluation processes. 

Note

The construction process will vary depending on how close the deposits are to the earth's surface.

4. Mining and processing of minerals or other geological materials

The actual mining begins when a mine is constructed. Miners use explosives to break up the rock and heavy machinery to move the rock to the processing plant. As soon as the rock is transported into the processing plant, the processing begins.

The extracted rock contains waste and valuable materials. Processing a mined rock involves the separation of valuable minerals or other geological materials from the waste.

Valuable minerals or other geological materials are then used in producing pure metal or other products. At the same time, waste is stored in a safe area to avoid pollution or used in the company's non-operating activities.

5. Closure of the mine followed by the reclamation of land

Minerals or other geological materials are finite resources. At some point in the life of a mine, resources will be exhausted, and the company will cease the production process.

When this happens, the company must reclaim the land. In other words, restore it to its condition before the mining process began.

Finding good minerals or other geological materials deposits is rare. As a result, a very limited number of companies make it to evaluate minerals or other geological materials in the mining process.

Mining Types

Any machinery required to extract ore is considered a mining asset.

Some of the fundamental assets for the continuous running of mining operations used in several mining types include

  • Crusher: used to break down rock into smaller pieces.
  • Conveyer belt: used to move material along.
  • Drill rig: used to drill holes into the earth.
  • Loader: used to pick up material and carry it to another location.

Information on some of the most common mining types follows.

1. Surface mining

Surface mining is the process of extracting ore from the ground by digging it out with heavy machinery.

One of the advantages of surface mining is that it doesn’t involve the construction of tunnels or shafts, which makes the process relatively easy. But, at the same time, the land disturbance may result in erosion or pollution.

Note

The most common types of surface mining are strip mining, mountaintop removal, and open-pit mining.

Surface mining methods include:

  • Strip mining: mining of exposed minerals or other geological materials after removing vegetation and rocks.
  • Mountaintop removal: the process of removal of the tops of mountains to get access to the mined area.
  • Open-pit mining: the excavation of large land areas that create a hole from which minerals or other geological materials are mined.

2. Underground mining

Underground mining is broken down into the following steps:

  • Drilling holes in the ground.
  • Placement of blasting materials into the drilled holes.
  • Setting off the blasting materials to make way for the tunnels.

Underground mines are constructed when minerals or other geological materials are deep below the surface.

Note

The entry from the surface to an underground mine may be through a horizontal or vertical tunnel.

 Underground mining methods include:

  • Room and pillar mining: creating a grid system of open rooms together with a system of pillars.
  • Narrow vein stoping: performed in an underground excavation along geological distinct sheet-like bodies of crystallized minerals within a rock where the mineral is mined and removed.
  • Large-scale mechanized mining: including mining of a long wall of ore in a single slice (long-wall mining), blasting of levels of the ore by explosives (sub-level-caving), and mining ore with the assistance of gravity (block caving).

The main advantage of underground mining is its reduced environmental impact, as the methods cause minimal disruption to the soil around the mine.

3. Placer mining

The process of sifting out valuable minerals or other geological materials deposits from loose river channels, beach sands, or other environments.

Like underground mining, placer mining has a lesser impact on the environment as there is no need to disturb the existing topography.

4. In-Situ Mining

In-situ mining involves the injection of a dissolving solution into the deposits to allow them to flow more freely. Deposits are then pumped up to the ground through a system of wells where they are processed.

Minimal noise and visual disturbance are some of the benefits of in-situ mining. Additional benefits include the absence of disturbance to the surrounding area and reduced waste produced.

Mining industry resources and reserves

There are several classification systems for the economic evaluation of mineral deposits worldwide. One of the most used is described in the Australasian Code for Reporting of Exploration Results, Mineral Resources, and Ore Reserves ('the JORC Code').

Under the JORC Code, we have the following diagram:

Diagram
Source: JORC Code

A mineral resource is a concentration or occurrence of solid material of economic interest in or on the Earth’s crust in such form, quality, and quantity that there are reasonable prospects for eventual economic extraction.

Mineral resources are further subdivided into the following categories in order of increasing geological confidence:

1. Inferred resources

Part of a mineral resource for which quality and quantity can be estimated with a low confidence level. In other words, quality and quantity are estimated based on limited geological evidence. It is expected that inferred resources could be upgraded to indicated resources.

2. Indicated resources 

Part of a mineral resource for which quality and quantity can be estimated with sufficient confidence. In this case, geological evidence is derived from detailed and reliable geological evidence. Indicated resources could only be converted into probable reserves.

3. Measured resources

Part of a mineral resource for which quality and quantity can be estimated with high confidence. Measured resources could be converted into proved or probable reserves under certain circumstances.

An ore reserve is an economically mineable part of a measured and/or indicated mineral resource.

There are two types of ore reserves, probable and proved. The confidence in the modifying factors applying to a probable ore reserve is lower than that of a proved ore reserve. In other words, the proven resource is the most geologically certain and the most economically viable to mine.

It is critical to understand this information when identifying and forecasting annual cash flow in the financial model.

Key Takeaways

  • Mining is an industrial activity of extracting valuable minerals or other geological materials.
  • It is a vital part of the global economy. Apart from being responsible for producing various products, it also employs thousands of people around the globe.
  • The mining process is extremely complicated and involves the search and evaluation of minerals or other geological materials, construction of a mine, mining, processing of minerals or other geological materials, and closure of the mine followed by land reclamation.
  • Very few companies make it to the evaluation of minerals or other geological materials step in the mining process.
  • There are four mining types: surface, underground, placer, and in-situ mining.
  • There are three subcategories of mineral resources inferred, indicated, and measured; measured reserves have the highest confidence level.
  • Ore reserves could be probable or proved. The confidence in the modifying factors applying to a probable ore reserve is lower than that of a proved ore reserve.

Researched and authored by Kseniia Tokarieva |  LinkedIn

Reviewed and edited by Parul GuptaLinkedIn

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