What Is A WCD? Schodde (2006)

WHAT DO WE MEAN BY A WORLD-CLASS DEPOSIT?
AND WHY ARE THEY SPECIAL ?
Richard Schodde
AMEC Conference, Perth
8th June 2006
Disclaimer
The following presentation is based on an analysis carried out by the author prior to
joining BHP Billiton. It therefore doesnt necessarily reflect the companys business
strategy.
The reported valuations differ from internal BHP Billiton estimates, in part, because
of different assumptions regarding cost of capital and future commodity prices.
Any reference to the word we refers to the minerals industry, not BHP Billiton.
World-Class Deposits
8th June 2006
Page 2
Disclaimer
The views expressed herein contain information derived
from publicly available sources that have not been
independently verified. No representation or warranty is
made as to the accuracy, completeness or reliability of the
information. Any forward-looking information in this
presentation has been prepared on the basis of a number of
assumptions which may prove to be incorrect. This
presentation must not be relied upon as a recommendation
or forecast by BHP Billiton.
Overview
What do we mean by world-class ?
Current definitions and issues associated with them
Proposed definition $250 million NPV threshold
(based on an analysis of 143 significant mineral discoveries)
How often are they found ?

On average 2-4 are found each year in the Western World
What makes them so special ?

Special characteristics of world-class mines
Impact on investors, government and society
8th June 2006
Page 3
What do we mean by world-class ?
8th June 2006
Page 4
There are wide range of definitions for world class

World-class means different things to different people i.e. for:
The general public Something of outstanding quality

Investors .. They make lots of money for a long time!
Geologists A deposit with a very big mineral endowment
Promoters Something that might be big
The risk is that the term is being over-used by industry

to the point of devaluing its meaning
8th June 2006
Page 5
Definitions commonly used by geologists

Donald Singer (1995)
Upper 10 percent of deposits in his database ordered in terms of
contained metal. This equates to 3.2 Moz for gold, 77 Moz for
silver, 2 Mt for copper, 1 Mt for lead and 1.7 Mt for zinc.
Peter Laznicka (1999)

An informal term applied to ore deposits with an exceptionally
large tonnage of economically recoverable metals. . The term
attests to an exceptional economic benefit these deposits provide,
or potentially provide, and consequently this class of deposits is
eagerly sought by the industry.
8th June 2006
Page 6
Major gold deposits discovered in the Western World

between 1950 and 2003
Million oz of Gold
1000
GOLD
N = 357
N>3.2 = 179
100
10
Singers threshold
for world-class
gold deposits
3.2
1
1950
8th June 2006
Page 7
1960
1970
1980
1990
2000
Source: WMC June 2005
Major base metal deposits discovered in the Western World

between 1950 and 2003
Million Tonnes of Cu-equivalent Metal
1000
BASE METALS
N = 927
N>2 = 261
100
Copper
Ni Sulfide
Ni Laterite
Lead-Zinc
10
2
Singer threshold
for world-class
copper deposits
0.1
1950
8th June 2006
Page 8
1960
1970
1980
Assumes 1t Cu = 0.33t Ni = 2.91t Zn = 3.47t Pb
1990
2000
Source: WMC June 2005
Definitions commonly used by the industry

Tom Albanese (2005)
Only the largest and highest grade deposits that would make a
difference to the companys bottom line.
Michael Doggett (2004)

World-class should be more than just big geologically [and that]
there must be an economic consideration. when economics
are considered, there is no such thing as a world class mineral
deposit. There are only big interesting mineral deposits or worldclass mines.
8th June 2006
Page 9
NPV approach
Analysis of the value created from potential world-class deposits

Use WMCs deposit database contains information on 115,000
mineral deposits around the world, including discovery history data
on 10,000 of these.
Evaluated the NPVs of 143 significant mineral discoveries made
in low-risk western world countries between 1985-2003.
63 gold (>1 Moz)
6 diamond (>3 M carats)
74 base metal (> 0.5Mt Cu-equiv)
Source: Schodde & Hronsky, Role of World-Class Mines in Wealth Creation
SEG2006 Conference, Keystone May 2006
Page 10 8th June 2006
Returns achieved for major gold discoveries
Gold deposits found in low-risk WW countries 1985-2003

IRR at Decision to Build (%)
Some of the smaller gold

discoveries generated
exceptional returns
100%
80%
Constant
US$400/oz REAL
gold price
60%
40%
20%
0%
1
10
100
-20%
Deposit Size (moz Pre-Mined Resource)

Source: Schodde & Hronsky May 2006
Value of major gold discoveries

NPV (US$m in 2004$)
$1000
GOLD
Constant
US$400/oz REAL
gold price
$800
Bigger is
better
$600
$400
$200
$0
1
-$200
10
Mt Todd
($236m)
100
Deposit Size (moz Pre-Mined Resource)

Value of major base metal discoveries
Base metal deposits found in low-risk WW countries 1985-2003

NPV (US$m in 2004$)
$2,000
Copper
Nickel Laterite
Nickel Sulphide
Lead-Zinc
Other Base metals
BASE METALS
$1,500
$1,000
$500
$0
1
10
100
-$500
Deposit Size (total mine site value US$b 2004 dollars)

Incremental NPVs of all significant gold discoveries

Caution: Assumes zero NPV for uneconomic deposits

Analysis excludes deposits < 1Moz
Incremental NPV (US$m)

$2,000
GOLD
$1,500
$1,000
$500
$0
0%
20%
40%
60%
80%
100%
Cumulative Percent of Deposits



Cumulative NPV (%)

$2,000
GOLD
100%
80%
$1,500
60%
$1,000
40%
$500
20%
$0
0%
20%
40%
60%
80%
0%
100%



Cumulative NPV (%)

$2,000
GOLD
100%
80%
$1,500
60%
53%
$1,000
40%
$500
20%
$0
12%
0%
20%
40%
60%
80%
0%
100%



Cumulative NPV (%)

$2,000
100%
GOLD
Over half the value is

captured in just 12% of the
major (ie >1 moz) discoveries
$1,500
80%
60%
53%
$1,000
40%
$500
$250
$0
20%
A
12%
0%
20%
40%
60%
80%
0%
100%




$2,000
GOLD
Number
$1,500
$1,000
$500
$250
$0
0%
12%
20%
40%
60%
80%
100%
Cumulative Percent (Number)




$2,000
GOLD
Number
$1,500
Tonnes
$1,000
$500
$250
$0
0%
12%
20%
30%
40%
60%
80%
100%
Cumulative Percent (Number, Tonnes)




$2,000
GOLD
Number
$1,500
Tonnes
NPV
The top 12% of the major gold

deposits by value (i.e. >$250m)
contain 30% of the metal tonnes
and 53% of the total NPV
$1,000
$500
$250
$0
0%
12%
20%
30%
40%
53%
60%
80%
100%
Cumulative Percent (Number, Tonnes, NPV)

Incremental NPVs of all significant base metal discoveries


Analysis excludes deposits < 0.5mt Cu-equiv

$2,000
Number
BASE METALS
$1,500
$1,000
$500
$250
$0
0%
14%
20%
40%
60%
80%
100%
Cumulative Percent (Number)




$2,000
Number
Tonnes
BASE METALS
$1,500
$1,000
$500
$250
$0
0%
14%
20%
32%
40%
60%
80%
100%
Cumulative Percent (Number, Tonnes)




$2,000
Number
Tonnes
Tax
$1,500
BASE METALS
$1,000
$500
$250
$0
0%
14%
20%
32%
59%
40%
60%
80%
100%
Cumulative Percent (Number, Tonnes, Tax)




$2,000
Number
Tonnes
Tax
NPV
$1,500
BASE METALS
The top 14% of the major BM

deposits by value (i.e. >$250m)
contain 32% of the metal tonnes
and 67% of the total NPV
$1,000
$500
$250
$0
0%
14%
20%
32%
59%
40%
60%
67%
80%
100%
Cumulative Percent (Number, Tonnes, Tax, NPV)

Value of top 30 Discoveries
Deposits found in low-risk WW countries 1985-2003
NPV (US$m in 2004$ @ 7% discount rate)

$1,500
Appears to be
a step-change
above $250m
$1,000
Gold
Copper
Nickel Sulphide
Nickel Laterite
Lead-Zinc
Diamonds
$500
$0
Deposit
Several commodities exhibit a step-change in value

NPV (US$m in 2004 dollars)
Diamonds
Lead-Zinc
Gold
Nickel Sulphide
Nickel Laterite
Copper
$1,500
$250m Threshold for

World-Class Mines
$1,000
$500
$0
-$500
10
15
Deposit Number (Ranked by NPV)

20
Size-frequency distribution .. discontinuity above 6 Moz?

Cumulative Frequency
1000
GOLD
N = 307
100
10
1
0.1
10
100
Deposit size (Moz Pre-Mined Resource)


1000
Not Modeled
GOLD
NPV Modeled
Nmodeled = 63
100
10
1
0.1
10
100


1000
Not Modeled
NPV <US$250m
NPV >US$250m
GOLD
N>$250m = 7
100
10
1
0.1
6 10
100

Size-frequency distribution .. discontinuity above 4 Mt Cu?

Base Metal deposits found in low-risk WW countries 1985-2003
1000
BASE METALS
N = 151
100
10
1
0.1
10
100
Deposit size (Mt Cu-equiv Pre-Mined Resource)


1000
Not Modeled
BASE METALS
NPV Modeled
Nmodeled = 74
100
10
1
0.1
10
100


1000
Not Modeled
NPV <US$250m
NPV >US$250m
BASE METALS
NiS
N>$250m = 10
brownfield
100
NiS
Cu
Cu
10
Cu
Cu
Cu
Zn
Cu
Cu
1
0.1
10
100

Highest value discoveries are in camps
Value of top 30 discoveries found in low-risk WW countries 1985-2003
NPV (US$m in 2004$ @ 7% discount rate)

$1,500
Camp
Part of a Camp
Stand-alone Deposit
$1,000
$500
$0
Deposit
How many world-class discoveries are made each year ?
Exploration expenditures and significant discoveries

All Western World : 1980-2005
Expenditures ($ Billion in 2005 dollars)
Number of Discoveries
$6
30
Total Expenditures
Tier 2 discoveries (NPV $50-250m)
Tier 1 (ie World-Class) discoveries
25
20
$5
$4
15
$3
10
$2
Incomplete
data
$1
$0
0
1980
1985
1990
2 to 4 world-class deposits
are found each year in WW
1995
2000
2005
Source: BHP Billiton May 2006
What are the special characteristics of a

world-class mine ?
Characteristics of world-class mines

Big often the largest in its class
Long life resulting in a lasting impact on the industry
High quality usually viewed in terms of ore grade, but more
correctly in terms of low production cost
Size . Tonnes-Grade distribution

Grade (g/t Au-equiv)
100
10
100 moz
1
Note: Excludes
deposits <100 koz
0.1 moz
1 moz
10 moz
0.1
0.1
10
100
1000
Deposit size (Mt Pre-Mined Resource)

Source: BHP Billiton Sept 2005
10000
Size . NPV versus Tonnes-Grade

Grade (g/t Au-equiv)
Weighted Average NPV (Tier 1 gold deposit) = $477m
100
Bigger is better !
NPV > $250m

NPV $100 to $250m
NPV $0 to $99m
NPV negative
Not modeled
10
100 moz
1
Note: Excludes
deposits <100 koz
0.1 moz
1 moz
10 moz
0.1
0.1
10
100
1000

Sources: BHP Billiton Sept 2005

Schodde & Hronsky May 2006
10000
Copper deposits found in low-risk WW countries 1985-2003

Grade (% Cu-equiv)
10.0%
1.0%
10 mt Cu
0.1 mt Cu
1 mt Cu
0.1%
1
10
100
1000

Source: BHP Billiton Sept 2005
10000
Copper deposits found in low-risk WW countries 1985-2003

Grade (% Cu-equiv)
Weighted Average NPV (Tier 1 copper deposit) = $692m
NPV >$250m
NPV $100m to $250m
10.0%
NPV $0 to $99m
NPV negative
Not modeled
Need at least
0.8% Cu
1.0%
10 mt Cu
0.1 mt Cu
1 mt Cu
0.1%
1
10
100
1000

Sources: BHP Billiton Sept 2005

Schodde & Hronsky May 2006
10000
Size of footprint
Porphyry copper deposits

Footprint area (km2)
100
10
0.1
Ore
0.01
0.1
10
100
1000
Copper metal (mt Cu-equiv)

Source: Donald Singer et al 2002
Size of footprint

100
10
Ore
Sulphides
0.1
0.01
0.1
10
100
1000

Size of footprint

100
10
Ore
Sulphides
Alteration
0.1
0.01
0.1
10
100
1000

Size of footprint
Giant orebodies
have big footprints

100
10
Ore
Sulphides
Alteration
0.1
0.01
0.1
5 mt
10
100
1000

World-class deposits have a high option value

Their large size and long life creates the opportunity to:
Achieve economies of scale in mining and processing. This
lowers the cut-off grade & increases the overall resource
world-class deposits can grow significantly over time !
Take advantage of market opportunities
by quickly expanding the mine during good times
Invest in developing new technologies
which will lower costs and increase the economic resource base
Growth in Resources at Ertsberg-Grasberg Camp

Copper Metal (Mt Cu)
60
50
40
Note: Resource data only available after 1996
Resources
Resources can continue to grow long after

the initial discovery. This is particularly
true for world-class deposits
Reserves
30
20
10
1988: Grasberg
discovered
Cumulative
production
1960: Ertsberg
discovered
0
1960
1970
1980
1990
2000
2010
Source: FCX
2020
Copper Production From Grasberg Camp

Actual versus forecast
Annual Production (ktpa of Cu in concentrate)

1000
Brook Hunt forecasts
Actual Production
800
600
400
200
0
1960
1980
1970
1960: Ertsberg
discovered
1980
1990
2000
2010
2020
2030
2040
Source: Brook Hunt & Associates 1980 to 2005
2050


1000
Actual Production
800
600
400
200
1983
0
1960
1980
1970
1960: Ertsberg
discovered
1980
1990
2000
2010
2020
2030
2040
2050


1000
Actual Production
800
600
400
200
1983
1986
0
1960
1970
1960: Ertsberg
discovered
1980
1990
1980
2000
2010
2020
2030
2040
2050


1000
Actual Production
800
600
400
1989
200
1983
1986
0
1960
1970
1960: Ertsberg
discovered
1980
1990
1980
2000
1988: Grasberg
discovered
2010
2020
2030
2040
2050


1000
Actual Production
800
600
400
1992
1989
200
1983
1986
0
1960
1970
1960: Ertsberg
discovered
1980
1990
1980
2000
1988: Grasberg
discovered
2010
2020
2030
2040
2050


1000
Actual Production
800
600
1995
400
1992
1989
200
1983
1986
0
1960
1970
1960: Ertsberg
discovered
1980
1990
1980
2000
1988: Grasberg
discovered
2010
2020
2030
2040
2050


1000
Actual Production
800
1999
600
1995
400
1992
1989
200
1983
1986
0
1960
1970
1960: Ertsberg
discovered
1980
1990
1980
2000
1988: Grasberg
discovered
2010
2020
2030
2040
2050


1000
Actual Production
800
1999
2002
2005
600
1995
400
1992
1989
200
1983
1986
0
1960
1970
1960: Ertsberg
discovered
1980
1990
1980
2000
1988: Grasberg
discovered
2010
2020
2030
2040
2050
Summary: Ten benefits of world-class mines

1)
2)
3)
4)
5)
6)
7)
8)
9)
10)
They generate significant wealth over an extended period of time

Help launch major mining companies
Create new markets through lower prices (Climax mine for Molybdenum)
Encourages further investment in exploration
Promotes innovation (flotation, autogenous smelting, synthetic rutile)
Stimulates other mines to set up in the area
Encourages downstream processing
Encourages support industries (Sudbury, Johannesburg, Kalgoorlie/Perth)
Assists in the social and political development of the region
Potentially lower environmental impact
Conclusions
World-class mines by definition are something special. They produce major
benefits to industry and society.
Better to define them in terms of wealth creation than physical size.
Deposits with NPV >$250m appear to have different size-frequency characteristics
an artefact of being of being part of a camp?
To have a reasonable chance of being world-class the deposit needs to contain
>6 Moz Au or >4-5 mt of Cu-equivalent ( = 1.0-1.3Mt Ni = 10-12 Mt Zn).
On average 2-4 world-class deposits were found each year in the Western World.
Economic analysis of 143 major deposits found between 1985-2003 showed that
much of the industrys wealth is captured in a handful of discoveries.
For gold: Of those >0.5 mt Cu-equiv, 12% by number had an NPV>$250m.
These contained 30% of the metal and 53% of the total wealth.
For base metals: Of those >1 moz Au, 14% by number had an NPV>$250m.
These contained 32% of the metal and 67% of the total wealth.
Closing note: The importance of world-class mines to society

Is mining a benefit to society?
What matters is how the [mineral] wealth is transformed into other
forms of wealth and income.
Source: Stoekel (1999)
Since much of the minerals industrys wealth is created by

world-class mines, the discovery and management of these
mines has a critical role in ensuring that the industry makes a
positive and lasting impact on society

What Is A WCD? Schodde (2006)

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WHAT DO WE MEAN BY A WORLD-CLASS DEPOSIT?

AND WHY ARE THEY SPECIAL ?

How often are they found ?

What makes them so special ?

What do we mean by world-class ?

There are wide range of definitions for world class

The general public Something of outstanding quality

The risk is that the term is being over-used by industry

Definitions commonly used by geologists

Peter Laznicka (1999)

Major gold deposits discovered in the Western World

Source: WMC June 2005

Major base metal deposits discovered in the Western World

Assumes 1t Cu = 0.33t Ni = 2.91t Zn = 3.47t Pb

Source: WMC June 2005

Definitions commonly used by the industry

Michael Doggett (2004)

Analysis of the value created from potential world-class deposits

Returns achieved for major gold discoveries

Gold deposits found in low-risk WW countries 1985-2003

Some of the smaller gold

Deposit Size (moz Pre-Mined Resource)

Source: Schodde & Hronsky May 2006

Value of major gold discoveries

Gold deposits found in low-risk WW countries 1985-2003

Deposit Size (moz Pre-Mined Resource)

Value of major base metal discoveries

Base metal deposits found in low-risk WW countries 1985-2003

Deposit Size (total mine site value US$b 2004 dollars)

Source: Schodde & Hronsky May 2006

Incremental NPVs of all significant gold discoveries

Caution: Assumes zero NPV for uneconomic deposits

Incremental NPV (US$m)

Cumulative Percent of Deposits

Source: Schodde & Hronsky May 2006

Incremental NPVs of all significant gold discoveries

Caution: Assumes zero NPV for uneconomic deposits

Cumulative NPV (%)

Incremental NPV (US$m)

Cumulative Percent of Deposits

Source: Schodde & Hronsky May 2006

Incremental NPVs of all significant gold discoveries

Caution: Assumes zero NPV for uneconomic deposits

Cumulative NPV (%)

Incremental NPV (US$m)

Cumulative Percent of Deposits

Source: Schodde & Hronsky May 2006

Incremental NPVs of all significant gold discoveries

Caution: Assumes zero NPV for uneconomic deposits

Cumulative NPV (%)

Incremental NPV (US$m)

Over half the value is

Cumulative Percent of Deposits

Source: Schodde & Hronsky May 2006

Incremental NPVs of all significant gold discoveries

Caution: Assumes zero NPV for uneconomic deposits

Incremental NPV (US$m)

Cumulative Percent (Number)

Source: Schodde & Hronsky May 2006

Incremental NPVs of all significant gold discoveries

Caution: Assumes zero NPV for uneconomic deposits

Incremental NPV (US$m)

Cumulative Percent (Number, Tonnes)