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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)
who notes the importance of geological endowment in
influencing the supply of minerals. Mineral deposits
are:
initially unknown (they must be discovered and
there is a cost involved in doing this)
fixed in size (they are a finite stock and, with
depletion, are eventually exhaustible)
variable in quality between and within deposits
(this is determined by grade, depth of deposit,
mineralogy and other factors)
fixed in location (geological factors have often
created these deposits in remote locations and they
need to be moved to intermediate- and end-use
markets).
As we also noted in Chapter 1, following agencies such
as the United States Geological Survey, it is common
practice to classify mineral commodities in three
categories metals, non-metals and energy minerals.
There are approximately 50 metals, 50 non-metals and
seven or eight energy minerals in this taxonomy. We
also noted that it is possible to recycle metals and some
non-metallic minerals from old-scrap and new-scrap
sources. This has the effect of postponing, and possibly
even preventing, their eventual depletion.
Despite consistently increasing consumption over the
past century, the issue of adequate mineral supply has
been a relatively infrequent source of concern. Where
they have occurred, such discussions about mineral
supply typically take place from both short-term and
long-term perspectives.
Short-run and long-run supply
Using a standard textbook approach, Tilton (1985,
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 companies do not have time to alter their
rate of production.
The short run is a time when mining companies
have time to vary their output but not their capacity.
The long run is a period when new mines can be
developed and processing facilities built and firms
can also expand the capacity of existing operations.
The very long run is a period in which the:
constraint imposed by existing known deposits
no longer holds and firms have the time to conduct
exploration and find new deposits. New technology
induced by the exhaustion of known deposits and
higher metal prices may also permit the exploitation
of new types of deposits.
A conceptual diagram showing the relations between
these periods appears in Figure 6.1.
Fig 6.1 - An interpretation of the relevance of different time periods
to mineral supply.
Limitations to mineral supply have often been an issue
in wartime particularly during strikes and there was also
a short period in the early 1970s when the Organization
of the Petroleum Eporting Countries (OPEC) cartel
constrained world oil supply. In 2011, there was major
concern when Chinese producers threatened the supply
of rare earths to other downstream users, particularly in
Japan and the United States (US).
Whenever oil and other mineral prices such as coal,
iron ore, copper, nickel and rare earths rise to high
levels, as has been the case on several occasions over the
past 50 years, commentators also become concerned.
Unsurprisingly, they seldom debate this issue in
an active way when mineral prices have remained
relatively stable or moved lower in real terms1. When
this has happened, it has been in large part because:
geologists have utilised advancing technology to
ensure that mineral reserves remain at manageable
levels
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).
68
mining methods have become more efficient
there have been continuing technical developments
in mineral processing
economic systems, such as the Soviet Union, have
collapsed (with Russia exporting substantially greater
amounts of specific metals such as aluminium)2.
The issue of mineral supply in the very long run
has attracted even less attention over the past two
centuries. Some notable contributors include Jevons in
his 1865 Essay on the Coal Question, and more recently
commentators such as Meadows and The Limits to
Growth school in the early 1970s.
Authors such as Tilton (2003) and Krautkraemer (1998)
provide useful surveys of the associated discussion.
Perhaps the most notable theoretical contribution has
been by Hotelling (1931) in his paper The economics of
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.
The mineral supply process
A straightforward view of new mineral supply,
following MacKenzie (1987), is a process involving
exploration, project development, mining, processing
and transportation to the market. The flow of minerals
supplied in a given period generally involves the
depletion of a finite mineral stock. One can view this in
terms of the following equation shows the relationship
between current mineral reserves, previous mineral
reserves, recent mineral consumption, and additions
to supply through recycling and new minerals which
become available because of technological change or
changes in mineral prices.
Mineral Mineral New Amount
reserves reserves mineral of mineral
this period = last period - consump- + recycled
tion last last period
period
New
+ mineral
reserves
2 See Corts (1999) on this point.
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 chapter 6 Mineral Supply Exploration, Production, Processing and Recycling
While the worlds minerals are ultimately fixed in
supply and are technically non-renewable, it is possible
to recycle many of them. Significant percentages of
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
away, it is even conceivable that recycled materials
could meet all new mineral demand and it would not
be necessary to produce newly mined material.
The worlds mineral stock is also affected by new
discoveries; by technological advancements in mineral
processing, which make previously uneconomic
deposits profitable; and by variations in prices, which
may add to or reduce the size of current mineral
reserves.
Supply curves
In addition to geological endowment, a variety of other
factors also influence mineral supply. They include
whether a mineral is an individual product or joint
product, the price of the mineral, input costs, transport
costs, government policy, institutional efficiency,
technological change, the impact of strikes and other
disruptions and market structure.
We utilise the familiar supply curve framework
in explaining the relevance and importance of the
above key determining factors. Students in economics
principles classes learn about supply functions and
curves in the early weeks of their course. The typical
initial presentation of supply is as an upward sloping
curve on a diagram, such as Figure 6.2, where price
per unit is plotted on the vertical axis and quantity
produced per period is on the horizontal axis. As prices
rise, producers will be encouraged to produce more
because it is profitable to do so. As price falls, they will
produce less.
In this presentation, price is a variable and all of the
other factors that affect the quantity supplied are held
constant. If their values change, the supply curve will
shift to the left or right as in Figure 6.2b.
RESOURCES AND RESERVES
At any given time, the level of estimated resources and
reserves provides a benchmark for the status of mineral
supply. Our discussion begins from this base, before
considering the nature of mineral supply using the
above supply curve model.
Mining companies publish information about the
mineral reserves and resources associated with their
projects, while national agencies such as the United
States Geological Survey, the British Geological Survey
and Geoscience Australia3 generate parallel estimates
for individual nations and the world as a whole.
3 A relevant recent reference is to Geoscience Australia (2011).
Mineral Economics
(A) Price
S
P2
P1
S
Q1 Q2 Quantity per
time period
S1
(B) Price
S
S2
P1
S1 S
S2
Q1 Q Q2 Quantity per
time period
Fig 6.2 - A typical supply curve: (A) price changes and quantity changes;
(B) changes in other factors and quantity changes.
Reasonably standard definitions of resources and
reserves (following Tilton, 2003, p 19) are as follows:
Reserves are those quantities of a mineral
commodity in subsurface deposits, that are known
and profitable to exploit, given existing technology
and prices.
Resources include reserves, together with deposits
that are:
economic, but not yet discovered
expected to become economic as a result of new
technology or other developments within the
foreseeable future.
The major mineral-producing nations use their own
generally similar definitions of resources and reserves.
The most popular early classification system is probably
the McKelvey Box of the United States Geological
Survey, which became widely used after 19704.
The JORC Code is the standard mineral resource
classification system in Australia and New Zealand.
This is the product of an ongoing collaborative effort
within the Joint Ore Reserves Committee of The
Australasian Institute of Mining and Metallurgy, the
Australian Institute of Geoscientists and the Minerals
Council of Australia. The first edition of the JORC Code
was published in 1989 and the most recent version,
as this chapter was compiled, appeared in JORC
(2012). Following a continuing period of international
cooperation there is now widespread consistency in the
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
Zealand, Canada, South Africa, United Kingdom and
the US.
The information in Figure 6.3 outlines:
the framework for classifying tonnage and grade
estimates so as to reflect different levels of geological
confidence and different degrees of technical and
economic evaluation.
Because the geological and modifying factors change
on a continuing basis, statements of Reserves and
Resources regularly change.
It is interesting to consider further the relationship of
a framework for Resources and Reserves such as the
JORC Code, to a supply curve model for newly mined
minerals. The diagrams in Figure 6.4 illustrate one
attempt to do this. They are adapted from the work of
Chavez-Martinez (1983), as reported in Harris (1985).
Looking at Figure 6.4a, we see that in a given period,
the market will clear at a price of P1, where q1 of the
mineral, say copper or iron ore, is mined and produced.
This corresponds in Figure 6.4b to the marked amounts
of cumulative production and current reserves.
Fig 6.3 - The general relationship between Exploration Results, Mineral Resources and Ore Reserves in the JORC Code (source: JORC, 2012).
Price Price
S0 S1
P1
D0
Cumulative
D1
q1
Quantity per
unit time
(a)
Fig 6.4 - One view of current new mineral supply, mineral reserves and potential mineral supply.
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At current levels of technology and factor (input)
prices, increments to new supply are possible with new
capital investment, but only at higher prices. These are
shown in Figure 6.4c. Technological advancement in
exploration, mining methods, mineral processing and
recycling, as well as changes to mineral demand, will
affect the level of Reserves and potential future supply.
In a JORC view of the world, only Proved Mineral
Reserves appear in the Reserves rectangle.
Mineral supply individual products,
main products, co-products and
by-products
Because of their geological occurrence, it is sometimes
profitable only to recover one mineral commodity (an
individual product) from the primary material mined or
drilled. In Australias major mining regions, companies
produce bauxite, coal, gold, iron ore and diamonds as
individual products. Some of the lower value-to-weight
minerals such as gypsum, limestone, sand, gravel,
manganese, salt and talc also are extracted in this way.
On other occasions, there is joint production. Here
miners extract mineral commodities as main products,
Price
S
P3
P2
Potential
production
Reserves
supply
Quantity of stock Changes in supply
(b) (c)
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 chapter 6 Mineral Supply Exploration, Production, Processing and Recycling
co-products or by-products because this is more
profitable. These may include combinations such as
silver, lead and zinc; copper and gold; gold and silver;
nickel and cobalt; copper and molybdenum; or tin,
tantalum and lithium. It is important also to appreciate
the meanings of each of these terms.
Following Tilton (1985, p 393):
a main product is so important to the economic
viability of a mine that its price alone determines
the mines output
a by-product is so unimportant, its price has
no influence on mine output
When prices of two or more (minerals) affect
output, the (minerals) are co-products.
We typically think of co-products and by-products
being extracted from base metal mines in locations
such as Mount Isa and Broken Hill. A topical example
of a major Australian mine that produces co-products
and by-products is Olympic Dam in South Australia.
Some details for the 2010 - 2011 financial year appear
in Table6.1.
Using average market prices, the total revenue from
Olympic Dam exceeded A$2B in this period. Copper
production accounted for about 70 per cent of the total,
while uranium was responsible for a little more than
20 per cent. Copper was clearly the main product, but
uranium oxide, worth almost A$500M, was also an
important co-product. Even though the mine produced
more than 100000 oz of gold and nearly 1Moz of
silver, both of these metals made only small percentage
contributions to mine revenue and profits. Both were
by-products.
KEY DETERMINANTS OF PRIMARY MINERAL
SUPPLY
Individual and main products
A standard way to consider the supply function of a
newly mined mineral commodity such as coal, bauxite,
iron ore, gold, nickel and copper, when it occurs as a
main product, is in the following terms:
f (own price input costs technological
Mineral change
supply = disruptive government market
events activities structure)
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
Copper cathode tonnes
Uranium oxide tonnes
Refined gold ounces
Refined silver 000 ounces
Estimated total sales
Mineral Economics
This specification follows Tilton (1985, pp 393-
395) and includes most of the important influencing
variables. It implicitly assumes that there are sufficient
reserves of the mineral available for exploitation.
Let us briefly reflect on the influence of these factors.
According to the standard theory of the firm, a company
will maximise its profits by producing at a point where
the costs of the last (marginal) unit of output just offsets
its own price. When the price of a mineral rises, a mining
company will tend to increase its supply. When it falls,
it will reduce supply. The industry will respond in the
same way. Where the global price of a commodity is
expressed in terms of another nations currency, eg US
dollars, exchange rate variations have a similar effect
to changes in price on an existing or potential mineral
producer.
Remember from Figure 6.1 how in the short run
capacity constraints in existing mines will inhibit the
ability of supply to increase as prices rise. A company
can employ more workers and expand its operations
within current mining tenements, but its ability to
increase supply will be limited. With the need for
regulatory approvals, and major capital investment
for mines, mills and supporting infrastructure, such
capacity constraints can apply for several years.
Input costs, particularly wages and energy costs, are
important factors affecting mineral commodity supply.
When they rise, it becomes more difficult for producers
to make profits. While wage levels of mining workers
are high, their relatively small numbers often make
the effects of rising wages less important than changes
in energy prices. These are particularly important, for
example, in transforming bauxite into aluminium.
Producing aluminium requires so much electric power
that it has sometimes jokingly been described as frozen
electricity.
During the past century, the positive impacts of
technological change on mineral supply through
more sophisticated mineral exploration, better mining
methods and innovations in mineral processing have
been substantial5. They have more than offset the
depletion of higher-grade deposits and the subsequent
5 An interesting discussion of revolutionary mining technologies developed since 1900
appears in Bartos (2007).
Table 6.1
Amount Estimated price per unit Estimated value ($ mill) Estimated per cent
194 100 $8250 1601 70.4
4045 $30 000 485 21.3
111 368 $1400 156 6.9
982 $34 000 33 1.5
2276 100.0
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chapter 6 Mineral Supply Exploration, Production, Processing and Recycling
movement to lower grades. With positive impacts of
open cut mining and the implementation of carbon-
in-pulp leaching and associated advances in mineral
processing, it has become possible to produce gold
from open cut deposits containing much less than 1 g/t.
Profitable extraction was previously possible only at
much higher grades.
A major innovation in the copper industry has been in
the solvent extraction electro-winning (SX-EW) process.
Electro-winning contributed less than three percent
of the total copper production in 1980 in contrast
to approximately 18 per cent of the world copper
production in 2009 (International Copper Study Group,
2010). The SX-EW has allowed the recovery of copper
from mine tailings, as well as a higher percentage of
metal to be ultimately recovered from orebodies. The
process cut the tonnes of waste per tonne of ore mined
by over 35 per cent in 1995 in comparison to its level in
1970 (Olewiler, 2002).
A variety of disruptive events such as strikes,
accidents in major mines, major equipment failure in
mineral processing plants, natural disasters such as
bush fires, floods and cyclones (known elsewhere as
hurricanes or typhoons), civil disturbances or even
terrorist attacks can disrupt mineral supply.
During 2004, for example, when the price of oil
rose from around US$30/barrel to US$55/barrel, the
disruptive impacts of events in Iraq were one source of
concern about oil supply. Threatened supply disruption
associated with strikes by oil workers in Venezuela and
Nigeria during the year added to this impact. Another
good example occurs in the cobalt industry, where the
Democratic Republic of Congo (DRC) dominates new
mine production. Internal disruptions (including civil
war) in the DRC caused surges in cobalt prices during
the mid-1990s. Together with Russia, Canada has been
the major nickel producer for the past century. Strikes
by workers in its key nickel-mining region around
Sudbury have disrupted world supply on several
occasions. Because such disruption drove up prices,
Australian producers derived considerable benefit.
Northern Australia has a cyclone season every year
from about January to April. Even though they are in
remote and often quite arid areas, large operating mines
are sometimes badly affected by the aftermath of these
major storms. This occurs unexpectedly in areas such
as North West Queensland, the Northern Territory,
the Pilbara, the Kimberley and even as far south as the
Goldfields region of Western Australia.
The activities of governments also have an impact
on mineral supply. Assuming that a country has a
significant mineral endowment, its mineral policy has
a central effect on its ability to supply minerals. Hence
the clear and stable regulatory framework in Australia
has served the nation well as far as its mineral sector
competitiveness is concerned. It has been assisted by
strong government support of organisations, such as
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state-based geological surveys that maintain significant
databases and departments of mines that administer
the operation of the minerals and energy sector. Federal
and state authorities have financed these activities by
using competitive taxation and royalty systems.
Significant policy changes may, of course, affect
this situation. For example, the introduction of more
stringent environmental regulations can adversely affect
mineral supply. If such regulations are less onerous in
other mineral-rich nations, mining company executives
will be tempted to invest in these regions. The Mabo
judgment in the Australian High Court in 1992, and
the subsequent passage of Native Title legislation in
the Australian Parliament in 1993, are examples of how
new policy may potentially influence mineral supply.
The end of the colonial era in the 1960s and 1970s was
associated with the emergence of state-owned mining
industries in many of the newly independent nations.
Political leaders wished to use the economic rent
from the resources sector to build other parts of their
emerging societies. Where foreign companies were
allowed to operate in these countries, they began facing
requirements:
to purchase supplies from domestic producers
to process ores or concentrates within the national
boundaries
to allow host governments to become part owners
of the mines.
Another common practice was, and continues to be,
the requirement to engage citizens of the host nation
in professional and managerial roles within resource
companies. Working visa limitations for expatriates
facilitate the impact of this. After the mid-1970s falling
mineral prices, as well as a lack of investment and
human capital, led to the decline of the mineral industry
in many of these nations.
Other favourable government policies that sometimes
apply to encourage new mineral production include
commitments to build infrastructure such as roads,
ports and communications systems. Another policy is
to offer low interest rate loans. Where mines or mineral
processing plants are struggling, government may also
provide operating subsidies. Many commentators agree
that flow-through shares in Canada have increased
grass-roots mineral exploration, which accounts for
75per cent of all exploration spending there.
Market structure also has an important influence on
the supply of individual and main products. This is a
particular focus of attention in the next chapter. When
there are few mineral producers, they exert greater
influence on supply and price. While the influence of
state-owned mining corporations has declined since
the early 1980s, there was a significant trend towards
greater concentration in many of the major minerals
sectors from the mid-1990s.
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 chapter 6 Mineral Supply Exploration, Production, Processing and Recycling

The number of buyers is also an important influence
on market structure and the competitive state of
particular mineral markets. Few buyers tend also to
exert large amounts of market power. Interestingly, the
combination of few buyers and sellers can sometimes
generate market outcomes similar to those where
there are many buyers and sellers. The simple matrix
in Table 6.2 provides a rudimentary view of how these
influences tend to apply.
Table 6.2
Market structure and competition a rudimentary view.
Number of buyers
mine capacity in the short run, and the size of
reserves in the long run.
In the very long run, new discoveries and technologies
may drive down production cost, and, therefore, the
prices that producers are willing to accept. A standard
view of the position of competitive producers, following
Tilton (1985) appears in Figure 6.5. By contrast, firms
in producer markets set prices for given periods of
time, often annually. If this is the case (again following
Tilton, 1985) we might expect a set of horizontal cost-
based curves such as those that appear in Figure 6.6.
Price Immediate Short Long
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
alternatively on some other criterion that will return a
greater than normal profit to the producer. At the other
end of the scale lies a competitive outcome where firms
are price takers and adjust their output to generate
optimum profit. They will produce when they can
make a surplus, but will cease operations if they cannot
cover their average variable costs. An alternative view
regarding this standard textbook result is that this is not
necessarily true in the mining industry because of high
closure costs due to environmental considerations and
other factors. This has been one of the arguments about
why the price of mineral commodities, such as zinc and
lead, have remained so depressed over long periods,
producing an inadequate rate of return to investors.
As prices rise, higher cost producers will begin
producing, though production constraints apply
because of:
current output and inventory levels in the very short
run
Fig 6.6 - Mineral supply curves during different time periods
in producer markets.
These representations imply certain assumptions
about the way in which the quantity that producers
supply will respond to price changes. The usual way to
assess such responsiveness is in terms of the elasticity
of supply. This is a parallel concept to the elasticity of
demand, discussed in the last chapter.
Economists typically focus on own-price elasticity
of supply. The simple formula for this for a particular
mineral in a given period (say a year) is:
% change in quantity supplied
Es =
% change in own price
Supply is elastic when Es is greater than one, and it
is inelastic when it is less than one. As production
approaches capacity constraints, and the mineral
supply curve becomes vertical, own-price elasticity of
supply approaches zero. Where the mineral supply

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chapter 6 Mineral Supply Exploration, Production, Processing and Recycling

curve is horizontal, as is the case for producer pricing
well before capacity constraints are approached, own-
price elasticity is effectively infinite. With the passage
of time, the elasticity of supply tends to increase. Hence
the own-price elasticity of supply will be greater in the
long run than it is in the immediate run or short run.
By-products
Because mineral by-products are so unimportant to a
mine and their price has no influence on their output,
their supply functions differ from those of individual or
main products. Crowson (1998, p 81) has argued:
That many metals and minerals are produced partly
or solely as by-products introduce great rigidities
to their supply. It means that their output will not
always respond to changes in their own prices, but
is often more influenced by the prices of the main
products with which they are associated.
This argument holds true in several parts of the
Australian mining industry, as well as in mining in
many other parts of the world. There are many good
examples of by-products from main product mines.
As well as the situation at Olympic Dam already
mentioned, the Escondida mine in Chile produces
copper as its main product and gold and silver as by-
products. Nearby Collahuasi produces copper as its
main product and molybdenum as a by-product. At
Antamina in Peru, copper and zinc are co-products,
while silver and lead are by-products. In Canada, at
the Voiseys Bay operations, copper and cobalt are by-
products at the large nickel mine. Other examples of by-
products occur where exotic metals such as selenium
and tellurium are produced with copper; indium and
germanium with zinc; bismuth with lead; and gallium
with bauxite. In many large gold mines, silver is a by-
product.
Because of the relative unimportance of by-products,
only the costs that are specific to their production affect
their supply. Companies allocate the joint costs of
producing main products and by-products only to the
main products. This means that the average cost of by-
product production is typically very low. It may even
approach zero, if in producing the main product, the
company naturally separates out the by-product, which
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
a saleable product.
may double the recovery rate of a previous by-product,
increasing its contribution to revenue and profits and,
thereby, changing its status to that of a co-product.
Price movements can also have this effect. Consider,
for example, the situation of the Murrin Murrin nickel
mine in Western Australia. In promoting this new
project in the mid-1990s, the Directors of Anaconda
Nickel argued that nickel and cobalt would be
co-products. At the time the price of cobalt stood at
around A$60/kg, while nickel was selling for A$10/kg.
Assuming the mine produced at full capacity (40000t
of nickel metal and 2500t of cobalt metal), the mine
would have generated annual revenue of A$350 M
in 1996 had it been operating at full capacity. About
57 per cent of revenue would have come from nickel
and 43 per cent from cobalt. In such a scenario, most
commentators would accept that these metals were
co-products. By 2010, however, the average price of
cobalt was A$45/kg, while nickel stood at A$21.50/kg.
Of the annual mine revenue, over 88 per cent came
from nickel and less than 12 per cent was from cobalt.
Though its revenue stream was significant, cobalt was
a by-product and indeed this has been the case for just
about all of the years of the mines operation.
Against this background it seems reasonable to argue
that the mineral by-product supply function would
take the following form:
Mineral = f (by- main product specific
by-product product price by-product
supply price input costs
technological disruptive government market
change events activities structure)
If one draws by-product supply curves in the usual
way (see Figure6.7), with price on the vertical axis
and quantity on the horizontal axis, immediate-run
and short-run curves are initially elastic but then quite
quickly inelastic as they come up against output and
capacity constraints. There is greater initial own-price
elasticity of supply in the long run and very long
run, though again this changes when the by-product
constraint is reached.
Price Long run
Immediate
run
Short
run and
very long run
By-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
We have noted above that when the prices of two or
more minerals produced by a mine affect its output,
they will be co-products. The price of the co-product must
cover its specific production costs and an appropriate
share of its joint production costs with other co-products.
The range of factors that affect the supply of a
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
the main product supply curves depicted in Figures6.5
and 6.6, though the sharing of joint production costs
may mean that they are a pushed-down version of
these curves until the various output, capacity and
known deposit constraints are reached in the immediate
run, short run and long run respectively.
SECONDARY MATERIALS THE ECONOMICS
OF RECYCLING
Newly mined minerals, which deplete finite mineral
resources, have traditionally made up the majority of
mineral production; however, in recent times, recycling
of minerals, particularly metals, has also become
an important alternative source of supply6. This is
particularly the case in developed nations where public
policy makers are encouraging recycling more and
more.
While authoritative data about mineral recycling are
not available on a world basis for all minerals, the US
Geological Survey provides annual estimates of its
importance for most key minerals in the US (see United
States Geological Survey, 2011). Although these rates
may not carry entirely across to Australia and other
nations, they do provide some indicative ideas about
the importance of the use of secondary materials in
mineral supply, given that the US is a major mineral
consumer7.
6 During the Cold War, another source of mineral supply for nations such as the US
the United Kingdom was from strategic stockpiles. The US and British governments
subsequently disposed of these stockpiles. Nations such as Japan, through the government
agency, the Japan Oil, Gas and Metals National Corporation (JOGMEC), still maintain
strategic stockpiles of important minerals.
7 The US economys GDP has recently stood at around 25 per cent of world GDP,
implying that the US is responsible for a significant amount of mineral consumption.
Given the nature of the intensity of use of mineral commodities during the stages of
economic development, it seems reasonable to argue, however, that consumers in the
US are unlikely to be consuming equivalent percentages of mineral commodities.
Mineral Economics
The estimates for ten key minerals appear in Figure6.8.
Recycling rates for materials such as chromium
(88percent), lead (mainly for batteries) at 80per cent,
iron and steel (77 per cent), magnesium (57 per cent),
nickel (largely from stainless steel), aluminium (both at
46 per cent) and copper (35 per cent) are all significant.
Recycling of metals such as gold and silver is also
important.
Fig 6.8 - Estimated rate of recycling of key metals in the United States, 2009
(source: United States Geological Survey, 2011)8.
While many of the above percentages are high, it is
important to realise that they are derived from two
broad categories so-called new scrap and old scrap.
The authors of the United States Geological Survey
(2011, p 61.1) advise that metal new scrap comes from
preconsumer sources, while old scrap originates from
post-consumer sources. Hence:
... when metals are converted into shapes bars,
plates, rods, sheets, etc new scrap is generated in
the form of turnings, stampings, cuttings and off-
specification materials.
Because new scrap supply occurs before minerals are
used by consumers of final products, it is secondary
supply in an unexpected way. Old scrap, by contrast,
is much easier to appreciate. It comes from products
that have reached the end of their useful lives from
old cars, computers, household appliances, car batteries
and many other products. The availability of old scrap,
as a percentage of total mineral use, will depend on the
lives of products in which it has been an input, the cost
of recycling and the rate of recovery of the mineral in
question.
Suppose that the supply (and consumption) of a
mineral grows at an annual rate of three per cent per
annum over a quarter of a century. After that period, the
products in which it has been an input, becomes obsolete
and can be recycled. Suppose further that it is profitable
to recycle half of the metal in these worn out goods. It
is a straightforward exercise to calculate that about
23 percent of mineral supply at the end of this period
can come from old scrap material. It is interesting to note
in Figure 6.9 that, for the six metals whose secondary
8 Recycling rate for titanium is from 2007.
75
chapter 6 Mineral Supply Exploration, Production, Processing and Recycling
Fig 6.9 - Estimated rates of recycling new and old scrap for six selected
minerals in the United States, 2009.
supply is separated into new scrap and old scrap, only
lead (and then aluminium) stood out as having a highly
significant rate of old scrap recycling.
The supply of new scrap minerals
This supply will be relatively cheap to recycle and
reasonably elastic until it comes up against a capacity
constraint. As Tilton (1985, p 402) notes, with respect to
metals, the factors affecting this constraint are:
current overall metal consumption
the distribution of this consumption by end uses
the percentage of consumption resulting in new
scrap for each end use.
Some supply of new scrap takes place in reasonably
competitive markets, though vertical integration
strategies for other minerals may ensure that producer
pricing continues to prevail in this area.
A reproduction of Tiltons view of the supply of new
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.
What stands out in this representation is the similarity
of the immediate run, short run, long run and very long
run. One would assume that the recycling cost would
be pushed down over time by small amounts. Although
not shown in the diagram it is also possible to assume
that the capacity constraint could be pushed out a bit
by technological advance in the long run/very long run.
However, the message of this diagram is one of elastic
low cost supply that is subject to a capacity constraint.
76
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
cost of processing material is considerable for most
minerals. This is because it needs to be collected and
then processed. Where collection and processing are
cheap, and consumption of a mineral has been growing
slowly, the supply of a mineral from old scrap can be
significant.
This is the case for the recycling of lead from motor
vehicle batteries, the main current use of the metal. With
the removal of lead from paint and as a petrol additive
contributing to slower percentage rates of growth in
consumption than for other major metals, it is easy to
appreciate why the percentage of lead recycled from
old scrap has been so high.
It is possible to construct indicative short-run and
long-run supply curves for secondary materials from
both the flow and stock of old scrap, and then add them
to derive an old scrap supply curve see Tilton (1985,
pp 403 - 405). Such curves will be upward sloping in the
usual way and relatively inelastic. One representation
of a short-run supply curve based on Tilton (1999)
appears in Figure 6.11.
Fig 6.11 - A short-run supply curve for old scrap minerals.
TOTAL MINERAL SUPPLY
The total mineral supply that becomes available in any
period is the sum of new mineral supply and secondary
supply9. The newly mined supply of a mineral may
occur as:
9 This overlooks minerals held in stockpiles, though these could also be included. They are
important, particularly for some precious metals, such as gold, but of limited relevance for
most minerals.
Mineral Economics
 chapter 6 Mineral Supply Exploration, Production, Processing and Recycling
an individual product
a main product
a by-product
a co-product.
Secondary supply can emerge from the flow of old
scrap or the current stock of old scrap material available.
The concept of new scrap is usually added to this.
The usual way of visually representing a total mineral
supply function is horizontally to sum supply curves
from lowest cost to highest cost production for each
of the components of new supply and secondary
supply. Conducting this exercise for a metal that
occurs significantly as a main product, a co-product, a
by-product, or as new scrap and old scrap will be a
complex exercise. Two good examples of such minerals
are gold and silver. By contrast, for a mineral such as
coal, which occurs only as an individual main product
and is largely not recyclable, this exercise will be much
more straightforward.
As one moves from the immediate-run to the longer-
run views, we have seen that the factors that affect each
of the different forms of production are likely to change.
Hence, the shapes of total mineral supply curves
will differ depending on the time period specified
immediate run, short run, long run or very long run.
They will also differ depending on whether the market
is competitive or dominated by a few producers who
exert strong market power.
Consider, for example, the construction of a short-run
total mineral supply curve for a mineral that occurs as
a main product and a by-product and that it can be
recycled from old scrap. A metal such as cobalt is one
example of such a mineral. Even with the strong position
of the Democratic Republic of Congo and Zambia there
are enough producers and users elsewhere to suggest
that a reasonably competitive market exists for this
metal. Cobalt also began trading in the London Metal
Exchange in 2010. The three components of short-
run supply are shown separately in Figure 6.12a and
summed horizontally in Figure 6.12b.
It is interesting to compare the shape of a mineral
supply curve, such as that in Figure 6.12b, with that of
the cost curves produced by a number of prominent
industry consultants. These are based on cash costs.
In discussing the behaviour of firms economists
commonly distinguish between their fixed costs and
variable costs. The latter vary with output, while the
former are the same regardless of the level of output.
Yet this distinction is often blurred in the mining
process as Crowson (1998, p 125) notes. Operators of
many mines seek to spread their costs over as great an
output as possible. Also annual purchase contracts for
fuel and supplies blur the distinction between mining
and its associated first-stage processing.
Mineral Economics
(A) By-
Price Old product
scrap Main
product
P0
P3
Capacity
constraints
P2
P1
Quantity
(B) Total
Price Supply
curve
P0
P3
P2
P1
Quantity
Fig 6.12 - A long-run supply curve for a mineral produced as a by-product,
from old scrap and as a main product: (A) old scrap, by-product and main
product supply curves; (B) total supply curve.
It has, therefore, become common practice to
distinguish between cash costs and other costs within
the mining industry. They refer to all fixed and variable
costs sustained in cash rather than as ledger entries
when operations are taking place. They include all
site costs of mining such as stripping, processing and
concentrating, but also incorporate sales and marketing.
Industry analysts produce average short-run cash-
cost and total-cost data for different mines for various
mineral sectors. They have not typically included
data on recycling. As an example, an indicative short-
run operating cost curve for newly mined nickel
might look like the curve in Figure 6.13. Such curves
provide an approximation for a short-run supply
curve for newly mined production10. They provide
useful competitiveness benchmarks for new and
existing producers. Yet because these data are usually
commercially sensitive and collected by only a few
organisations, they are not widely available in the
public domain. Indeed they tend to be prohibitively
expensive to observers who do not depend on them to
generate significant income streams.
In summary, the discussion in this chapter has sought
to introduce the topic of mineral supply in a fashion that
integrates with the preceding review of the elements
of mineral demand. We trust that you find them, in
combination, a useful foundation for Phillip Crowsons
discussion of Mineral Markets in Chapter 7.
10 It should be acknowledged that the sum of producer marginal cost curves, rather than
average cost curves, are the components of an industry supply curve for producers in any
competitive industry.
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