Commodity Derivatives, 2nd Edition

CHAPTER 5Base Metals

5.1 OVERVIEW OF BASE METAL PRODUCTION

Typically, the mining process will begin with a geological survey of an area including test drilling to determine the size of the deposit, its depth, and quality. From this a decision will be made as to whether or not the value of the deposit will be greater than the cost to develop and operate the mine. This decision will consider several factors, some of which may not be purely geological. These other considerations will include mining infrastructure issues such as where to put the buildings or roads and will likely include any related environmental issues. Lead times between the actual discovery and production can take many years and may often involve a substantial initial outlay. Many banks wishing to lend to mining operations may often link the debt repayments to the revenues generated and may involve some form of hedge to lock in future cash flows.

About 80% of all elements found in the earth are metal. However, they rarely occur in a commonly recognisable form as they react to combine with other elements to create compounds. As a result, the production process will involve separating the metal from the individual components with which it has bonded. Different metals will react with other elements to varying extents. Silver and gold are very unreactive and do not readily combine with any other element, and so are found in their pure state. At the other extreme it is impossible to find francium in its pure form, ...