Manganese nodule project economics Factors relating to the Pacific region
Charles J. Johnson and James M. Otto
This paper discusses and compares the main elements that determine the overall economics of nodule projects. The rarely examined issue of the impact on costs of processing nodules in different locations in the Pacific region is investigated. The authors then move on to an analysis of the sensitivity of nodule economics to changes in major cost and revenue elements. The paper then shifts from the quantitative to the more qualitative issues that may influence future seabed mining developments, including: the implications of the recently established 200 nautical mile Exclusive Economic Zones; the discovery of cobalt-rich manganese crusts; the prospects for nodule or crust mining for strategic reasons. Keywords: Nodule Seabed mining
The authors are with the Minerals Policy Program, Resources Systems Institute, East-West Center, 1771 East-West Road, Honolulu, HI 96848, USA.
‘AD. Little, Technological and Economic Assessment of Manganese Nodule Mining and Processing, prepared for the US Department of the Interior, Contract No 1401-0001-79-C-44, 1979, 75 pp. ‘B.V. Andrews, J.E. Flipse and F.C. Brown, The Economic Viability of a FourMetal Pioneer Deep Ocean Mining Venture, Texas A & M University, Sea Grant College Program, TAMU-SG-84-201, 1983, 201 pp. 3Little, op tit, Ref 1.
The 1970s saw the rise and fall of major commercial interest in manganese nodules (hereafter referred to as nodules). During this period hundreds of millions of dollars were spent by private mining consortia exploring seabed nodule deposits and developing mining and processing technologies. By the late 1970s various economic analyses indicated that nodule mining and processing was unlikely to meet the high internal rates of return (IRR) (also referred to as discounted cash flow rate of return, DCFROR) required for such risky investments.‘.’ By the early 198Os, interest in nodules had waned, and those consortia that stayed in the business maintained only skeletal technical staffs. This paper is not intended to repeat previous detailed studies on nodule economics. Since the late 1970s no major changes have been made in mining and processing technology that would fundamentally alter the previous economic analyses. However, there remains a need to present economic analyses of nodule projects within a framework that is clearly understood by non-specialists - particularly for those involved in government policy making.
Nodule mining and processing technology Various methods have been considered for gathering loose nodules from the soft sediment-covered seabed at depths of about 5 000 m. Two mining consortia have tested one-fifth scale mining devices and three mining consortia have successfully tested hydraulic systems to lift nodules through a pipe to a mine ship on the surface. Recovery rates of over 90% have been reported. However, no consortium is known to have operated a complete mining system longer than a few days.” At present, it is reasonable to assume that there are no major technical barriers to scaling up to a 2 to 3 million dry tonnes (2.8 to 4.2 million wet tonnes) per year commercial operation. It does not follow that scale up to a commercial size operation will be free of start-up problems and delays.
1986 Butterworth & Co (Publishers) Ltd
Mangunese nodule project economics
As shown below there are at least five nodule have either undergone significant bench-scale based on a process currently in operation’:4
processing options ‘that and pilot-work or are
(i) reduction ammonia leach process; (ii) cuprion process; (iii) pyrometallurgical process; (iv) hydrometallurgical acid leach process; (v) sulphuric acid leach process. It is impossible to know which process will be selected one or two decades into the future. However, based on discussions with industry, and on likely constraints on waste disposal that are expected to apply in the decades ahead, a reasonable option is a four-metal pyrometallurgical plant similar to the one described in a recent study.’ The capital cost and material and labour requirements used in the present paper are derived largely from this study. Costs of materials and labour are primarily based on a study by Johnson.’
Base case cash flow model
4A.D. Little, Technological and Cost Analyses of Manganese Nodule Processing Techniques and Their Significant Variations, prepared for the US Department of Commerce, Contract No NA83SAC00637, 1984. 5/bid. ‘%. Johnson, Economic and Business Investment Climates For Manganese Nodule Processing In Six Pacific Countries, prepared for the US Department of Commerce, institutional Grant No NA81AA-D00070, 1985, 149 pp. 7J.D. Nyhart, L. Antrim, A.E. Capstaff, A.D. Kohler and D. Leshaw, A Cosf Mode/ of Deep Ocean Mining and Associated Regulatory Issues, MIT Sea Grant College Program, MITSG 78-4,1978,163 pp (plus appendixes). ‘J.D. Nyhart, M.S. Triantafyllon, J. Avaback, A. Bliek, B. Sklar, M. Gillia, D. Kirkpatrick, J. Muggerridge, Ft. Nakagawa, J. Newman and A. Will, A Pioneer Deep Ocean Mining Venture, MIT Sea Grant College Program, MITSG 83-14, 1983, 255 pp. ‘Andrews et al, op cif, Ref 2. “Little, op tit, Ref 4.
Detailed cash flow models, such as those developed by Nyhart et a/‘,’ Andrews et al" and Little”’ are available for those who desire a high level of detail in their analyses. For the purposes of this paper a simplified financial model was developed to examine the impact of changes in the major variables including energy, non-fuel materials, transport, labour, capital and sales revenues. It is probable that the following model will produce profitability estimates within about 1% in the IRK of the more complex models given similar cost and revenue assumptions. Table 1 contains a summary of the model assumptions and Table 2 lists the main capital and direct operating cost elements, excluding depreciation, income tax, working capital and a return on invested capital. It is clear from Table 2 that from an investment and operating cost perspective, nodule operations are basically processing operations. About 80% of the capital investment and 75% of operating costs are associated with the processing plant compared with 25% associated with operating costs for mining and ore transport. Because of the relatively small capital investment and operating costs associated with mining, improvements in mining technology and economics will not significantly alter overall nodule project economics. However, improvements in mining technology will increase the confidence that the scaled-up mining system will be able to operate smoothly for long periods - an essential requirement before the financing of a nodule project from private capital markets can be seriously considered. Table 3 is useful in illustrating where funds will flow in a nodule project and shows the average annual breakdown of revenue by cost categories for the base case. Roughly one-third of the revenue goes to the investor as a return on the approximately $1.5 billion in capital investment and working capital. Energy is the next largest category accounting for 22%, followed by mining, transport and non-fuel materials, each of which accounts for about 9% of revenue. As will be shown in the section on the siting of processing plants, some of the base case variables - such as energy, transport, taxes and labour costs - vary considerably among sites in the Pacific.
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Manganese nodule project economics Table 1. Nodule operation: Project
Base case assumptions.
Two mining vessels operating In the Clarion-Clipperton zone of the Pacific Transport fleet Pyrometallurgical processing plant - four metal recovery (Mn recovered as ferromanganese) Scheduling Year: 1 to 4 construction 5 75% production (2.25 million dry tonnes) 6 to 24 full production (3.00 million dry tonnes) Capital expendituresa Distributed 20%, 30%, 25%, 25% over years 1,2.3,4 Mining equipment, ship conversion $250 million and transport $1 100 mullion Processing plant $1350 million Total 100% equity financing Working capital of $135 million is not recovered Operating
$332 million Year: 5 6 to 24 $442 million Metal recovery
Grade (percentage) co cu Mn Ni
0.25 1.30 27.00
Processing efficiency (percentage)
70 85 80 a5
10.00 0.80 0.25 3.00
Taxation 20% straight-line depreciation Loss carry-forward No tax credit No depletion allowance Effective tax rate: 35% aConstant 1984 US dollars Table 2. Nodule mining
costs (three million
Capital Investment= Mining and ore transport Processing
Million constant 1984 US$
Direct operating costs (annual) Mining Ore transport Processing plant Energy Non-energy Labour Maintenance and insurance Metal transport/marketing
170 75 25 30 30
39 17 6 7 7
Total direct operating costs
aExcludes $135 millron In working capital. Table 3. Base case average revenue Revenue
aRevenue figures are rounded to the nearest 5 million. Total investment in mining and processing including 135 million rn working capital is about $1.5 billion.
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by cost category. Million constant 1984 US$
Mining Transport Nodules Metal Energy Non-fuel Labour Maintenance and insurance Taxes Investors share
40 30 170 70 25 30 95 245
5 4 22 9 3 4 12 32
Manganese nodule project economics
Sensitivity analysis of a nodule project
“Johnson, op tit, Ref 6. ‘20cean Mining Associates, Nodule Processing Site Considerations: Colombia, prepared by Bechtel Mining and Minerals Division, 1980, 62 pp (plus appendixes). 130cean Mining Associates, Nodule Processing Site Considerations: Australia, prepared by Bechtel Mining and Metals Division, 1982, 118 pp (plus appendixes). 140cean Mining Associates, Nodule Processing Site Considerations: Hawaii, prepared by Bechtel Mining and Metals Division, 1982, 118 pp.
The purpose of this section is to show the impact on the base case IRR of moderate variations in the main cost elements and in metal prices. In each case only one variation is applied to the base case, however hundreds of combinations are possible. The IRR calculations are based on the assumptions and model in Table 1. These IRR estimates are significantly higher than most reported estimates, in part because the model developed in this paper: (1) ignores all investments in exploration and technology development (sunk costs); (2) assumes capital investments over a modest four-year construction period; (3) assumes that production at capacity can be achieved in the second year after commercial start up; and (4) assumes that all ferro-manganese products can be sold and that there is no significant decline in metal prices resulting from increased metal supplies. Past experience vividly demonstrates that the exact IRR calculations are not as important as the relative levels and changes in the IRR resulting from changes in the main variables. As shown in Table 4, which summarizes the impact of selected variations, the project economics are most sensitive to variations in metal prices. During the past decade of generally depressed metal prices, investors have become very cautious towards very large capital investments in new, relatively high-risk technologies where the economics are highly sensitive to metal prices. The second most sensitive variable in project economics is capital costs, followed by energy. As expected for such capital intensive projects, variations of up to 50% in labour costs do not have a substantial impact on project economics. The relatively low labour inputs in nodule projects, which are capital- and energy-intensive, remove most of the comparative advantage of locating processing plants in a country where the main comparative advantage is low labour costs. The IRR is also relatively insensitive to changes in transport costs including both the shipment of nodules to the processing site and finished products to markets. A recent study,” and studies by Ocean Mining Associates,‘2-‘4 of nodule processing site considerations in various Pacific countries provided the bases for the analysis in this section. If it is assumed that the nodule mining technology will operate smoothly, then the prime consideration with respect to overall nodule project economics becomes the processing plant type and plant location. The following seven locations were briefly examined: Australia (Gladstone), Canada (Prince Rupert), Colombia (Bahia Solano), Ecuador (Manta or Esmeraldas), Fiji (Namosi Area or Savusavu), Hawaii (island of Hawaii), and Table 4. Sensitivity analysis.
Base case Metals prices Tax rate Capital costs Energy costs Transport costs Labour costs
Percentage change in IRR
0 125 ~25 +25 ~25 +25 ~25 f25 ~25 f25 -25 +50 -50
20.0 4.9 12.8 14.8 11.1 17.7 12.2 15.4 13.2 14.5 13.4 14.3
+45 -64 -7 f7 -20 f26 -12 +12 -4 +5 -3 +4
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Manganese Table 5. Impact of different processing locations on nodule project economics. Processsing
Philippines (Leyte or Mindanao). Table 5 shows the estimated constant dollar IRR for each location. The analysis in Table 5 is based on modification of the base case model to include variations anticipated at each location. A full feasibility study would cost tens of millions of dollars and is far beyond the scope of the present study. The estimates in Table 5 are most useful in indicating the relative ranking of projects and not the absolute IRRs of projects. As shown in Table 5, Canada is expected to have the highest IRR (lowest-cost location) of the seven sites - followed by Colombia, Australia, Ecuador, the Philippines, Fiji and Hawaii respectively. This ignores adjustments in perceived risks for various sites which are discussed in a later section. The assumptions behind the IRR analysis are summarized in Table 6. The largest operating cost variable is for electricity which varies from a low of $40 million/year in Canada to a high of $118 million/year in Fiji a range of almost $80 million. Total annual transport costs vary by $30 million/year and labour varies by $17 million/year. Therefore, other factors being equal, a lower-cost economic option is to bypass a nearby processing site in, say, Hawaii, which has relatively high electricity costs, and ship the nodules to a more distant site such as Canada which has much lower electricity costs. Table 7 shows the estimated electricity costs per kilowatt hour (kWh) for a large base-load power supply at each of the seven processing sites. Assuming a pyrometallurgical processing plant is selected, it is probable that no site with electricity costs above 4 cents/kWh in constant 1984 cents will be seriously considered as a processing site. Therefore, Fiji, Hawaii and the Philippines are unlikely to be considered seriously by private consortia for processing nodules unless a low-cost energy source is developed. However, there are other important factors that influence the willingness of private consortia to consider a site for a major investment. The analyses and comparisons of various countries and sites fall under the broad category of ‘business investment climate’ studies. These studies not only include the specific economics of the project site (ie cost of electricity, materials, port suitability and tax levels), but also the level of risk - which is based on the possibility of changes that can occur in a
IRR percentage 14.6 13.9 13.1 12.4 11.2 11.1 10.8
Canada Colombia Australia Ecuador PhIlippines Fiji Hawaii
nodule project economics
Table 6. Project costs for seven processing sitesa (constant 1984 US dollars).
Capital cost” + 10% working capital Total operating cosUyear Mining Transport (nodules) Transport (metals) Total processing plant/year Energy
: Coal Coke Oil Electricity
Non-fuel materials Water Labour Maintenance and insurance Estimated effective tax rate (percentage) Loss carry forward Depreciation (percentage)
70 40 30
70 45 35
70 28 30
70 30 20
70 30 20
70 36 35
70 25 35
70 50 30
46 64 12 54
44 64 12 48
48 64 12 40
49 67 12 60
50 67 12 68
50 67 12 118
55 67 12 100
51 67 12 111
70 25 30
70 2 26 30
70 2 27 30
70 2 13 30
70 2 13 30
70 2 14 30
70 2 26 30
70 2 10 30
35 Yes 20
40 Yes 20
35 Yes 20
30 Yes 20
35 Yes 10
25 Yes 20
40 Yes 20
30 No 20
‘The cost estimates reflect data collected in each of the respective countries during 1984. blncludes capital costs for mining, transport and processing facilities. Source: C. Johnson, Economic and Business investment Climates for Manganese Nodule Processing in Six Pacific Countries. prepared for the US Department of Commerce, Institutional Grant No. NA81AA-D-00070, 149 pp.
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Manganese nodule project economics Table 7. Estimated electricity cost for a large base-load consumer/
Source: C. Johnson, Economic and Business lovestment Climates for Manganese Nodule Processing in Six Pacific Countries, prepared for US Department of Commerce, Institutional Grant No NA81 AA-&00070, 149 pp.
and W.D. Coplin, Political Countries, a Euromoney Special Study, Euromoney Publications Limited, London, 1981. Risk
Constant 1984 US cents/kWh
Power plant type
Canada (Prince Rupert) Australia (Gladstone) Colombia (Solano) Ecuador (Manta) Hawaii (Hawaii) Philippines Fiji
2.2 2.7 3.3 3.8 5.5 6.2 6.6
Hydro Coal Hydro Hydro Geothermal Coal Coal
country which will have a detrimental impact on projected profits. Risk has become an increasingly important factor over the past 15 years, and commonly includes political risks, country economic risks and government attitudes towards foreign investments. Political risk can be defined as the ‘probability that political events and conditions will have an impact on international business operations and profits’. l5 We prefer the more narrow definition of political risk as ‘political instability which encompasses various combinations of significant change in regime or significant levels of politically inspired violence’. If’ Economic risk is defined here as the possibility that the government will move to impose restrictions on foreign operations in order to attempt to offset the poor economic performance of an economy. A common example is to impose strict foreign exchange controls to prevent the outflow of foreign exchange from a country. The last area of risk is the attitude of the government towards foreign investment. This risk area is usually best measured by the government’s past record in dealing with foreign investment. The above risk variables influence the required profit levels (IRR) of investments in a country, and, increasingly, whether investments will proceed at any profit level. As a broad generalization, investors will require effectively an IRR (on total funds invested) of an additional 2% to 5% in stable developing countries when compared with the IRR in stable developed countries. Table 8 lists the factors and adjustments that a foreign investor might apply to the minimum acceptable IRR for investments in seven Pacific countries. Perceptions of risk vary between companies; however, the adjustments shown in Table 8 appear typical. If investors make adjustments to their minimum IRRs as shown in Table 8, then Canada and Australia have a significantly higher comparative advantage as sites for processing plants. Assuming Hawaii and Fiji are representative of Pacific island sites, it is probable that nodule processing following the pyrometallurgical route will not occur on any of the smaller Pacific islands. Table 8. Possible adjustment in the minimum acceptable
=lf the minimum IRR for Australia is X% then the minimum for Colombia is X + 2. It is important to emphasize that all companies do not have the same risk assessments and minimum IRR profit level.
Adjustment in minimum lRRB 0
Australia Canada Hawaii
+2.0 to 2.5
3 to 5
to 1 .o
IRR for various sites.
Comments Very stable Very stable Local interest groups influence government, no experience with major minerals TNCs Among the most stable of Pacrfic island nations, some experience with major mineral TNCs Success in attracting major minerals investments in past decade; negotiations proceed slowly Variable, treatment of TNCs; recent policy shifts to attract TNC investments Future uncertainty and corruption cause many TNCs to wait and see
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Manganese nodule project economics
Lowering project risk Various studies have suggested that a high level of profitability is necessary to attract investment in nodule projects. In a study in 1979, Little stated, ‘Based on our experience and interviews with key mining executives, we are of the opinion that a DCF/ROI [IRR] of 30% (without inflation) is commensurate with the level of risk currently associated with the first ocean nodule projects’.” It is believed to be highly unlikely that market conditions and technology improvements occurring in this century will result in an expected IRR of 30% on total funds invested (in constant 1984 dollars). Therefore, unless the minimum acceptable IRR can be reduced substantially, there are no reasonable arguments for the private sector to spend substantial funds in further nodule development research. The following three avenues of investigation appear warranted because they have the potential to reduce substantially nodule project risk. Technological
As previously shown in Table 2, only about 20% of the total capital investment is in the high-risk seabed mining, and only 16% of operating costs are directly related to mining nodules. The majority of investment is associated with relatively low-risk shipping and nodule processing. Minerals processing investments are usually based on IRRs of 12% to 15% (in constant dollar terms) on total funds invested. However, because the operation of nodule processing facilities is assumed to be totally dependent on the high-risk nodule mining portion of the project, it follows that if mining fails then the processing plant will fail. Consequently, a high IRR is required for the total project. However, it may be possible to separate the high-risk mining portion from the lower-risk processing portion by one of the following options. 0
17Little, op cif, Ref 1,
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Design the processing plant so that at modest incremental investment the plant can be converted to process land-based nickel laterite ores. Design the processing plant so that it can operate on blended nodule and laterite ores or on either nodule or laterite ores. Convert an existing facility for land-based laterite nickel ore to accept nodules.
If the processing plant is capable of processing land-based ores or can be converted to accept land-based laterite ores, than the plant economics are no longer totally dependent on the success of the high-risk seabed mining portion of the project. The processing plant then faces overall risks closer to a plant processing land-based ores. Therefore, the required IRR for the processing portion of the investment could be decreased to say about 15% from the 25% to 30% range indicated in other studies. The weighted average required IRR of 30% in mining and 15% in processing is in the 15% to 20% range, which is within the range of possibility in this century. The options described above need more investigation before their merits can be fully evaluated. A convertible plant would probably need to be located in the tropics near a site in proximity to both nickel laterite deposits and low-cost electricity. Australia, Colombia and Indonesia might meet such requirements, whereas Fiji and Hawaii would not, With respect to the possibility of converting existing facilities, the
Munganese nodule project economics
presently mothballed Exmibal nickel laterite processing facility in Guatemala might eventually be considered. A fourth option to reducing risk is for governments to support further mining technology development to reduce the uncertainty associated with the first commercial operation. To date, no government has indicated a willingness to invest several hundred million dollars in further technology development and testing. Market risk Another area that could lower the required IRR for an ocean mining venture is to reduce the risk associated with the market price of the metal products. For strategic reasons, governments might consider the establishment of metal price floors for the strategic metals cobalt and manganese, which account for roughly 60% of a project’s revenues. Such action would substantially reduce the perceived marketing risk for a nodule project and increase the chances of private financing. A particular problem is the relatively small cobalt market which has demonstrated extreme price volatility during the past decade. It is noted that the trend in recent years among the major industrial nations has been away from subsidies (such as price floors) for the minerals industry. An alternative approach to the issue of market risk would be for governments to give preferential access to home markets. Such action is most likely if production is from within an industrial country’s own 200 nautical mile Exclusive Economic Zone (EEZ). Regulatory risk At present, the legal environment for ocean mining is not conducive to inspiring confidence in private investors and lenders who require a known regime of laws and regulations to assess the viability of a project. Mining can occur in either international waters or in the EEZs of specific countries and the location will dictate which set of laws will regulate the enterprise. The regulatory framework that applies to mining enterprises operating under the Law of the Sea Treaty has yet to be fully developed and tested. At a national level, no country has fully formulated specific legislation regarding exploration and development of mining projects within their EEZs. Until the legal environment is better defined, it is doubtful that private loans from commercial banks can be raised to develop a nodule mining project regardless of apparent project economics. If major nodule or crust deposits are proved within the 200 nautical mile EEZ of stable Pacific nations, such as the USA, these deposits may become commercially viable before deep seabed nodule deposits that fall under the jurisdiction of the Law of the Sea Treaty. There are a number of reasons for this, including: (1) the perceived risks are less for investing under better known national legislative regimes than under the untested Law of the Sea Treaty; and (2) governments are likely to provide some form of assistance (subsidy) for investments within their own EEZs. The net result is that both the perceived risk and required IRR are probably lower for investments within the EEZs of stable Pacific nations than under the Law of the Sea Treaty.
Nodule versus nickel laterite deposits Nickel
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Manganese Table 9. Cost comparison of nodules nickel laterites (constant 1984 US$).
Cost to produce $100 in contained metals Ore type
Operating cost 6)
Nickel lateritea Nodules
aRecoverable metal percentages (nickel laterite: 2.3% Ni, 0.08% Co; nodules 1.28% Ni, 0.18% Co, 1.1% Cu and 21.6% Mn). Source: J. Black, The Recovery of Medals from Deepsea Manganese Nodules and the Effects on the World Cobal and Manganese Markets, Masdissertation, unpublished doctoral sachusetts Institute of Technology, MA, USA, 297 pp.
competitive position of nodules with land-based deposits. As lower-cost nickel sulphide deposits are depleted, there has been a shift toward development of the more energy-intensive nickel laterite deposits. Given the price, cost and recovery assumptions listed in Table 1, nodules appear to have a distinct comparative advantage over laterites. On a per ton dry ore basis, nodules will cost substantially more to mine than land-based nickel laterites but about the same to process. The advantage lies in the fact that the value of recoverable metals per tonne of nodules is roughly 50% greater than that for a tonne of typical laterite ore. As shown in Table 9, it costs about $55 to mine and produce $100 of recoverable metal from nodules compared to about $75 for $100 of recoverable metals from a nickel laterite ore. The reason why industry has not shifted from mining nickel laterites to nodules is because of the much higher perceived risks associated with nodule mining. the
Nodule versus crust deposits Extensive nodule deposits have long been known to exist on the ocean floor at depths of 4 000 to 5 000 m. Typically, nodules are potatoshaped 3 to 6 cm in diameter, and have average metal grades of approximately 0.75% nickel, 0.5% copper, 0.25% cobalt, and 20% percent manganese. The richest deposits discovered to date are in the Clarion-Clipperton zone between Hawaii and California (as shown in Figure 1). Nodules in this area average over 1% nickel, 1% copper, 0.25% cobalt and 25% manganese. In contrast, extensive deposits of cobalt-rich crusts were not reported until the early 1980s by Halbach. ‘s Crusts are found on most marine rock surfaces, and can reach several centimetres in thickness on older solid seamount surfaces. The highest grade deposits are located at 80&2 400 m depth in the Central and Western Pacific as shown in Figure 1. Cobalt in crusts is much higher in metal grade at about 0.75%) manganese is similar to nodules, and nickel and copper are substantially less at about 0.5% and under 0.1% respectively. As previously stated, interest in nodule exploration has almost come to a standstill; however a moderate level of government-sponsored exploration for crust is taking place in the Pacific. Some private industry groups are now taking a closer look at crusts, but no significant private sector exploration has taken place to date. The present interest in crusts over nodules is the result of a combination of factors, as follows.
lsP. Halbach, F.T. Manheim and P. Otten, ‘Cobalt-rich ferromanganese deposits on the marginal seamount regions of the central Pacific basin - results of Midpac ‘81’, Erzmefall, Vol 35, No 9, 1982, pp 447-453.
POLICY March 1986
The richest-known nodule deposits are on the seabed outside the 200 nautical mile EEZ of individual nations, and nodule mining appears more likely to occur under the Law of the Sea Treaty. In contrast, the richest known crust deposits occur within the 200 nautical mile EEZ of individual nations, and therefore can be explored and developed under the legal jurisdiction of individual nations. The perceived regulatory risks to investors are lower within the 200 nautical mile EEZ of stable countries than under the Law of the Sea Treaty. Crust deposits contain a higher total value of metals (particularly cobalt) per tonne than nodules, and also a much higher value per m*. In addition, rich crust deposits are located at about a third the depth of rich nodule deposits. Offsetting the advantages mentioned
Cobalt-rich manganese crust areas
Clarion-Clipperton manganese nodule
Figure 1. Permissive
in the Pacific
Source: C.J. Johnson, A.L. Clark and J.M. Otto, ‘Pacific Ocean minerals: the next twenty years’, Journal of Business University of British Columbia, 1985 (in press).
above is the fact that most crusts are firmly attached to barren rock surfaces, and extracting crusts present formidable technical problems yet to be resolved. Development of crusts might directly benefit Pacific island nations that have deposits within their 200 nautical mile EEZs. Benefits will not be from processing (which is not likely to occur in the Pacific islands) but from taxes and royalties on mining operations. Such tax and royalty revenue could be substantial relative to the size of some Pacific island economies. Present interest in crusts appears to be largely driven by the willingness of industrial governments to support crust research. Governments view crusts as a strategic resource that may fall under their jurisdictional control. Therefore, they are more willing to support crust research, particularly the USA which has large crust resources in the Pacific. To date, there has been insufficient research to provide a basis for an analysis of the possible profitability of crust mining. Indeed, the mining technology has yet to be developed. Our guess is that direct mining costs will be substantially higher than for nodules but that processing costs
POLICY March 1986
Manganese nodule project economics
will be roughly the same. Higher costs may be offset by: (1) the lower risk associated with mining within a nation’s 200 nautical mile EEZ; (2) the higher likelihood of some form of government subsidy for crust mining; and (3) the higher value of crusts per tonne. In addition, new crust deposits are being discovered each year, and there is a high probability that the richest, best deposits are yet to be discovered. Based on the limited data available, a possible mine site will have characteristics similar to those shown in Table 10.
Conclusions Most industry analysts agree that prospects are quite limited for commercial nodule and crust mining during this century. However, as discussed in this paper, there are a number of factors that can improve the commercial prospects for nodules and crusts. The analyses in this paper led to the following conclusions pertaining to the future commercial outlook for nodules and crusts:
There is little chance during this century that metal prices will rise in constant dollars to levels that would permit private consortia to achieve their stated profit criteria of a constant dollar IRR of about 30%. There are no known technological breakthroughs that might dramatically improve the economics of nodule projects while, at the the economics of land-based nickel same time, not improve laterites. Our simplified model indicates an IRR in constant dollars of 13.8% for a base case and 14.6% for the case where the processing plant is located at Prince Rupert, Canada. These profit rates are not significantly different from those that are achievable with lower-risk land-based nickel laterite mines and smelters. These profit levels are substantially above those estimated in more detailed studies by Little and others. The profit levels above would be reduced by 0.5% to 3% if nodule mining takes place under the Law of the Sea Treaty. It is essential to lower the required profit level of 30% (IRR) to 15% to 20% before it will be realistic to consider the possibility of commercial nodule or crust developments by the private sector in this century. As described in this paper, selected options may reduce the risks associated with the land-based processing plant that account for about SO% of the capital investment and 75% of operating costs. This may be achieved by building a processing plant
Table 10. Crust mine site parameters
Source: C.J. Johnson, A.L. Clark, J.M. Otto, D.K. Pak, K.T.M. Johnson and C.L. Morgan, ‘Resource assessment of cobalt-rich ferromanganese crusts in the Hawaiian archipelago’, prepared for the US Department of Interior, Minerals Management Service, 200 pp.
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Mean crust thickness (cm) Crust grade Co (percentage) Ni (percentage) Mn (percentage) Pt (g/t) Crust area (km’) (individual areas) Seamount slope (degrees) Crust coverage (percentage) Substrate type Depth (m) Crust recovery (percentage) Production (dry tonnes/year)
of possible commercial interest in the Pacific. Possible range in mine site parameters
Hypothetical mine site parameters
3.G5.0 0.881.1 0.440.7 20-28 0.2208
4.0 09 0.5 22.5 0.4
lo-30+ 5-20 60-90 Basalt and hyaloelastics 800-Z 400 50-75 750 ooo- 1 500 000
20 10 80 Basalt and hyaloclastics 800-Z 000 70 1 000 000
nodule project economics
that can process either nodules or land-based nickel laterite or can be converted at modest cost to process nickel laterites. If such processing options are possible then the processing plant might have risk levels closer to other metal processing plants or about 15% in constant dollars. The combination of a high-risk mining portion of the project requiring an IRR of 30% and a lower-risk processing portion requiring 15% would produce an overall project IRR in the 15% to 20% range. The conclusion is that nodule projects are presently uneconomic but could become economic during this century assuming the overall required profit levels can be reduced to an IRR of 15% to 20%. Crusts are currently receiving most research interest because major deposits fall within the 200 nautical mile EEZ of numerous Pacific nations, they contain about three times as much strategic cobalt as nodules, and governments are willing to support such research. Their location at one-third the depth of nodules may provide some mining advantages. However, this is probably more than offset by the problems of extracting crusts from their hard rock seamount surfaces. The best deposits of crusts from a mining perspective are yet to be discovered, and crusts are likely to continue to attract government research support. The conclusion is that a commercial development of crusts might occur before commercial mining of nodules. Because of the limited size of the cobalt market the first commercial crust-mining operation will probably prevent other entrants to crust mining for many years. It is possible that important deposits of nodules also occur within the 200 nautical mile EEZ of some countries and perhaps at relatively shallow depths. The expected lower nodule concentrations and metal grades may be offset by the perceived lower-risk legal regimes, and possible government subsidies for developments within their EEZs. Governments and companies interested in profitable investments during the next 15 years are unlikely to invest in nodule or crust research. However, the longer-term commercial prospects for nodules and crusts in the Pacific are sufficiently encouraging, particularly to some island nations of the Pacific, to justify the establishment of policies appropriate to efficient exploration and research.
For the larger metal-consuming nations such as Japan, FR Germany and the USA, substantial financial support to assist island nations in evaluating the mineral resource potential within their EEZs enhances the long-term prospects of diversified sources of metal supplies to consuming nations while increasing the economic development opportunities for those Pacific nations that prove to have the richest nodule and crust resources.
POLICY March 1986