Exploration Risk

It is commonly said that mineral exploration is a risky business, but what does that really mean? Although exploration can be financially rewarding, there is a high probability that a single venture will be a failure. Risk is defined as chance of failure or loss and its adverse consequence (i.e., failure or loss). Risk differs from uncertainty in that uncertainty simply means lack of knowledge of the outcome or result, whereas risk involves a loss. Thus, one could be uncertain of an outcome, but not necessarily be at risk of losing something. In risk analysis, two quantities are estimated: the magnitude (severity) of the possible adverse consequence(s), and the likelihood (probability) of occurrence of each consequence. Procedures of risk analysis are well established, if not simple, and are applied in both business and engineering (Aven, 2003; Bárdossy and Fodor, 2004; Davis and Samis, 2006). Mineral exploration is an economic activity involving risk and uncertainty, so risk also must be defined in an economic context in which the extent of the loss is defined. Successful mineral exploration strategy requires identification of some of the risk sources and consideration of them in the decision-making process so that controllable risk can be reduced. It is not uncommon to see recommendations that exploration firms should accept all projects with positive expected monetary values—that is, projects that have a positive economic value after being multiplied by the probability of deposit discovery and subtraction of exploration costs. Clearly, this strategy would be unwise for a firm with limited resources if the chance of failure were significant. Both expected monetary values and the probabilities of various outcomes such as economic failure should be considered in the decision-making process. Because economic return, when measured by net present value, is closely related to the size of mineral deposits, and because deposit sizes can be represented by highly skewed frequency distributions, achieving expected monetary or higher values tends to be a low-probability outcome. This and the typical rareness of mineral deposits are the fundamental reasons for the high risk in mineral exploration.