Will Blockchain Disrupt the Mining Industry?
There has been a lot of discussion recently about the impacts of blockchain technology and disruption of the mining industry. Blockchain gives us the ability to create secure, traceable, derivative products that have a claim on a physical commodity and has been popular with goldbugs, with Goldmoney and RMG notable examples. Also hugely popular are non-blockchain but ultimately similar ETF’s, which though not generally redeemable for physical commodities, have similar payoffs and claim to have the same physical gold backing. The ‘tokenisation’ of above surface gold has led to widespread speculation of the possibility of tokenising subsurface gold. Barrick Gold Corp CIO Michelle Ash recently went as far as to speculate that subsurface gold could be tokenised and remain underground, effectively using the earth as a vault. This raises some interesting issues and possibly large implications for exploration and mining. One of the key questions is likely to be that if an ounce of gold never gets mined, is it really worth as much as an ounce at surface which as well as having utility as a store of value, has utility as jewellery, electronics etc? Tokenised subsurface gold may have further political risk to consider from the prospect of a nation nationalising or annulling a subsurface right. To some the appeal of gold bullion is the ability to hide it in a vault safe from expropriation by governments or as an insurance against Armageddon type scenarios, would they really see tokenised subsurface gold in the same way regardless of the application of blockchain? Given the differences, what will be the divergence in price for surface vs subsurface gold?
Vaulting Gold in the Subsurface
If we are not going to mine the gold why bother exploring and finding it, why not just estimate the extent of undiscovered gold on a national or global level and tokenise that, putting to bed forever the gold exploration industry? Would it lead to an implosion of gold price as oceans of gold are dumped onto the market at once? It would be a fascinating exercise for a nation where subsurface gold is owned nationally, to try and put an accurate figure of undiscovered gold for the purpose of creating tokens and even more fascinating to see individual landowners or households attempt similar exercises in a country where mineral rights are private! Interesting arguments would arise from whether the below surface gold would still have to adhere to conceptual cut off grades, depths of mining, metallurgical recoveries etc. or could the few ppb of gold present in a run of the mill granite be tokenised despite the fact is could never feasibly be mined profitably? Could there be a conceptual gold rush on the earth’s mantle and core even!? Who will draw the lines and where will they be drawn? The plethora of questions that arise are likely to keep mining, legal and political professionals occupied for some time should we head down that route.
Financing Exploration and Mine Development Through Tokenisation
If we are to tokenise gold or other commodities on the understanding that it will be mined then inevitably we will have to grapple with the respective values in the ground in terms of cost of mining, metallurgy, political risk, price uncertainty etc. In which case, the token starts to look a lot like a conventional gold exploration equity, particularly if in the future we can begin to remove exploration company agency/management risk through Artificial Intelligence (AI). In fact, it looks even more like certain crowdfunding schemes that promise the final product of a business venture in return for investing. As we improve technologically perhaps we will be able to know what is underground; what it will cost to get it out, the magnitude of risks etc, with near absolute certainty. In this future, I could indeed envisage exploration companies selling some sort of derivative product to finance their operations, blockchain related or not, possibly reversing the cash flow of the industry by effectively pre-selling the commodity. After all it is commonplace for companies developing mines to enter into derivative contracts (forward contracts), as part of a hedging strategy so it is a small leap to use derivatives as a fund-raising tool. If exploration companies could know their future production with relative certainty they could either access debt or raise money through writing call options or perhaps issuing a blockchain related derivative that promises delivery. As it stands today when an exploration company issues equity it is conceptually very similar to writing a call option on the underlying commodity, but an option that encompasses not only price uncertainty but resource/technical uncertainty (see my previous series of blogs on Exploration Risks and Decisions), one key difference being the added benefit of voting rights. Should AI advance to the level that it can be deployed to optimise exploration management then the difference of a share with voting rights and an option without becomes meaningless. In fact, if we envisage a future where we can have certainty on the subsurface and where the strategy and operation of companies is optimised by AI. Then the distinction between exploration company equity; derivative product issued by a mining company, conventional traded derivative product, blockchain derivative, or even crowd funding structures that pay back the final product, starts to look less important.
These questions and arguments point to the fact that interesting as it is, blockchain isn’t the main key to tokenising subsurface gold. This isn’t particularly surprising given that similar non-blockchain related derivative products have existed for some time without gaining widespread use to finance exploration or monetise subsurface commodities. The reality of tokenising subsurface minerals is more prosaic and largely relates to creating an international regulatory and legal framework, which can be a painfully slow and difficult process. Furthermore, if we are not to rely on estimates of undiscovered gold, though there is a strong argument that may be the more sensible path, then our exploration technologies need to improve by an order of magnitude so that we are able on a deposit scale to estimate subsurface gold reserves (and perhaps all the other conceptual mining factors) to a comparable degree of accuracy to that which we can estimate gold in a vault. We would also need similar advances in quantifying, if not eliminating, political, agency and management risk, an area where AI shows some promise.
The new wave of Blockchain products may yet cause considerable disruption by providing yet another way to invest in commodities such as gold, pulling money away from exploration and mining companies. It does seem to me though that conceptually we have already assimilated the same thing: after all we have moved from gold coins as a store of value, to gold backed currency, to fiat currency, to gold derivatives (the notional amount of which vastly outweighs the gold in existence) and carried on gold mining regardless. In other words, we have long since passed the point where humans could have decided we do not need to mine more gold, at least for bullion purposes, but decided that at least some of the time we prefer to hold the shiny metal in our hands.