Asteroid Mining: More Problems

Includes: GDX, GLD, PALL, PPLT
by: Stocks & Shares

A prior article outlined broad problems facing the NEA (near-earth asteroid) mining business concept in order to balance the media attention afforded to Planetary Resources, an NEA venture in the limelight. Pitches from scientists and NEA ventures imply that payloads of platinum-group metals brought to earth would dramatically shock the precious metals markets. On the contrary, there are a myriad of reasons why this space "gold rush" will not have a significant impact on the economics of mining in the near future.

This article will question the validity of NEA mining's key assumption that we know the composition of NEAs, which represent a more plentiful supply of platinum group metals than prospects that can be found on earth. This misconception is based on extrapolation and dubious assumptions, rather than empirical evidence. In truth, we do not know enough about these bodies to say that several would make excellent mining prospects.

There are many issues with current NEA mining projections:

Misconception No. 1: We know how big the NEAs are.

We do not know this, which can plainly be seen in a list of NEAs compiled by NASA that shows diameter ranges as wide as a factor of five. Such a high error in length would lead to a 125-fold margin of error between minimum and maximum NEA estimates. This error could be even greater since many of these bodies deviate from spherical shapes.

I am not criticizing NASA or scientists. The task of finding a small, dark rock in space by the dim light it reflects from the sun is not easy. Astronomers are earnestly working to improve our knowledge of the solar system. In fact, I am confident that scientists and possibly new ventures will find new NEAs and improve our estimates.

However, current errors in NEA size should dissuade investors from all-or-nothing rocket-launched mining ventures. Moreover, this ambiguity and the limits of our knowledge should be highlighted by pitchmen instead of being downplayed or ignored in presentations to investors and other broad audiences.

To reiterate, our NEA neighbors are in a poorly lit neighborhood and we do not have an accurate map.

Misconception No. 2: We know what NEAs are made of.

No, we don't. We only guess by inferring what they are made of from mineral compositions of meteorites that have been collected on the Earth's surface.

NEA mining has been the subject of scientific interest and gross estimation for decades. Jeffrey Kargel of the U.S. Geological Survey published estimates for recovery of platinum group metals from NEAs in 1994.

Somehow, we made the dubious leap from the empirically determined compositions of collected meteorites to asteroid abundances. This sample could easily suffer selection bias from two sources: Our methods of meteorite collection and meteorite survivor bias. Many researchers hunt and find meteorites on Earth by using metal detectors to scan for suspicious rocks. This search method is biased toward collecting higher metal containing meteorites. Worse yet, we assume that the meteorites on Earth are representative of the compositions of NEAs. Wouldn't tougher minerals be more likely to survive entry and impact on the Earth's surface as substantial fragments? Fluffier NEAs with lower metal composition may have pelted the earth more than we suspect, but they won't leave as many rock-sized meteorites. The absence of evidence is not the evidence of absence.

Misconception No. 3: We know the distributions of NEA mineral composition, and we can easily determine which asteroids would make the richest mining prospects before launch.

Presentations about asteroid mining often venture into the absurd by stating that we would only mine the best prospects, and that we could somehow pick the best 10% of asteroids that would have compositions corresponding to the top 10% of meteorite compositions. Pitchmen for this concept then use the compositions of the richest meteorites to justify economic assumptions.

This selection process would be actionable if, one, the distribution of collected asteroid compositions is similar to distribution of NEA mineral compositions and, two, we could know the mineral composition of an NEA in its entirety.

We have not catalogued the mineral composition of NEAs. Assuming that the top 10% of NEAs are as mineral-rich as 10% of collected meteorites is as faulty an assumption as me finding a $20 bill on a slab of sidewalk and then extrapolating that there must be a sidewalk where every square has a $20 bill. There is no evidence to confirm that we know how to model the distribution of these minerals in NEAs.

Even if such a distribution became apparent through expensive surveying, there might not be a way of proving an asteroid before landing equipment. To make an appropriate analogy, lottery tickets should not be purchased because the top 10% of lottery tickets with the most winning numbers have compelling payouts. Unless we have a way of knowing the top numbers before the lottery, such talk is nonsense.

Today on Earth, miners often dig exploratory holes only to find that the composition is not sufficiently rich in precious metals to economically justify a mine. Miners have the benefit of geological data that is not available for tiny asteroids, most of which are little more than dim lights observed by telescope. Even with clues from surface rocks, information from nearby exploratory mines, and knowledge of the regional terrain and the geological implications they have on a prospect, many exploratory mines fail to prove the value of a site.

Proving an NEA mine would likely prove more treacherous since most of the mining budget would be spent to send the mining or testing equipment to the NEA. Exploratory mining would be far more expensive in space than on Earth, and the commitment to mining a site is less flexible.

Astronomical Optimism

Clearly, NEA mining ventures are not based on sound fundamentals. Retail investors who are interested in playing the limited supply of noble metals or platinum group metals should instead consider mining companies or holding the physical commodity. Exposure to platinum group metals can be obtained through shares of ETFS Physical Palladium Shares (NYSEARCA:PALL) or through the purchase of ETFS Physical Platinum Shares (NYSEARCA:PPLT). These are holdings physical, refined, actual metals, and should not be confused with hypothetical, unrefined space dreams.

The gold market will also not be effected. A portfolio of actual gold mining companies with operations, production, and reported earnings can created by buying shares of Market Vectors Gold Miners ETF (NYSEARCA:GDX). Each of these ETFs has an expense ratio under 1%. Fund expenses can be avoided through direct investment in attractively valued gold miners, which was discussed in a prior article. Investors can buy shares in SPDR Gold Shares (NYSEARCA:GLD) to play any appreciation in physical gold as a precious metal play.

Additional writing will explore the value of different NEAs using NASA-size estimates. This additional work will serve to further kick the tires of existing estimates.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Please read the article disclaimer here.