How a crash in metals prices has made 2016 a great year to build a mine

Posted by: privatefinancetips in BLOG, Finance News Mar 27, 2016

Earlier this month, Stornoway Diamond Corp. said something that would have been unimaginable a few years ago – its mine has been built in front of schedule and under budget.

“You can imagine we’re sticking our necks out by stating that, so we need to be pretty confident it’s the case,” Stornoway chief executive Matt Manson said within an interview. “And we are.”

The Montreal-based firm, that is building Quebec’s first diamond mine, moved the conclusion date up by five months to the end of 2016. It also slashed the development cost estimate by a lot more than $35 million to $775.4 million.

During the commodity boom, capital cost blowouts became so routine in the mining industry that they was a running joke. Analysts and investors just assumed costs could be much higher compared to companies’ projections, and they were usually right. One extreme example was Barrick Gold Corp.’s Pascua-Lama mine, that was budgeted just US$1.5 billion in 2004. Barrick spent more than US$5 billion before halting the unfinished project in 2013. If Pascua-Lama ever gets completed, the best cost could exceed US$10 billion.

We’ve had the opportunity to purchase things when we needed them and they’ve been available when we’ve needed them

However, the construction environment is different dramatically due to the crash in metal prices. Skilled labour is much more available, devices are cheaper and gets delivered faster, and the prices for other inputs like steel and pumps have plummeted.

Put simply, 2016 is a superb year to become creating a mine. Together with Stornoway, other companies have announced capital cost reductions this month. Pretium Resources Inc. slashed the estimated cost of its Brucejack project by 14 per cent, to US$640.8 million. First Quantum Minerals Ltd. cut the price of its Cobre Panama project to US$5.5 billion, down 15 per cent from the original projection.

Of course, not many information mill actually benefiting from this opportunity. Stornoway’s Renard project is among a little number of major mining projects under construction across Canada. Miners often say that they would like to build mines in down cycles and mine them in up cycles, but more often than not, the alternative holds true. They tend to build mines when they can finance them, which is during boom times. With so many mines being built at the same time, the prices for labour and other inputs skyrocket and projects run way over budget.

Manson asserted whenever Stornoway buys something today, may it be trucks or pumps or valves, the company has the capacity to get what it needs very quickly from the most effective supplier at its budgeted price. Which has helped the organization stand above its construction schedule.

“When there’s a more competitive construction environment, you might find the very best guy in the industry is employed by Goldcorp for the next six months,” he explained.

“So you go to the next guy, who’ll set you back a bit more and can ‘t be quite exactly the same quality. So you end up being behind schedule and over budget.”

The most overt example of the way the environment is different might come from heavy equipment provider Caterpillar Inc.

Only not too long ago, mining was Caterpillar’s most profitable and busiest business segment. When miners ordered equipment, they could expect to wait 1 . 5 years or more for this to reach, pay money upfront, and have zero ability to negotiate the terms of the sale. There are even rumours of trucks being delivered without any tires on them.

Today, mining is Caterpillar’s worst performing segment – its resources business actually lost money in the fourth quarter of 2015. Miners ordering equipment in the company can expect to receive it inside a couple weeks, and can get bonuses for example maintenance contracts added too.

Stornoway was fortunate for the reason that it received financing for the Renard mine in the spring of 2014. By that point, the commodity boom was over and it was simple to procure materials from Caterpillar along with other suppliers.

“We’ve been able to purchase things whenever we needed them and they have been available when we’ve needed them,” Manson said.

While mining services and equipment are far more affordable compared to what they used to be, that doesn’t mean that everything is cheaper for mining companies today.

Randall Oliphant, executive chairman of New Gold Inc., noted that miners are also affected by the amount of non-mining industrial activity going on. So, for example, if your large amount of government-backed infrastructure has been developed near a mine, that may tighten the market for local labour along with other inputs. New Gold is building a mine in Northern Ontario and it has seen some of this first-hand.

“In Ontario, certain aspects of mine construction continue to be competitive,” Oliphant said. “The same guy can pour a concrete foundation for a mine, or an office within Toronto.”

Financial Post

pkoven@nationalpost.com

Twitter.com/peterkoven