Why 2016 is a GREAT year to BUILD a mine
Projects being built faster, for less money
Earlier this month, Stornoway Diamond Corp. said something that would have been unimaginable a few years ago — its mine is being built ahead of schedule and under budget.
“You can imagine we’re sticking our necks out by saying that, so we have to be pretty confident it’s the case,” Stornoway chief executive Matt Manson said in an interview. “And we are.”
The Montreal- based firm, which is building Quebec’s first diamond mine, moved the completion date up by five months to the end of 2016. It also slashed the construction cost estimate by more than $ 35 million to $775.4 million.
During the commodity boom, capital cost blowouts became so routine in the mining industry that they became a running joke. Analysts and investors just assumed costs would be much higher than the companies’ projections, and they were usually right.
One extreme example was Barrick Gold Corp.’ s Pascua- Lama mine, which was budgeted at just US$ 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 ultimate cost could exceed US$10 billion.
However, the construction environment has changed dramatically because of the crash in metal prices. Skilled labour is far more available, equipment is cheaper and gets delivered faster, and the prices for other inputs like steel and pumps have plummeted.
Put simply, 2016 is a great year to be building a mine. Along with Stornoway, other companies have announced capital cost reductions this month. Pretium Resources Inc. slashed the estimated cost of its Brucejack project by 14 per cent, to US$ 640.8 million. First Quantum Minerals Ltd. cut the cost of its Cobre Panama project to US$ 5.5 billion, down 15 per cent from its original projection.
Of course, not many companies are actually taking advantage of this opportunity. Stornoway’s Renard project is one of a small handful of major mining projects under construction across Canada. Miners often say that they want to build mines in down cycles and mine them in up cycles, but more often than not, the opposite is true. They tend to build mines when they can finance them, which is during boom times. With so many mines being built at once, the prices for labour and other inputs skyrocket and projects run way over budget.
Manson said that whenever Stornoway buys something today, whether it be trucks or pumps or valves, the company is able to get what it needs very quickly from the best possible supplier at its budgeted price. That has helped the company stay ahead of its construction schedule.
“When t here’s a more competitive construction environment, you might find the best guy in the business is working for Goldcorp for the next six months,” he said.
“So you go to the next guy, who will cost you a little bit more and might not be quite the same quality. So you end up being behind schedule and over budget.”
The most overt example of how the environment has changed might come from heavy equipment provider Caterpillar Inc.
Only a few years ago, mining was Caterpillar’s most profitable and busiest business segment. When miners ordered equipment, they could expect to wait 18 months or more for it to arrive, 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 from the company can expect to receive it within a few weeks, and might get bonuses such as maintenance contracts thrown in.
Stornoway was fortunate in that it received financing for the Renard mine in the spring of 2014. By that point, the commodity boom was over and it was easy to procure materials from Caterpillar and other suppliers.
“We’ve been able to buy things when we needed them and they’ve been available when we’ve needed them,” Manson said.
While mining services and equipment are far more affordable than 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 a lot of government- backed infrastructure is being developed near a mine, that can tighten the market for local labour and other inputs. New Gold is building a mine in Northern Ontario and has seen some of this first-hand.
“In Ontario, certain elements of mine construction are still competitive,” Oliphant said. “The same guy can pour a concrete foundation for a mine, or for an office building here in Toronto.”
WE’VE BEEN ABLE TO BUY THINGS WHEN WE NEEDED THEM.