E&MJ’s Annual Survey of Global Mining Investment

This year’s survey confirms that the economic engine driving mining investment is running out of fuel

By Magnus Ericsson and Viktoriya Larsson, Raw Materials Group

The mining boom is over. During 2008, only 158 new mining investment projects with a projected total cost of $81 billion were registered in Raw Materials Group’s Raw Materials Data Metals (RMD Metals) Mines/Projects database. Admittedly this figure is 40 % higher than the $58 billion registered in 2007, but when compared with the increases noted during the preceding years it is relatively moderate. The trends are clear: The boom in mining projects peaked in 2006 with 200 new projects, but projects are getting larger and more expensive—up from an average capital cost of $190 million in 2006 to $512 million in 2008.

The project fall-off accelerated during the second part of 2008 as metal prices imploded. During the first six months of 2008, 101 new projects were registered at a total cost of $50 billion, but in the third quarter the figure dropped to 34 projects and $17 billion and slumped even further in the last quarter to 23 projects at a total cost of only $14 billion. However, the situation is still far from the most recent low point: The $11 billion and 65 projects recorded for the entire year 2002.

$409 Billion in the Project Pipeline

Total investment in the industry’s project pipeline, as recorded in the RMD Metals database, was $409 billion by the end of 2008—an increase of one-third compared with the equivalent figure compiled for 2007. However, absolute figures at each year end are not directly comparable, as it is difficult to ensure that every possible project is included, which is never possible. Variations in survey coverage of projects influence the size of the project pipeline: for example, an indicated decline in the number of projects could result from a decrease in survey coverage of the very smallest projects. And it is sometimes difficult to determine when a marginal project is to be considered abandoned and should be taken off the list. RMG removes projects from which there is no news within 8 years of first mention. It should also be noted that some projects are never publicly disclosed and thus do not appear in the RMG database. In spite of these uncertainties, we are convinced that the growth rate for new projects has finally halted and will begin to decline.

As cost estimates of projects are updated during the year, the trend of escalating project costs noted earlier continues However, we note that many projects are being expanded when moving from the feasibility to the construction phase and thus all cost increases can not be attributed solely to increasing unit costs. During 2008, the cost increases recorded in “old” projects—those registered before 2008—declined but still total about $40 billion compared with the total pipeline of projects in 2007 308 billion USD[RC1] . This is mainly due to the discovery and development of more complex orebodies, often in remote locations, that may also be deeper lying with lower ore grades, as well as to increased costs for equipment, labor and materials. Problems caused by the earlier lack of experienced staff have been quickly reduced during 2008. [RC2] Long lead times for certain equipment items have quickly shrunk.

Our previous conclusion that metal prices will be underpinned by a rising long term investment cost level still holds, in RMG's analysis but the level of these long term prices has dropped. [RC3] However, RMG does not expect metal prices to drop to the levels experienced during the previous market slump.

More projects were completed during 2008 than in previous years, representing a total figure of $20 billion in capital investment. Presently, projects valued at a total of $37 billion are in the construction phase, up from $31 billion in 2007 and representing an increase of slightly under 20%, which is still less than last year’s equivalent figure.

This year’s survey shows current investment in brownfield projects to be $102 billion, a figure that is consistent with previous years, representing 25% of the total pipeline in relative terms. However, it is difficult to accurately monitor the progress of brownfield projects from project studies to construction because they are often carried out internally and quickly, without public disclosure. Thus, our total investment figure for projects under construction is undoubtedly an underestimate, particularly for this project category.

Typically, a project takes at least a year—usually even longer—to develop, depending on its size, location, existing infrastructure, availability of financing and many other factors. The volume of projects in early stages prior to a feasibility study, has grown, indicating that there is still a steady flow of new projects into the pipeline but also that it is difficult to take projects beyond those initial phases. RMG's earlier prediction that there will be a continued growth in projects under construction during 2008 was correct. In 2009 we anticipate a steep drop in project pipeline numbers if not an actual decline.

All of this year’s survey statistics are based on projects with an announced investment estimate. The RMD Metals database also includes approximately 2,000 projects—mostly in the conceptual stage—for which no investment figure has been announced. The investment total for all mining projects, including projects for which no investment estimate has been published, is thus much higher than our 2008 year-end estimate of $409 billion. It is, however, difficult to estimate just how much higher it should be; the total would likely be double the 2008 figure if it were assumed that projects without published investment estimates have a similar cost structure to those projects whose costs are known. It could, however, also be argued that unannounced-project costs are lower, as most mega projects are conducted by public companies that must publicly disclose all significant expenditures. If this is indeed the case, the total figure would thus be less than double the recorded-cost total of $409 billion. Projects involving metals not covered in this survey but included in the RMD database also represent a specific investment total but one that is estimated at a much lower level than the major metals represented in the survey.

Most of the early stage projects included in the $409 billion figure will never, or at least not during the next couple of years with low metal prices, pass from the conceptual study phase to the construction stage for a number of reasons, including insufficient profitability, inadequate ore reserves, failure to secure financing, technological problems or excessive political risk.

Top Four Metals Grab 82% of the Money

Copper, iron ore, gold, and nickel, in that order, are the most important investment targets for mining companies. These metals account for 82 % of [RC4] the total project pipeline. They also dominate the mining business in terms of the total value of its output, together they are valued at billion USD [RC5] or some 63 % of the total value of all non-fuel minerals production during 2007.

Iron ore has been under-represented in the project pipeline for many years, but since 2004 continued high demand for iron ore and healthy increases in prices paid have made iron ore one of the hottest investment targets. Of the total amount of investments into new projects presented in 2008, 33% are iron ore projects but the level of investment is down from 2007 both in relative (50%) and absolute terms ($27 billion). Vale’s giant Serra Sul project in Carajas, Brazil, alone is estimated at over $10 billion. Consequently, iron ore investments have jumped from fourth place to second place in the total ranking, almost catching up with copper in 2007. At present it appears that iron ore demand and prices will not fall as dramatically as some of the base metals and thus the volume of iron ore projects might continue to grow.

Copper increased its share of the total pipeline while both gold and nickel decreased. During 2008, the number of uranium projects grew—particularly when oil prices hovered at record high levels. We have chosen to report the “energy metal” separately in this year's survey. The “Other” category, including silver, cobalt, tin and ferroalloys projects, increased somewhat if the exclusion of uranium is taken into consideration. Investment for platinum group metals (PGMs) was constant during 2008. Lead and zinc’s share of total investment decreased in concert with falling zinc prices in 2008.

Gold projects are usually less expensive than copper projects, and although gold projects have risen to an average capital cost of $165 million in 2008 compared with $130 million last year, that figure is much less than the $480-million-plus average project cost for copper. This is due to the fact that it is still possible to find small but high-grade gold deposits which can be mined profitably by junior or mid-sized companies, while most new copper projects are often huge, low-grade open pit operations, often distant from existing infrastructure.

The average cost of an iron ore project is much higher than that of copper, now standing at well over $670 million, compared with $500 million in 2007. Nickel projects used to be the most costly of them all, with new laterite technologies being technically more demanding and ore grades low, necessitating haulage of large volumes of ore and waste, but iron ore projects have now surpassed them. PGMs projects have an average cost somewhere between those of copper and gold projects, while zinc projects are generally in the same range as gold projects.

When comparing average investment costs over the last few of years, capex increases become obvious. Figure 1 contains projects that have not increased their projected output volumes over the years. [RC6] The slowdown in cost increases noted already in last year’s Project Survey continued in 2008.

Among the new projects listed by RMG during 2008 copper dominates, accounting for over 36% (27% in 2007) of the value of all new projects. Iron ore follows with 27% (47%) . Gold with 10% of the newly announced projects has declined rapidly from 17% in 2006. Nickel is at 7%, half the level achieved during its market peak.

Latin America—Still on Top

Almost one-third of listed investments are in Latin America, a level that stayed constant in 2008 after growth in 2007. Oceania, mainly involving Australia and Papua New Guinea, remains in second place but the region’s overall share of investment funding fell considerably from 20% to 17% in 2008. Africa’s share also dropped slightly during 2008 while North America and Africa remained steady at 15% and 14%, respectively. Europe's share of the investment pipeline increased significantly, mainly due to new projects in Russia’s Siberia but also from considerable investment activity in the Nordic countries. Asia’s share of investments remained constant at 11%.

In 2008, the top ten countries for mining investment increased their cumulative share of the global total to 68%, compared with 61% in 2007. Last year's survey stated that "investments are more evenly spread around the globe," perhaps a premature conclusion considering the long lead times in a mining project[RC7] .

Papua New Guinea entered the top 10 list this year, narrowly edging Mexico. Australia still retains its Number One position with $53 billion worth of announced investments. Its growth over 2007 is, however, lower than the other Top 10 countries except South Africa, indicating an end to the unprecedented boom of the last few years. Canada remains in second place at $44 billion or 11% of the total. In third is Brazil, having increased its project pipeline slightly more than Australia.

Russia’s share grew tremendously during 2007 with its project pipeline more than doubling to reach $35 billion. After a period of consolidation the Russian mining industry has entered into an investment phase with huge new projects in iron ore, gold, copper and uranium. South Africa again fell, this time from fifth to seventh, its 10% increase in share indicating some of the difficulties investors perceive in Southern Africa in general. Peru remains in sixth place. The revived Frieda River copper project together with Marengo's Yandera and the planned expansion at Lihir catapulted Papua New Guinea into the group of ten. Below the top ten cutoff are Mexico, New Caledonia, Democratic Republic of Congo, Argentina, China, Indonesia and Sweden in that order, each with a portfolio of projects totalling $5 billion to $8 billion. Sweden’s appearance is but one indication of the improved investment climate for mining in western Europe as the European Commission takes note of the global race for resources. The investment figure for China is most certainly an underestimate since many of the projects conducted by its state-owned companies are never announced in such a way that they reach the international mining press.

Top Ten Countries for Mining Investment, 2008

About This Survey

This review of metal mining projects is based on Raw Materials Projects, the database researched and published by Raw Materials Group, Stockholm, Sweden (www.rmg.se). The full database is available from RMG on an annual subscription basis and includes more than 3,000 projects as of December 2008, ranging from those in the prefeasibility stage to those currently under construction. Of the total number of projects listed in the database, more than 1,100 include detailed descriptions of resources/reserves, grades, planned investment cost, and completion date.

This survey includes all countries with known projects. In the process chain from ore to metal, its main focus is on the mining stage. Pure smelter projects are not listed. In some cases, however, where the process is fully integrated from mining to refining, such as acid pressure leach hydrometallurgical nickel projects, all stages are included.

Eligibility for a full listing requires each project to have an announced investment cost estimate, reserve/resource data and an estimated annual production figure. Comparability of information from different companies, countries and regions varies, as specific project information or definition may be unclear for various reasons, or the project may also involve large unreported infrastructure costs. Raw Materials Group attempts to resolve these factors, but cannot rectify all discrepancies arising from definitions and comparability.

Information contained in the survey is global in scope. However, it should be noted that completely accurate coverage of some regions is difficult to attain due to lack of information or corporate reporting standards and requirements. In total, mine projects are included from more than 70 countries and the survey’s aggregate figures are considered to reflect overall investment trends in the mining industry reasonably accurately. For more information, visit www.rmg.se or call +46-8-7440065.

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