Pulling Back Across the Board

 

With commodity prices in retreat and financing more costly to find, companies have gotten wary of commitments to big budgets E&MJ’s annual project survey looks at the background and reviews the current status of project developments.

By Simon Walker, European Editor

For anyone who had ever doubted that the minerals business is uncomfortably cyclical in nature, 2014 must have come as somewhat revelatory. Take a quick skim through a handful of company annual reports and quarterlies, and the message is consistent: budgetary cautiousness has descended on the mining industry.

That is not to say, of course, that there has been a complete shutdown on project development; far from it, in fact, but the overriding trend has been one of financial prudence in the face of challenging market conditions. And while projects that have already been under way for several years are being completed, albeit often at higher costs than originally anticipated, boardrooms have become increasingly reticent to commit to big-budget investments until greater market clarity re-emerges.

The situation has become comparable to the domestic housing market. When householders are uncertain, house moves become fewer—but, more people add extensions to their existing properties, not only to increase the long-term value but also to give themselves more living space.

Following this analogy, mining companies have drawn in their financial horns while commodity markets are depressed, and the outlook in key economies such as China is less positive than it was, say, five or six years ago. Nonetheless, while there is substantial pressure on production costs, there is a big incentive to add that extension—to add incremental processing capacity or to invest in new equipment that will help optimize the operation and so help maintain profitability.

It is easy to focus on the big-number projects, where costs come in the billions. And, as was noted in last year’s project survey (E&MJ, January 2014, pp. 26–31), quite a few of these have taken a hit recently. That is not suggesting that they are now consigned to history forever, but that their developers have decided essentially to mark time until they feel more confident that the right investment environment has returned. Some, of course, may indeed never materialize for a variety of reasons, the most likely being a politically inhospitable location. As Antofagasta and Barrick Gold discovered with their Riko Diq copper-gold prospect, the tribal areas of western Pakistan are unlikely to be a welcoming target for investment for some time to come, despite the acknowledged resource, the economic benefits that would accrue to the region, and the money spent on getting to the walk-away decision.

The Market Background

A quick look at London Metal Exchange (LME) price graphs gives a pretty accurate illustration of the state of the metals market in general. Take copper, for example; in early 2011, three-months metal was trading at a little more than $10,000 per metric ton (mt). At the beginning of December, it was $6,400, with the underlying trend in the intervening four years having been inexorably downhill.

Zinc, by contrast, has demonstrated a different profile. Having plumbed the depths during 2009 at less than $1,100/mt, between the start of 2011 and the end of 2014, the price slipped from nearly $2,600/mt to a nadir of around $1,800 before rising again; only in the last few months did it fall back to its early-December figure of $2,200/mt.

To an extent, aluminum followed a similar trajectory, albeit with a longer decline from a recent peak of nearly $2,800/mt in early 2011 before bottoming out at around $1,700/mt early last year. Its subsequent recovery to slightly under $2,000/mt was irregular, demonstrating jittery market sentiment for the metal.

The nickel price’s recent history also showed a U-curve, again with a long downward slide from more than $29,000/mt in early 2011 to half that during mid-2013. Subsequent gains were temporary, with a marked downturn again in late 2014 to $16,600/mt in December, reflecting the general unease over the world’s economic well-being.

As noted in last year’s project survey report, lead has bucked the trend over recent years, at least in terms of the market showing relative stability. During 2011– 2014, an early slide from more than $2,600/mt was halted later in the year, and has since been followed by trading within a fairly tight band of $2,000–2,200/mt, trending to the low end of this in December.

As noted in E&MJ’s annual iron-ore report (November 2014, pp.28–32), the iron business was not a place for the faint-hearted last year. In late November, the price had fallen by almost exactly half during 2014, touching $68.49/dmt before inching slightly higher again. The combination of the fruits of heavy investment in new capacity by the major producers, Vale, Rio Tinto and BHP Billiton, and slowing Chinese demand were the drivers behind the continuous price slide, which has unquestionably hurt badly many of the higher-cost new entrants to the market. The stories told in E&MJ’s Nordic mining review in October (pp.30–36) bear witness to the tribulations of smaller producers and project developers there, and could surely be repeated elsewhere in the world.

New Projects: Australia Remains Ahead

According to SNL Mining & Minerals, the company’s Swedish office (formerly the Raw Materials Group) logged around 150 new projects into its database in the last few months of 2013 and through 2014. Interpreting this information, and stripping out those that are listed as being purely conceptual or are currently under construction, the number of wholly new projects that are at prefeasibility or feasibility study stage fell to just 50—worldwide.

The rationale for E&MJ adopting this approach is straight-forward; in the current stage of the minerals cycle, conceptual projects are unlikely to be progressed in any meaningful way for some time, while it is in companies’ interests to get projects that are already in progress completed as quickly as possible in order to achieve their intended benefits. Plan B in that respect is a major scaling-back of earlier plans in order to save scarce capital and reduce borrowing costs, with companies preferring to live with what they have got rather than to commit further funds at a time when the crystal balls of the market-makers remain distinctly cloudy.

Taken on a geographical basis, one country stands out as being in the forefront of continuing project optimism: Australia, which accounted for a quarter of all of SNL’s pre- and feasibility-study stage new listings for the period. Chile, Canada and the USA came a distant second in that respect, with a scattering of projects in other parts of Latin America and sub-Saharan Africa. One cannot help but feel, however, that the few companies that are involved in project evaluation in Russia may have developed significant second thoughts in recent weeks, given the new levels of uncertainty that have emerged there in relation to the economy and the sudden decline in the exchange value of the ruble.

Again looking on the narrower basis encompassing study-stage projects, the typical value of individual projects ranges from well less than $100 million in some cases to a few hundred million in others. Rare in the list are billion-dollar projects this year; Capstone and KORES’s Santo Domingo (copper) in Chile is one such, while Chinalco has completed a feasibility study on expanding its Toromocho copper operation in Peru that would cost an estimated $1,320 million to complete. The Decar nickel-iron prospect in northern Canada carried a similar initial cost estimate, but is presumably now on a longer timeframe following Cliffs Resources’ withdrawal from its joint venture with First Point Minerals last August.

In terms of commodities, between them, gold and iron accounted for half of the study-stage projects, with copper and silver the focus for a further quarter. Given the slide in prices over the past 12 months, it is hard to imagine that many of the smaller iron-ore projects will stand up to scrutiny over the coming year. The continuing interest in gold, on the other hand, suggests that many companies are still confident that the downside has come to an end and that future demand will support new output capacity.

Santo Domingo, owned 70% by Capstone Mining and 30% by KORES, is a large copper-iron development project in northern Chile. Summary results of its Feasibility Study were announced in June 2014. Initial capital costs are estimated at $1.7 billion. (Photo courtesy of Capstone Mining)

Iron Ore: Tuning the Investments

Having spent plenty over recent years, the major Western Australian producers are now consolidating their operations. As BHP Billiton CEO Andrew Mackenzie noted in the company’s September-quarter report: “We have completed our major supply chain investments and, for the first time in a decade, we have no major projects in execution. With our focus now on maximizing the value of existing infrastructure, we plan to reduce costs and invest judiciously in very low capital cost debottlenecking initiatives.”

His thoughts were echoed by Rio Tinto’s CFO, Chris Lynch, in an interview in December, when he said that the company is now focusing on stripping out costs that were inflated during the boom years of the 2000s. “As much as we’d like it to be different, it’s still a cyclical industry. During the really hot market years, costs were being bid up fairly heavily,” Lynch was reported as saying. “Those costs are hard to get out, but once you have the opportunity to do that you need to take advantage of it. There is a lot more competitive pitching in bids, and costs are coming down,” he added.

In its September quarterly, the company reported that its infrastructure expansion to support its 360-million-mt/y target capacity is scheduled for completion in mid-2015, while its current optimization program has freed up more than $3 billion of capital previously earmarked for the expansion.

Nevertheless, Rio Tinto may not have completed its Pilbara investments quite yet, with the announcement in November of forthcoming discussions with Sinosteel, its joint-venture partner in the Channar mine, over a further extension of operations there.

Elsewhere in the world, the company is continuing with its evaluation of the Simandou resource in Guinea, this time in joint venture with Chinalco. In 2012, Rio Tinto committed more than $500 million toward project development with, at that time, initial production targeted for 2015. Since then, progress on the project appears to have slowed, with domestic politics, the regional Ebola crisis and the time needed to negotiate formal infrastructure and investment agreements all taking their toll.

In Brazil, Anglo American was able to celebrate the first shipments from its $8.8 billion Minas-Rio operation in October, with the company now in ramp-up mode to achieve the nameplate 26.5 million mt/y capacity over the next 18–20 months. Meanwhile, at Anglo’s iron-ore interests in South Africa, held through Kumba Resources, prefeasibility studies on a 5-million-mt/y expansion at Kolomela are currently under way. In addition, there is a feasibility study into expanding capacity at the Thabazimbi mine.

In Brazil, Vale has cut its 2015 capex budget from $12.5 billion to $10.2 billion, which includes $3.696 billion for the S11D and CLN S11D expansion projects at Carajás, and $659 million for the Conceição Itabiritos II, Vargem Grande Itabiritos and Cauê Itabiritos projects in its southern production system.

Elsewhere in the world, LKAB is spending around $1 billion on developing its new Gruvberget, Leveäniemi and Mertainen open-pit mines in northern Sweden, while Arcelor Mittal has a $1.7 billion budget for a revised second-phase development of its mine in Liberia. This will enable the company to produce 15 million mt/y of high-quality sinter feed at lower costs than originally outlined. Arcelor Mittal is also spending $730 million on bringing the “early revenue phase” of its joint-venture project on Baffin Island in northern Canada on stream, targeting an initial output of 3.5 million mt/y of products later this year.

Also in Canada, Tata Steel anticipates that its direct-shipping ore project in Québec and Labrador will be ramping up to 40% capacity this year, while it continues with its feasibility study on the LabMag and KéMag taconite deposits.

And in Russia, Metalloinvest is budgeting $450 million for upgrades to one of its pelletizing plants at its MGOK operation, and $850 million for a new hot briquetting plant at LGOK.

Zinc: Where’s The New Capacity?

While no new lead-zinc projects appeared on SNL’s 2014 list, the lack of interest does not reflect current market predictions, according to Teck Resources’ vice-president for investor relations, Greg Waller. Quoted in a news report in November, Waller said that the company sees the zinc price continuing to rise as large mines (such as Century in Australia) close and no new projects come on stream. In addition, there is likely to be little exploration for zinc over the next three-to-four years, despite the market now being in deficit.

Long anticipated as being the replacement for Century, MMG’s Dugald River deposit in Queensland has been subject to trial stoping during 2014 with the aim of determining accurate design parameters, although a definitive design has yet to be decided. MMG is also involved in evaluating the Izok Lake-High Lake zinc prospects in Nunavut, Canada, which have been known since the 1950s but still await development; no doubt its focus on completing construction at Las Bambas in Peru has taken precedence.

Copper: Capex in the Balance

While the recent round of major investment in new iron ore capacity appears to have drawn to a close, the same cannot be said for copper. Across the world, companies have been continuing to spend substantial sums, albeit in the form of capex that was committed some years ago and is only now coming into play.

As an example, by the start of 2014, the partners in the Cerro Verde expansion project in Peru, headed by Freeport, had spent some $1.5 billion with a further $3.1 billion still to be incurred. And, as Freeport pointed out in its annual report, “Considering the long-term nature and large size of the project [which is tripling concentrator capacity to 360,000 mt/d], actual costs could vary from these estimates.”

Meanwhile in Indonesia, Freeport has estimated mine development capex for the Grasberg block-cave mine and the associated Common Infrastructure project to is expected to total some $5.2 billion between 2008 and 2021, with a further $2.6 billion to develop the DMLZ mine. In the DRC, the partners in Tenke Fungurume will be investing in a second sulphuric acid plant, while closer to home, Freeport’s mill expansion at Morenci is costing the company $1.6 billion.

Not every project on companies’ books fits current expectations, of course, with Freeport noting that while it has continued with its studies in the El Abra sulphide ores, “future investments will be dependent on technical studies, economic factors and global market conditions.” Similarly, Barrick has reported minimizing its 2014 budget for Cerro Casale, while “continuing to explore alternative development options for this project.” On the other hand, the company finalized its 50/50 Jabal Sayid joint venture agreement with Ma’aden in December, with first production there now scheduled for 2016.

In Panama, First Quantum Minerals’ most recent estimate is that $6.4 billion will be needed to commission its Cobre Panama project, now under construction, with the company near to completion of its Sentinel mine and smelter in Zambia—just when the government there prepares to introduce the new fiscal regime that has led Barrick to suspend operations at its Lumwana mine.

Potential Process Costs Inhibit Nickel

Having put its Western Australian nickel operations up for sale in May, BHPB pulled the plug in November, with no acceptable offers on the table. These are, of course, traditional hard-rock mines, while the focus on new development projects today is often laterite-hosted nickel-cobalt deposits that require costly hydrometallurgical processing for metal recovery. BHPB’s venture into that area of technology, at Ravensthorpe, showed that even the majors can make spectacular mistakes from time to time.

Nonetheless, Western Australia’s nickel-bearing laterites continue to attract evaluation interest, probably for infrastructural and energy-availability reasons as much as any. A number of companies have projects on the go in the state, each with billion-dollar price tags. Other parts of the world still attracting evaluation and project development interest include Indonesia and the Philippines, while the potential of some Latin American countries as future nickel suppliers is also on the cards.

Energy: US Shale Gas Glut

As far as coal is concerned, recent news has been more about capacity closures rather than project developments. At an analysts’ briefing in November, the president of BHPB’s coal division, Dean Dalla Valle, noted that producers worldwide are aiming to idle some 50 million mt/y of thermal coal capacity in response to weak prices. With world energy markets in decline overall as oil prices have tumbled, and with the dramatic change in the USA’s supply role in recent years, thermal coal has lost ground in a big way. And so has met coal, albeit in relation to much smaller tonnages, with 2014 prices having slipped below $100/mt for the first time since early 2008. Little wonder then that producers are currently more concerned only with retaining existing capacity than in investing in new mines.

Uranium explorers, by contrast, do seem to have a brighter outlook, at least on the demand side. China is busy building new nuclear power plants, and the sentiment pendulum is generally swinging back toward nuclear energy as being a viable lower-greenhouse gas option. The depletion of much of the former Soviet military uranium stockpile is certainly an incentive for renewed project development, with both conventional (hard rock) and calcrete-hosted targets under evaluation. As always, political decisions can have a profound impact on uranium, so presumably the people at Greenland Minerals and Energy heaved a sigh of relief at the re-election of the incumbent party in November’s elections there. And uranium is, of course, only a byproduct from the proposed Kvanefjeld rare-earths mine.

Other Commodities

Aside from the major targets, it is perhaps reassuring that some companies are continuing to run deposits of less-popular commodities along the development track. This year’s additions to SNL’s list include rare earths, tin, silver, niobium, lithium and diamonds, while Rio Tinto reported during 2014 that it is prioritizing its South of Embley bauxite project in Queensland, with a feasibility study under way.

The uses of rare earths in next-generation electronics and other applications has reawakened interest worldwide, although commitments to project development are still in short supply. The unrest in South Africa’s platinum industry has contributed to a general slowdown in new developments there, with the focus being on projects that could support greater levels of mechanization. And with De Beers investing some $2 billion in taking its Venetia diamond mine underground, the company is also pushing ahead with its joint-venture Gahcho Kué project in Canada’s Northwest Territories, with first production predicted for late 2016.

With demand running at a record high during 2014, developing new sources of fertilizer raw materials is also a priority. In Russia, Uralkali has its $1.5 billion Ust-Yayvinsky mine project at shaft-sinking stage, and is designing its Polovodovsky project. In Saskatchewan, meanwhile, development continues at BHPB’s Jansen mine, with the company recently hinting at a speed-up there in response to the flooding at Uralkali’s Solikamsk-2 mine in November.

Looking Ahead

Once confidence returns, and with it higher commodity demand, there should be no shortage of potential projects available for re-assessment. Until that happens, however, corporate project planning teams may well be in for lean times.

While there are plenty of projects now on hold, things could indeed get significantly worse—or provide greater opportunities, depending on one’s point of view—if commodity prices continue to weaken. In December, Vale’s executive director for its ferrous operations, Peter Poppinga, said, “If the price stays at $70 for some time there will be 220 million metric tons [of iron ore] that are not competitive in the market any more.” That will mean a major shakeup among the world’s producers, with increasing numbers of marginal operations failing. However, by 2016 demand will once again be outstripping supply, Poppinga added, with prices responding accordingly as limited new production capacity fails to compensate for tonnage already lost.

Companies will also need to rethink their funding strategies. According to Blackrock fund manager Evy Hambro, speaking at last year’s Mines and Money conference in London, “gold miners looking to lure back fund flows need to cut production and give more money back to investors rather than plowing it into the business in a bid to boost production.

“Gold companies need to understand if people are going to give them capital they need to have transparency around investment decisions,” Hambro said. “They don’t want capital plowed back into the business chasing production growth rather than value creation.”

In other words, chasing economies of scale with expensive investments at a time of low commodity prices may not be the best approach to keeping one’s funding sources sweet in the longer term. In reality, that is what appears to be the case at the moment, with the focus on trimming costs out of existing operations rather than hemorrhaging cash on new capacity that may prove to be unmarketable.

E&MJ would like to thank SNL Metals & Mining for its assistance in providing the raw data from which this article has been prepared.

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