With all those sunk costs in Victor the pressure may grow to accelerate
new pipe development or back off. New IBAs for Attawapiskat and other
coast communities?
Perhaps recent CVRD interest in McFaulds play will cool under the new
reality of capital costs. Better to wait to see if and when
project becomes real.
Bottom line. Bad news for explorers might give Ontario a much needed
breather to get some certainty with Far North First Nations.
http://www.theglobeandmail.com/servlet/story/LAC.20080404.RPARKINSON04/
/TPStory/Business
High costs mean big miners could be on the prowl
DAVID PARKINSON
dparkinson@globeandmail.com
April 4, 2008
Investors in the mining sector may have been too busy salivating to
notice, but metal commodity prices haven't been the only thing going
through the roof. The costs of developing new mines have also been
soaring - and that could foreshadow a new round of takeovers in the
sector, analysts at RBC Dominion Securities Inc. said yesterday.
The investment bank's mining group issued a report showing that in
the past year and a half, capital cost estimates for major mining
projects under development have surged by an average annualized rate
of more than 56 per cent.
Much like Canada's oil sands companies (which are, for the most part,
essentially developing mining projects), mine developers are being
hammered by surging labour costs amid acute shortages of skilled
workers, as well as sharp increases in costs for materials. Costs for
steel and cement have risen by as much as 40 per cent annually over
the past two years, the report said.
One of the most glaring examples of these runaway costs is right here
in Canada. The estimated capital budget for the Galore Creek
copper/gold project in British Columbia has jumped from $1.1-billion
in the fall of 2005 to a whopping $5-billion today - prompting the
project's owners, Teck Cominco Ltd. and NovaGold Resources Inc., to
put the project on hold while they seriously rethink the whole thing.
But the cost increases are hardly unique to that project or even this
country. New mine developments in such far-flung places as Alaska,
Australia, Panama, Romania, Russia and Papua New Guinea have seen
project cost estimates soar over the past year, in many cases
doubling or even more.
"We do not believe an end is in sight," the RBC analysts said.
This is creating a very risky and expensive environment for embarking
on new mining projects - and this, the analysts believe, is creating
the impetus for takeovers.
The pieces of the argument fit together nicely. Mining companies,
especially big senior names, are kicking off cash like never before,
thanks to record commodity prices. Cash flow at such mining giants as
BHP Billiton Ltd., Barrick Gold Corp. and Xstrata PLC have more than
tripled in the past three years.
But these seniors have the same problem they have always had: They
have mature mines whose resources are dwindling yearly, and to keep
their businesses growing, they have to find ways to replace those
depleted reserves and then some.
Developing new mines is all fine and good, but why bother when
development costs are skyrocketing? Why not put all that loose cash
to work buying existing assets that are already late in the
development process? You've got the cash to pay for it, the risk is
reduced, and the reward can be realized much sooner.
"Companies looking to expand production, or replace a declining
production profile, may be better off acquiring companies with one or
more late-stage development projects, rather than funding existing
early-stage projects all the way through development," the analysts
wrote.
"The most likely targets for M&A in the short term will likely be
companies with established production and/or reasonably near-term
growth certainty," they said.
On the top of that list is Kinross Gold Corp., which has a couple of
projects (Kupol in Russia and Paracatu in Brazil) slated for
completion this year. With a market cap of $14-billion, Kinross would
probably be a mouthful for all but the biggest of mining companies.
But the RBC analysts also mention some smaller names that fit the
mould - including Centerra Gold Inc. and Eldorado Gold Corp.
Even if these companies don't get taken out, they could still offer
nice near-term growth with relatively low development risk. Other
stocks fitting this description include Agnico-Eagle Mines Ltd,
Jaguar Mining Inc., Anatolia Minerals Development Ltd.and European
Goldfields Ltd., the analysts said.
On the other hand, RBC cautioned investors to be wary of
capital-intensive projects that are years away from completion.
That flashes a yellow light over Barrick. The gold mining giant has
three such projects that fit this risky profile: Donlin Creek in
Alaska, Pueblo Viejo in the Dominican Republic and Pascua Lama in
Argentina/Chile.
"We feel such long-lead-time projects are unlikely to be sought after
until permitting and timelines are better delineated," they said.
The rising price of mine projects
A sampling of capital cost increases at major mining projects
Project Location Ownership Capital expenditures
($million): Original Capital expenditures ($million): Revised
Galore Creek B.C. Teck 50%, NovaGold 50% $1,102 (Oct. '05)
$5,000 (Oct. '07)
(copper/gold)
Boddington Australia Newmont 66.7%, AngloGold 33.3%
$1,500 (Dec. '05) $4,500 (Feb. '08)
(gold/copper)
Donlin Creek Alaska Barrick 50%, NovaGold 50% $2,130 (Sept.
'06) $3,900 (Nov. '07)
(gold)
Petaquilla Panama Inmet 48%, Petaquilla 52% $1,708 (Jan.
'07) $3,500 (Feb. '08)
(copper) (Teck Cominco option for 26%)
Rosia Montana Romania Gabriel Resources 80%, Minvest 20% $638
(March '06) $1,000* (Dec. '07)
(gold/silver)
*RBC estimate
SOURCE: RBC DOMINION SECURITIES
