Earlier this month, Stornoway Diamond Corp. said something that would have been unimaginable not too long ago – its mine is being built ahead of schedule and under budget.
“You would ever guess we’re sticking our necks out by saying that, therefore we have to be pretty confident it is the case,” Stornoway leader Matt Manson said in an interview. “And we’re.”
The Montreal-based firm, that 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 they was a running joke. Analysts and investors just assumed costs would be higher than the companies’ projections, plus 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 best cost could exceed US$10 billion.
We’ve been able to purchase things whenever we needed them and they’ve been available when we’ve needed them
However, the development 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 also 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, others 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, very few companies are actually benefiting from this opportunity. Stornoway’s Renard project is among a small 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 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.
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Manson said that whenever Stornoway buys something today, whether it be trucks or pumps or valves, the company has the capacity to get what it really needs quickly from the best possible supplier at its budgeted price. That has helped the company stay ahead of its construction schedule.
“When there’s a more competitive construction environment, you might find the very best guy in the business is employed by Goldcorp for the next 6 months,” he said.
“So you go to the next guy, who will cost you a little bit more and can ‘t be quite exactly the same quality. Which means you end up being behind schedule and also 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 even more for it to arrive, pay money upfront, and have zero ability to negotiate the terms of the sale. You can even find rumours of trucks being delivered without any tires on them.
Today, mining is Caterpillar’s worst performing segment – its resources business actually lost profit the fourth quarter of 2015. Miners ordering equipment in the company can expect to get it within a couple weeks, and might get bonuses for example maintenance contracts thrown in.
Stornoway was fortunate for the reason that it received financing for that Renard mine early in the year of 2014. By that point, the commodity boom was over also it was simple to procure materials from Caterpillar and other suppliers.
“We’ve had the opportunity 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, i am not saying that everything is cheaper for mining companies today.
Randall Oliphant, executive chairman of recent Gold Inc., noted that miners are also affected by the amount of non-mining industrial activity happening. So, for example, if your large amount of government-backed infrastructure is being developed near a mine, that may tighten the marketplace for local labour along with other inputs. New Gold is creating a mine in Northern Ontario and has seen a number 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 within Toronto.”
Financial Post
pkoven@nationalpost.com
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