What a difference a few months make. After several years of sky-high commodity prices and record capital spending, the global mining industry finally succumbed in October to the financial turmoil sweeping the world.
Communities dependent on the mining industry across Northern Ontario were bracing for news of layoffs and project delays as commodity prices nosedived.
First Nickel placed its Lockerby operation in Sudbury on care and maintenance, laying off 140 employees, FNX Mining suspended contact nickel production at its Levack property and, in northwestern Ontario, North American Palladium shut down its Lac des Iles Mine.
Neither Vale Inco nor Xstrata had announced any major cutbacks or project delays in the region, but both companies have cut back elsewhere. Xstrata Nickel was first off the mark, suspending operations at its Falcondo ferronickel operations in the Dominican Republic and taking annual production of 29,000 tonnes of nickel in ferronickel off the market.
Vale Inco announced that it would stop using higher-cost thermal power generation at its Indonesian operations and rely solely on hydroelectric power, resulting in a 20 per cent reduction of nickel-in-matte production, or approximately 17,000 tonnes annually. The company also announced that its nickel refinery in Dalian, China would operate at 35 per cent of its nominal capacity. Vale’s capital spending budgets for 2009 will remain unchanged.
The decision by FNX to suspend "commercial" production at its Levack nickel contact deposits was not expected to result in any layoffs.
"At Q3 2008 commodity prices and current metal accountabilities, production from the company’s Podolsky Mine and the Levack Complex, except for the Levack nickel contact deposits, remains profitable and will continue as planned for the remainder of 2008," said a company press release.
Capital spending
FNX reported a loss of $26.5 million for the third quarter of 2008 and announced cuts to its planned capital expenditure budgets.
"In these turbulent market conditions, the company is conserving cash and reduced its 2008 capital expenditure budget at the end of the second quarter by $51 million and further reduced it at the end of the third quarter by an additional $11 million," said FNX chairman and CEO Terry McGibbon. "Capital expenditures for 2009 have not been finalized, but will be drastically reduced from 2008 levels and limited to a minimum to satisfy near term production plans and to ramp up production from our higher margin copper-nickel-precious metal footwall ore deposits at Podolsky and Levack."
First Nickel said its Lockerby Mine would be ready to ramp up again when economic conditions improve.
"Regrettably, the prevailing nickel prices are below Lockerby’s cash costs per pound of payable nickel even though the company has worked diligently throughout 2008 to reduce costs," said company president and CEO William Anderson.
Several other nickel miners in northeastern Ontario have also been affected by market conditions. Ursa Major Minerals, a junior miner, halted pre-production mining at its Shakespeare open pit project in Webbwood, west of Sudbury, and Liberty Mines put its Redstone and McWatters properties in the Timmins area on care and maintenance.
The Redstone Mine commenced commercial production in July 2007, processing 200 tonnes of ore per day from a 419,000-tonne resource averaging 2.32 per cent nickel. Suspension of operations at McWatters will affect preproduction output of between 200 and 600 tonnes of ore per day.
North American Palladium’s misfortunes are attributable to a combination of plunging platinum and palladium prices and depleting reserves. Since June, the price of palladium has fallen from $475to $180 per ounce, while platinum fell from $2,100 to $880 per ounce.
The company said it would focus on expanding reserves and conducting grassroots exploration at Lac des Iles.
Next bull market
Speaking at the Second Americas Nickel Conference in Rio de Janeiro in October, Richard Murphy, president and CEO of Independent Nickel, said project delays and production cutbacks "are sewing the seeds of the next bull market."
Ronaldo Valino of Pricewaterhouse Coopers urged mining companies to take advantage of the economic meltdown to cut costs and redefine projects. "I believe the companies will be even stronger after this adjustment, with more robust operations, and will be better prepared," Valino said. "Asia will continue to grow and the American economy will recover," he added.
Mary Ann Crichton of Hatch Canada predicted that nickel prices would hover around US $6 per pound through 2009. Deutche Bank, however, took a more pessimistic view, predicting an average price of US $4.35 per pound for nickel and $1.72 per pound for copper. Deutche Bank expects global GDP growth to average 1.2 per cent in 2009, and predicts China’s economy will grow by 8.4 per cent in 2009 and 7 per cent in 2010.
Another factor impacting on the nickel market is the increased use in China of nickel pig iron. Low-grade nickel pig iron is mainly used in the production of 200-series stainless steel, the most prevalent stainless steel in China. However, some Chinese steel mills have also started production of 300-series stainless steel using nickel pig iron.
"It’s increasingly evident that the period of US$20 per pound nickel has resulted in permanent nickel demand change," said Alan Heap, managing director of global commodities at Citi Investment Research, a division of Citigroup Global Markets.
Capital equipment
Meanwhile, a report by Citi Investment Research claims that sales of capital equipment could fall by 40 per cent over the next two years as mining companies concentrate on capital preservation, working capital and share buy-backs.
Dependent as it is on equity markets, the exploration industry has probably suffered most to date.
"There are a whole pile of people who have reeled in their horns in the last few months," said Garry Clark, executive director of the Ontario Prospectors Association. "Most of the projects I know of have gone into a saving money mode. I have drillers calling me looking for work. Eight months ago, it was the other way around. You couldn’t find a drill."
Mining supply companies serving the exploration industry have already announced layoffs. Boart Longyear in North Bay, for example, laid off 45 employees while Atlas Copco trimmed its North Bay workforce by 37 and has made additional cutbacks in Sudbury.
Suppliers such as McIntosh Engineering, now part of Stantec, see the slowdown as a welcome respite from an overheated industry that taxed their capabilities and created production backlogs. (See story on Page 22.)
Others, such as Sudbury’s HLS Hard-Line Solutions, see it as an opportunity to gain market share.
"We started HLS during a major downturn in mining in 1996, so we grew through the bad times," said company president Walter Siggelkow. "We don’t have a high overhead, and we’re 20 to 30 per cent less expensive than our competitors, so when mining turns down and things get tough, we become more attractive to do business with."
