B.C. mining sector finally above ground again

Annual mineral exploration conference notably upbeat for first time in years

Teck CEO Don Lindsay: “we had analysts and prognosticators telling us that we would never recover and that the industry was doomed. Next time you see that, buy Teck” | Submitted

One year ago, the share price for B.C.’s largest mining company, Teck Resources Ltd. (TSX:TECK.B), had fallen below $4, and some analysts were predicting it would follow more than a dozen American coal-mining companies into bankruptcy.

One analyst predicted the company’s stock would drop to $1 per share.

One year later, the company’s stock has moved back above $30, and Teck CEO Don Lindsay stood in front of his industry peers last week and cheerily dished out some crow for those analysts at the Association for Mineral Exploration BC’s (AME BC) Roundup 2017 conference.

“We had analysts and prognosticators telling us that we would never recover and that the industry was doomed,” Lindsay said. “Next time you see that, buy Teck.”

For the first time in four years, there was a sense of optimism at the annual conference that the mining and exploration sectors have survived one of the worst downturns ever and have good prospects ahead.

“There is a palpable sense that a turnaround is real,” said AME BC CEO Gavin Dirom.

Not far from the Vancouver Convention Centre East, where the Roundup conference took place, the mood was similarly upbeat at the Cambridge House Resource Investment Conference at the Vancouver Convention Centre West.

Mickey Fulp, publisher of the Mercenary Geologist, one of the Cambridge House conference speakers, pointed to the performance of the TSX Venture Exchange – which bottomed in January at 474 and hit 839 in August – as an indicator of the returning investor confidence.

“That’s a 50% gain almost,” Fulp said. “And commodity prices have increased, and you’ve got [U.S. President Donald] Trump, and this infrastructure build-out – all of this kind of lining up. I think it’s going to be a very good year.”

Minerals and metals prices are rising, investor confidence in the majors is returning, and those majors are keen to restock depleting minable reserves, which means many juniors with promising deposits will find some willing partners or buyers.

A prolonged down-cycle forced major mining companies to tighten their belts, which meant little investment in greenfield exploration and development.

“Every day we are pulling more out of the ground, and we need to have prospects ready to fill the gap when existing mines are exhausted,” Lindsay said.

Added Goldcorp (TSX:G) CEO David Garofalo: “Our reserves, as an industry, have been declining for about five years consecutively. If you look at the top three producers of the world – including Goldcorp and Barrick [TSX:ABX] and Newmont [NYSE:NEM] – collectively and individually we’ve seen our reserves decrease by about one-third.”

Because it takes a decade to bring a new mine from discovery to production, the majors are looking to the junior exploration sector to bring them new mineral deposits. Garofalo said a company like Goldcorp typically needs 15 to 20 “names” in its portfolio.

One of the newest names in that portfolio is Kaminak Gold, which Goldcorp bought last year for $500 million.

But Goldcorp isn’t really interested in small mines. It needs large production and long life, so Kaminak’s Coffee project just south of Dawson City in the Yukon is likely just the first step in developing a larger district.

“The $300 million in expected investment in Coffee, I would characterize as a down payment in a new district,” Garofalo said.

According to Haywood Securities, mining companies on the Toronto Stock Exchange raised $9.4 billion in 2016 – a 38% increase over 2015 – and market capitalizations of mining companies increased by $100 billion in 2016, compared with 2015.

Mining has always been a cyclical industry, and Lindsay said no one can guess when the next commodity price plunge will happen because the industry is now in an unprecedented era of extreme volatility.

“We are seeing today higher highs and lower lows, and the time period from when it starts to finish, that cycle is compressed,” Lindsay said.

There is some ebullience in the industry over U.S. President Trump’s plans to spend US$1 trillion on rebuilding infrastructure – potentially sparking the kind of demand for commodities that China’s infrastructure spending drove.

But Lindsay tempered that optimism by pointing out that, while the US$1 trillion spending plan is over 10 years, “China spends a trillion dollars on infrastructure in 11 months. So China is still by far the dominant market.”

China has a lot to do with today’s commodity price volatility. As Lindsay pointed out, when the Chinese president issues a fiat – like cutting production at Chinese metallurgical coal mines to 276 days from 330 days – the impact is dramatic. (Teck is a diversified company that produces metallurgical coal, copper and zinc.)

When China decided to cut back on its production of steelmaking coal, prices went from US$92.50 per tonne in 2016’s third quarter to US$200 per tonne in Q4 2016, and US$285 in 2017’s first quarter, Lindsay said.

And when China achieved its objectives – which included cleaning up its air pollution – and went back to regular production, met coal prices quickly began to fall again.

“As miners and explorers, I believe that we have to consider that this extreme volatility is the new normal in our industry,” Lindsay said.

To guard against that volatility, both Lindsay and Garofalo suggested their industries will need to do things differently.

Lindsay cited a partnership between Teck and Goldcorp in Chile as an example. Both are planning new mines there, and they decided to share infrastructure – including a single port, tailings facility, transmission line and desalination plant.

It not only saves both companies a lot of money, but also shrinks the environmental footprint and earns significantly more buy-in from the communities where they will operate.

“Boy, did the community consultation ever go differently with that,” Lindsay said.

Garofalo said his company also plans to try to phase out tailings ponds eventually and go to 100% water reuse – another move aimed at improving social licence.

“As an industry, we have to get out of the business of building traditional tailings facilities,” he said.

“One, because it’s very water-intensive, but two, it’s socially risky as well. We’ve seen tailings disasters happen from time to time. Admittedly, [it’s] seemingly rare when that happens, but it’s a tremendous black eye for the industry.”