Ditched: More high-profile mines and projects – Steve Todoruk

Steve Todoruk joined Sprott Global Resource Investments Ltd. as an Investment Executive in 2003. He has argued that the recent wave of write-offs might help the market for exploration and mining stocks.

But the pain before the possible upside is still coming: Alaska’s “Pebble” deposit just bit the dust.[1] Steve talked me through these events and what it means for shareholders in mining stocks.

“The Pebble deposit is one of the largest discoveries of a copper-gold deposit in the last 10 years.  A well-known Canadian exploration company called Northern Dynasty Minerals (run by the Hunter Dickenson Group) made the original discovery. In 2007, Anglo American PLC, based in London, entered as a joint venture partner to provide capital for the very expensive ongoing development work.”

Northern Dynasty and Anglo American had discovered a total of 81 billion pounds of copper, 107 million ounces of gold and 5.6 billion pounds of molybdenum at the Pebble deposit.[2]

He continues: “For comparison’s sake, during the same time frame, another giant deposit was discovered in Mongolia called the Oyu Tolgoi copper-gold deposit.” According to the website of Turquoise Hill Resources, which owns 66% of the Oyu Tolgoi project, this deposit contains total resources of 101 billion pounds of copper and 62 million ounces of gold.[3]

“Today, Rio Tinto Plc. is building this into a new mine which is costing them approximately $6 billion. Early stage production at Oyu Tolgoi has just begun.”

“Deposits as big as Pebble or Oyu Tolgoi are very rare. Finding these massive deposits and developing them in a timely fashion – say less than ten years– is a primary goal of big mining companies.”

That’s why the recent news from Anglo American shocked the investment community. “On September 16, Anglo American announced it was giving up on the Pebble deposit. Anglo had spent $541 million since 2007 on this high profile deposit. They would have had to spend about another $1 billion to meet the terms of their agreement with Northern Dynasty.”

Anglo American probably attempted to restructure the joint venture deal with Northern Dynasty, Steve believes, but Northern Dynasty would likely have said no to any such renegotiation.

“Like many other major mining companies, Anglo American is making very hard decisions to get their costs under control and improve their cash flow numbers.  Anglo’s new CEO has announced that he intends to cut in half the $17 billion earmarked to build new mines; walking away from the Pebble project is part of that process.”

“Anglo American decided that their money was better spent on other more profitable-looking projects,” says Steve. “They only have so much money to go around and as a result, the Pebble project got the axe.”

What will happen to the Pebble project now that Anglo American has left the joint venture?

“Northern Dynasty will regain a full interest in the deposit. With $541 million already spent on it in exploration, this may be somewhat positive for Northern Dynasty shareholders. I believe that one of the other bigger, more financially sound majors will enter into a new joint venture partnership with them to develop this giant deposit.”

“Rio Tinto currently owns, and has owned for the past six years, 17.7% of the shares in Northern Dynasty. That makes them the most obvious joint venture partner.”

The Pebble deposit is one of several high-profile deposits that have been let go recently (another major example was discussed here).

“We recently talked about a similar case involving a high-profile project that was abandoned. Kinross Gold Corp. gave up on their world-class gold deposit in Ecuador — called ‘Fruta del Norte’ – after failing to reach a deal with the political authorities in Ecuador on taxes and royalties on the mine.”

“Kinross had paid $1.5 billion to acquire the Fruta del Norte deposit in 2009, but walked away from it empty-handed. They took the 10 million ounce, high grade gold deposit as a write-down.”

“Part of the reason for Anglo American’s decision to walk away from Pebble – though not necessarily the ultimate reason – was the presence of very loud and prominent NGOs who opposed mining of the Pebble deposit.”

Big mining companies expect this type of opposition, he says. “That is just part of doing business in today’s world. Anglo American likely believes they will face less opposition to their other new mining projects in Chile and Peru.” Major mining companies like Anglo may increasingly avoid certain jurisdictions altogether (Steve also discussed this topic here).

Although write-offs tend to negatively affect stocks, the fact that new management teams are willing to cut their losses is a good sign, says Steve, and investors could benefit from the savings — and possibly higher earnings — this produces.

“As a shareholder in these big mining companies, you want the management to take these steps. I believe that these write-offs are necessary to achieve stronger profits in these companies in upcoming quarters.”

Steve Todoruk worked as a field geologist for major and junior mining exploration companies after he graduated with a B. Sc. in Geology from the University of British Columbia, in 1985. Steve joined Sprott Global Resource Investments Ltd. in 2003 as a Senior Investment Executive. To contact Steve, e-mail him at [email protected] or call him at 1.800.477.7853.