Lease could be withheld: Rowat — Deputy minister says Tobin may deny lease for Voisey’s Bay

The chief negotiator for the Newfoundland government says Inco (N-T) may face the denial of a mining lease for the Voisey’s Bay project in Labrador if it does not agree to build a smelter and refinery in Newfoundland.

William Rowat, the deputy minister in charge of administering the project for the Newfoundland government, tells The Northern Miner that the Newfoundland government has studies that prove the smelter and refinery are economic, despite announcements from Inco that its feasibility studies had shown that only a mine and mill were justified by the present reserves at Voisey’s Bay.

Rowat says Premier Brian Tobin will determine the fate of the project, and might invite other companies to develop the resource. “He has indicated quite strongly that if they don’t put a better proposal on the table than they have now, that they will not get the lease to operate the mine in Labrador. To the extent that there are other mining companies around the world, obviously there may be somebody who’s very interested in working that deposit.”

Rowat says the lease could be denied based on a December 1995 amendment to the province’s Mineral Act that requires mining companies to produce refined metal in Newfoundland whenever smelting and refining are economically feasible. The provincial government would be the party to determine whether they were or not.

“Smelting and refining, where economically feasible, are to be done in the province,” he says. “It’s specific in the legislation — it’s up to the provincial government to decide whether a project is economically feasible, and that means contribution to shareholder value.”

Inco had, in all previous announcements, included a caution that the smelter proposed for Argentia, in southeastern Newfoundland, would be built only if it proved to be economic in the final feasibility study.

Both Rowat and Tobin, who are the only government officials handling detailed inquiries about Voisey’s Bay at present, have made repeated references to studies the government has commissioned to determine the feasibility of the project. Rowat insists the government’s studies show it would have an acceptable rate of return even with the current low metal prices that Inco says harm the project’s economics.

“We have the same model that Inco has. All the same assumptions are built into that model, and then we start to modify that model based on the kind of expert advice we get,” says Rowat. “We have probably run hundreds of scenarios on that model… In all cases, where you plug in those variables, and admittedly we disagree on some of those variables, those lead to a positive rate of return.”

The government negotiator says the chief problem with Inco’s studies is that they overestimate the capital costs “in the range of 10 to 25 per cent.” He also says the government’s studies are fully credible.

“Even if you set aside the mining capital costs, there are things like roads, airstrips, and building large institutional complexes or accommodation for their staff. Within the government itself we have a Department of Works that does all sorts of tendering and contracting in the north. So we know what the costs are. Without even getting into the capital costs of the mining component, you can already begin to test how high these guys are.”

Inco’s estimates of the project’s operating costs are closer to the government’s, but the net result, says Rowat, is that the full package of mine, mill, smelter and refinery makes money. “Disagree or not, our estimates are that you can make a number of the scenarios work with the Ovoid alone. That’s a very significant statement.”

Rowat would not identify the government’s consultants, and would not reveal the exact figures or supply summaries of the studies.

“We’re using an American and we’re using two Canadians, both from Ontario,” says Rowat. “In both cases, these guys have long careers in mining and in tax policy, in one case as it affects mining. Similarly, the other guy has a lot of experience working in the industry and actually running mines in northern climates as well.”

Rowat’s description of the second consultant narrows the field considerably, since only one Ontario-based consulting firm Strathcona Mineral Services has a long record of “actually running mines” in the Arctic. If Strathcona is indeed advising the provincial government, the province’s case gains a great deal of credibility, assuming it agrees with the government’s in-house findings.

Strathcona’s president, Graham Farquharson, was out of town at presstime and Strathcona staff could not confirm whether the firm was working for the Newfoundland government.

The environmental assessment panel reviewing the project has announced it will still start public hearings on the development, and will issue a schedule of meetings on Aug. 6. The panel, a creature of the memorandum of understanding between the national and provincial governments and the two aboriginal groups, can only postpone its hearings if all four parties agree to a delay, and the Canadian Environmental Assessment Agency, which is managing the review, has not acceded to requests from the others to halt the process.

Premier Tobin argued that going ahead with the hearings would “give a blank cheque [to Inco] when the full size, scope and impact of the project is as yet unknown.” Tobin did not explain how reducing the size of the project could increase its environmental impact.

Inco has said a September 1997 court injunction, obtained by the Labrador Inuit Association and the Innu Nation, effectively prohibited underground exploration at Voisey’s and has meant that additional reserves cannot be drilled off. Rowat argues that the company is using that as an excuse.

“They’re making a big, convenient argument out of that at this point, but all I would say is that if suddenly they need to do all those kinds of confirmations, how did they make a decision to spend $4.3 billion in the beginning?”

Tobin turned up the rhetorical heat further when he asked The Evening Telegram in St. John’s, “Does anybody believe that Inco spent $4.3 billion [to acquire Diamond Fields] without satisfying itself that they had not only a viable deposit, but the most exciting nickel, cobalt and copper deposit anywhere on the planet Earth?”

Despite its attempts to convert resources into reserves with words instead of drill bits, the government makes the point that the size of the reserves now drilled off in the Ovoid are sufficient to make the full smelter and refinery feasible. “The numbers work for the Ovoid production alone,” says Rowat. “So we simply don’t buy that argument. It’s a little late for them to start making an argument like that.”

The delays in the Voisey’s Bay project also have fuelled speculation over possible bidders for Inco. The company’s share price has slid from $43.40 about a year ago, and at presstime, Aug. 5, it had closed at $15.85.

Cross-town rival Falconbridge (FL-T) has been picked as a possible bidder, perhaps in tandem with its parent Noranda (NOR-T). Rio Tinto (RTP-N), Gencor and Anglo American have all been mentioned as well.

There are also open suggestions from the Newfoundland government that Inco is actively looking for a partner. “There are rumors that they are in discussions with Falconbridge,” says Rowat. The suggestion is an unusual one, since the government argues the project is economic in any event. Inco could derive little or no advantage from bringing in a partner on a viable project and would only dilute its own holding.

Another issue in the feasibility of the Voisey’s Bay project is the nickel price. Nickel was fixed at US$4,110 per tonne on the London Metal Exchange on Aug. 5, or US$1.86 per lb. Prices have been on a fairly steady downslope for three months, though they rallied briefly immediately following the July 23 announcement that talks between Inco and the province had broken off.

Price forecasts show little relief in the medium term, with most analysts predicting an average of US$2.10-2.20 in 1998, and US$2.00-2.50 in 1999. The longer-term consensus price is around US$3,
though the average from January 1990 to June 1998 is about US$3.25.

The Newfoundland government does not dispute the price forecasts, but Rowat thinks the present ones are pessimistic. “Six months ago they were using US$3.50 as the 20-to-30-year long-term price. . . . If you go back and look at the price cycle, you’ll find that peoples’ view of the long-term discount price of nickel tends to go up or down depending on where you are in the cycle. When you’re down around US$2, your view tends to be more pessimistic than if you’re at US$4.50.”

Arguing that cost performance is more important than revenue, Rowat says, “What’s important for a mining operation is where you sit on the cost curve.

Inco, on a number of its projects, including Voisey’s Bay, [is] in the lowest quartile.”

Equally, though, Voisey’s cost position is not guaranteed if the project is delayed. The high-grade mineralization in the Ovoid (31.7 million tonnes grading 2.83% nickel, 1.68% copper and 0.12% cobalt) can be mined by open-pit methods and will certainly carry low operating costs, but the underground resource in the Eastern Deeps — assuming it is minable at all — has a much lower grade, meaning correspondingly higher unit production costs.

At the same time, developments in the nickel-laterite business could crowd even the lowest-cost hard-rock operations off the bottom rungs of the cost ladder. High-pressure acid leaching projects such as Inco’s Goro mine in New Caledonia and a number of Australian projects are expected to have low operating costs because of the efficiency of HPAL metallurgy.

Taken together, lower-quality resources at Voisey’s and the emergence of more competitive laterite producers could seriously harm Voisey’s profitability over the first few years of the 21st century.

Meanwhile, BAE-Newplan Group, a St. John’s-based subsidiary of SNC Lavalin that had been engaged to design the mine and mill, laid off some staff in response to Inco’s decision to suspend design and procurement work on the project. A minimum of 12 jobs are being cut.