Year of the Timid Turtle

The last year of the ’90s was a good time to keep your head in and your eyes shut. Call it the Year of the Timid Turtle. But even as the last few pieces of rubble from 1997 and 1998 fell back on the industry’s head, the small, subtle signs of a recovering real economy — as distinct from the virtual one now driving the major stock markets — were beginning to show.

Not that share prices were back up for most junior exploration companies — raising money in the present climate is as pleasant an experience as trying to get someone to buy a round at a temperance meeting. But the large resource companies saw a definite recovery in their share prices as investors realized the market can batter solid assets too much.

One of the year’s biggest stories was the change in the temper of the metal markets. The invisible hand of the market began the year by giving mining and mineral exploration companies an upraised finger, but by the last quarter it was actually helping to pull them up off the ground.

The most striking and sudden turnaround was in the gold market, which had seen steady declines in the price from January through to early September. A conjunction of events that month, including a heavily oversubscribed Bank of England gold auction and an agreement by the central banks of the United Kingdom, Switzerland, Sweden and the European Union countries to limit gold sales, set off an explosive increase in demand. By early October, prices — bid up by panicking short sellers and worried end-users — had touched US$340 per oz., settling above US$300.

In the main, gold producers breathed easier, and most producers saw their share prices recover modestly. But a couple of companies had hedged their production so aggressively that the spike in the price of their commodity had hurt instead of helped them.

Ashanti Goldfields (ASL-N) and Cambior (CBJ-T) were the two highest-profile casualties of this game of financial crack-the-whip. Ashanti, which had been doing a merger deal with its part-owner Lonrho, saw that opportunity cave in when its hedge book moved from the black into a US$450-million deficit.

Cambior, whose hedging strategies had earned it considerable praise from the street, and not a little extra revenue when the gold price was on a steady slide, found itself on the wrong side of about a million ounces in option contracts.

Both companies dragged their lenders into smoky rooms to hammer out deals that allowed them to survive. Both, too, will finish their flings on the options market by restructuring their existing debt, with charges on their more solid assets.

Fortunately for Ashanti and Cambior, though less fortunately for other producers and disastrously for gold explorers, gold prices tanked again in October and November, ending up in the US$280s — much the same price as at the start of the year.

The news from the base metal markets was not as immediately exciting as the spike in the gold price, but vastly brighter. All the major industrial metals but lead left 1999 much more expensive than when they entered it. Economic recovery in industrializing Pacific Rim countries ran ahead of most predictions, giving all the metals a boost.

Nickel, the most spectacular performer, doubled, not only because of recovering demand but because fears of oversupply (from new Australian laterite production and from the Voisey’s Bay discovery in Labrador) proved unwarranted. Nickel closed at US$4,100 per tonne on the London Metal Exchange at the end of 1998, but recent prices are past the US$8,000 mark. Supply disruptions, such as the lockout at Inco‘s (N-T) Thompson operation, and the fear of supply disruptions (the perpetual fret about Russia’s Noril’sk nickel complex) contributed to nickel’s resilience.

Less spectacular gains by copper and aluminum — both up between 25% and 30% — promise, over the longer term, to be more durable than nickel’s spike. Copper production began to be rationalized in 1999, especially in the porphyry belt of the southwestern U.S., where Broken Hill Proprietary‘s (BHP-N) BHP Copper unit and Phelps Dodge (PD-N) both announced significant production cutbacks. The selloff of the Zambian government’s interest in the mines of the copper belt and continued uncertainty in the Democratic Republic of Congo also buoyed the price of the red metal.

At home, the metal markets set the agenda for most of 1999’s mining news. In April came the long-anticipated death of Royal Oak Mines, whose disastrous strategy of combining high production costs with monstrous debt left it vulnerable to cost overruns at its new Kemess project in northern British Columbia. Royal Oak’s Pamour and Matachewan operations, in northeastern Ontario, were closed; its Giant mine, in the Northwest Territories, was sold to Miramar Mining (MAE-T); and Kemess (which stumbled badly out of the gate in 1998, meeting virtually none of its feasibility targets) is being sold to Northgate Exploration (NGX-T).

Rising nickel prices oiled the wheels of another stalled train in 1999. Toward the end of the year, Inco and the government of Newfoundland were back in talks in an attempt to break the stalemate over development of the Voisey’s Bay deposit. Development work at Voisey’s has been stalled since mid-1998, when the government told Inco that Voisey ores would have to be processed into refined metal in the province. It backed up its demand with amendments to the province’s Mineral Act that gave the minister of mines and energy discretionary power to pull mining leases if the holder did not completely process ores in the province.

Inco, which had feared being stuck with huge capital costs if it came through on an earlier plan to build a smelter-refinery complex in Argentia, Nfld., has since proposed a hydrometallurgical plant for the same site. Making hydrometallurgy work on sulphide ores may be easier said than done, though, and if there is a long lead time to turn Argentia from a big bench test into a producing refinery, Voisey ores may end up in Sudbury and Thompson after all.

Governments elsewhere in Canada also did their best to encourage the globalization of mineral development. The current government of British Columbia led a comparatively benign existence in 1999, but then there was little enough left to do to drive the mining industry away from the West Coast. Having perhaps realized the industry wasn’t crying wolf when the giant Highland Valley copper mine shut down in May, the government brokered a deal to reopen the mine at mid-year and Highland Valley was producing copper once again in October.

Preservationist groups in Ontario got their wish when the provincial government there unveiled its Living Legacy program, which withdrew large parts of the province from staking. The government promised the land withdrawal would not affect the rights of existing claim holders, even going so far as to develop a “contract” that guaranteed access to land already staked. This contract was said not to confer any obligations on property-holders that signed it — surely a first for any contract in the history of common law.

Still, the province’s tree-huggers insisted that Living Legacy was only a start, and that citizens should be pressing the government to increase the amount of protected land.

No year would be complete without a good, old-fashioned staking rush, which was provided by Nuinsco Resources‘ (NWI-T) nickel discovery at Lac Rocher in northwestern Quebec. Junior exploration companies — at least those that had not already converted to internet momentum plays — got out their rusty axes and sagging snowshoes and converged on the Frotet-Evans greenstone belt. Nuinsco, which timed a financing beautifully (netting almost $10 million), didn’t provide the deposit the junior market was looking for, though it continues to plug away on the project. Much like the rest of the industry.