Energy costs hurt American mining

Denver — The collective effort of mining companies to cut costs and improve profits is being jeopardized by high power costs, particularly in the western U.S., where an emerging energy crisis is sending shock waves through all sectors of the economy.

In some cases, hefty power bills are proving to be the last straw for companies already struggling to produce adequate returns while still meeting stringent regulatory and environmental standards. Indeed, the energy crisis that began with rolling blackouts across northern California, is threatening to affect the entire U.S.-based mining industry.

Power has long been a significant component to costs, amounting to a mining company’s second-largest expense behind payroll. While it does not appear that power costs will overtake labour costs any time soon, they are taking their toll on mining operations.

Earlier this year, Phelps Dodge warned 1,600 employees of possible shutdowns at three major copper operations in Arizona and New Mexico. Currently, it pays US11 per kW-hour at its copper operations, more than three times the average cost over the past five years. Historic costs have been in the range of US3-5 per kW-hour in the U.S.

“Until the power crisis in California is resolved, its negative impact on industrial operations in surrounding states will be huge in terms of additional plant closings and employee layoffs,” says Phelps Dodge Chairman Steven Whistler.

That isn’t likely to happen soon, as California has yet to arrive at a solution to its self-induced energy crisis. Legislators there allowed utilities to deregulate, but they did not allow them to pass along increased costs to consumers. What’s more, efforts to build power plants were continually blocked by green activists. Even Silicon Valley’s power-hungry “new economy” giants endorsed a myriad of green initiatives, such as Proposition 12, which put California taxpayers on the hook for a US$2-billion parks bond (the largest in U.S. history) to “protect” millions of acres of land from development. Local governments compounded the problem by passing resolutions calling for their cities’ power needs to be met with “green power,” without much thought about their efficiencies. As a result, the heavily populated Golden State ranks dead-last nationwide in total electric generation per capita.

California’s woes are proving to be a windfall for for the world’s largest zinc producer, Cominco (CLT-T). Over the next two months, the Vancouver-based company will reduce zinc output at its Trail, B.C., refinery in order to sell excess power from the Waneta hydroelectric dam on the Pend Oreille river to American customers. In addition, planned shutdowns in August and September allow further opportunities to sell power.

Cominco says the power sales will ensure profits for the company without affecting sales to its zinc customers, and without reductions to its workforce.

California is perhaps the most extreme example of the “not-in-my-backyard” syndrome coming home to roost, but other states are feeling the pinch, including neighbouring Nevada.

Trying not to be caught off-balance, Newmont Mining (NEM-N) is taking matters into its own hands. It has negotiated a 15-year power agreement to keep the juice flowing, by signing a letter-of-intent with Houston-based El Paso Corp. for 150 MW from a newly proposed power station, to be built near Newmont’s main operations at Carlin, Nev.

The 480-MW natural-gas-fired plant would be at the receiving end of the 290-mile Ruby pipeline, bringing gas from Colorado and Utah west to Nevada and California. Further purchase commitments, financing and regulatory approvals are required before the 2-year construction phase can begin.

The opportunity comes at a time when Newmont’s main power source, Sierra Pacific Resources, has proposed an emergency rate increase to cover costs stemming from California’s current crisis. Under the proposed rate hike, electricity costs could jump 29% for the state’s largest consumers. Currently, as the state’s largest power consumer, Newmont pays US4.6 per kW-hour, up from US4.2 per kW-hour before a November 2000 rate increase.

If the rate increase passes and, as proposed, goes into effect March 1, Newmont could see its power bill increase to between US$15 million and US$25 million in 2001. The Denver-based company produced 3 million oz. gold from Nevada at cash operating costs of US$202 per oz. last year.

Barrick Gold (ABX-T) is Sierra Pacific’s largest single consumer, at 110 MW per year. Its costs could jump to US5 per kW-hour, from US4.5 in 2000. The company anticipates its power costs could grow 18% to nearly US$50 million in 2001 if the rate increase passes.

Farther north, in Montana, the Golden Sunlight mine of Placer Dome (PDG-T) is about to feel the energy squeeze. The operation pays US$2.9 per kW-hour under a long-term contract that ends in June. With current market prices hovering at about US16.8 per kW-hour, the mine’s monthly electrical bill could jump to US$1.3 million, up from US$238,000.

With just two years of operations left, Golden Sunlight may be forced to close sooner than expected if electricity prices continue to stay high. Many other gold mines are in a similarly precarious position.

Base metal operations aren’t exempt either, as the energy crisis coincides with an overall downturn in the American economy. Still, marginal gold mines are the most vulnerable to cost increases of any kind, given the current weakness in the gold price.

In previous years, gold companies sometimes found that prices improved during economic downturns, but this is no longer the case. Gold prices barely reacted to the collapse of the Russian and Brazilian currencies a few years ago, and even the collapse of the “new economy” has failed to trigger any movement in the yellow metal.