Staying the course

In September 1999, two well-respected consulting firms, Strathcona Mineral Services and Roscoe Postle Associates, were hired by the local unions representing workers at the Pamour operation in Timmins, Ont., and the Giant mine in Yellowknife — both operations then owned by the bankrupt Royal Oak Mines. The unions wanted to know whether an employee buyout of the projects was worth pursuing.

The answer, in both cases, was no. The Pamour and Giant mines had been so starved for capital investment during previous years that buying and operating them would not have paid. Pamour needed new equipment, and Giant needed new reserves, and Royal Oak had not put money into providing either.

The consultants’ assessments have since been proved right. The Pamour properties, now owned by Kinross Gold, are no longer in production, and Kinross is concentrating on a long-term program for Pamour as part of its operations in the Timmins area. Giant will provide feed for Miramar Mining’s Con mill until existing reserves are depleted, probably this year.

There is a moral to this story. Cost-cutting may at times be rewarded by the market, but controlling costs alone is not management. Royal Oak was a determined cost-cutter at both Pamour and Giant, but the company signally failed to manage those operations to get the most out of the orebodies.

This is significant in a time when metal prices are depressed and companies are under a great deal of pressure to provide profitable results. Many capital investment plans have been shelved. Mine-site exploration is being supported by most producers, but grassroots exploration — which gets plenty of lip service as the industry’s “lifeblood” — is dormant at many large companies.

In a capital-intensive industry like this, any strategy designed for the next quarterly earnings statement is short-sighted. And mining, especially now, is not just capital-intensive but knowledge-intensive. When cost-cutting eliminates experienced staff — or burns out those that remain to deal with an increased workload — it is the falsest of economies. When cost-cutting retards the delineation and development of more ore, it simply passes the cost along to a later time when that ore could be mined.

It is in bad times that insight and invention are at their most precious. Simply hacking away another cost centre is neither insightful nor inventive; it is just reactive, a way of doing without thinking that may, if done often enough, comfort someone charged with meeting a bottom line.

We are not arguing against financial discipline: on the contrary, only companies that have been rigorous in their choice of projects, and in the ways they have managed those projects, could ever afford to maintain investment in hard times. Cautious and hard-nosed project evaluation and economic analysis are the only way to ensure an operation will be feasible. (It is instructive to note that many unsuccessful projects have failed in the hands of the most enthusiastic mine-makers; a conviction that “we can make projects work where others cannot” often goes before a fall.)

At the same time, feasible and profitable projects should not be starved for capital to satisfy short-term goals. If revenue shrinks in bad times, cost-cutting to meet an unrealistic profitability target is the strategy of desperation, with more fear than reason behind it. When necessary capital investment and sustaining funds are cut off, the operation will wither. Once that takes hold, operating costs may run out of control, and investment that could have been justified before will only be good money thrown after bad.

Times change and markets turn. When they do, they reward the companies and projects that have maintained their ability to take advantage of better times. Mining companies that provide their operations with the capital needed to keep equipment up to date, that do not try to get by on a skeleton staff, and that continue to discover and develop resources: those are the real survivors in any economic slump. That, and only that, deserves to be called ‘staying the course.’