Exploration the only answer to dwindling reserves

From a speech by Norman B. Keevil, Jr., president and chief executive officer of Teck Corporation, at the 1988 Mineral Outlook Conference in Ottawa.

The biggest challenge facing Canada’s mining industry today is to replace our waning production base — our ore reserves. Canadian mining will not decline because it is non-competitive. We can compete with the world. We’ve proven it. Our productivity is better than the U. S., and many other countries. The talent is there. The biggest danger we face is that we will run out of ore. Not that the resources are not there, but that we will not discover and develop them faster than we run out of established reserves.

The challenge of today is exploration. More exploration and better exploration.

This may sound alarmist. We all sense there has been a lot of exploration in the last couple of years, financed in part by that excellent flow-through share program. In fact, some may have felt there was too much exploration.

A lot of “discoveries” have been reported, but almost all of them were in gold. Some of these will be significant. Others will be developed as small mines, and some will succeed while others fail.

Gold is fine as a mine, but it does not sustain our transportation industry in the way that coal and potash do, for example, or the number of secondary processing jobs we have in nickel, zinc and copper.

If you felt the gold industry was in pretty good shape, you were right. This was the result of a lot of exploration, and proves we can do the job.

But what of base metals?

In 1987 the value of Canada’s non-petroleum mineral production was $16 billion. Of this, $12 billion or 78% was exported in one form or another, contributing heavily to our balance of trade with the rest of the world.

The value of Canadian gold production in 1987 was $2.2 billion. The value of our four main base metals, copper, zinc, nickel and lead, was $5.2 billion — about 2 1/2 times that of gold. Coal added $1.6 billion, and other products totalled $7 billion.

In terms of exports, the five most important contributors were: gold, $1.9 billion; copper, $1.7 billion; zinc, $1.5 billion; nickel $1.2 billion; iron ore $1.0 billion.

The big challenge through much of the 1980s was survival. Survival in the face of low prices for most of our products, and excessive interest rates, — on debt loads which for many companies were themselves excessive.

We had over-spent, over-borrowed and become fat. This was true not just of our industry but of a lot of Canada’s industries — and elsewhere in the world as well.

The response was to cut costs, and we did. We had to, because most of our competitors around the world were doing the same thing.

The worldwide cost of producing a pound of nickel, for example, has been reduced by about $1 in the last four years. The cost of producing copper has been shaved by 30% and zinc by 15%. These are impressive results, in a world that had grown used to ever increasing costs. Some of the cost cutting was positive, where we had true increases in productivity and learned to work leaner and smarter.

Other of the cost cutting was less positive, even if essential at the time. This is where there is a payment yet to be made in the future.

For example, when you must cut discretionary costs to meet interest payments, exploration can be considered, temporarily, a discretionary cost. Yet less exploration now can only lead to less productive capacity in the future. Mines are a depleting asset, and must be replaced. Exploration is the research in our business, every bit as vital as research is to an electronics company.

Another example of cost cutting that may hurt the future is cancellation or deferral of capital expenditures. There are a number of open pit copper mines around, in the U.S., for example, that have not kept up with their stripping — and will not be able to afford to catch up in the future unless prices are much higher than they have been.

This will force mine closures even though the deposit has not been mined out, because the remaining mineralization is no longer economically accessible.

Similarly, in underground mines we have had to leave lean ore behind — highgrading to survive. This has led to premature closures and will lead to more.

Our Pine Point mine is a case in point. It had to change its mining plan to stay afloat, and closed last year with a lot of what might have been mined in better times left behind forever.

That one mine produced an average 300,000 tons of zinc concentrate and 60,000 tons of lead concentrate a year, with a metal value at today’s market of $280 million. It provided 58% of the feed to our country’s largest zinc smelter at Trail.

Thus, survival by cost cutting can have its hidden costs, to the extent it results in a future in which we must pay the piper.

Since 1981, nickel reserves have declined by 19%, or almost a fifth. And this is the healthiest of the non-ferrous metals.

Copper reserves have declined by 21% since 1981. We have lost a fifth of our copper reserve base.

What does this mean? In British Columbia alone, copper production in 1987 was 348,000 tonnes, with a value of $837 million. By 1998, ten years from now, six or seven mines will have closed, and production will be down to 240,000 tonnes, a decline of 30%. Much of this will be from one mine, Highland Valley Copper.

It means we can see a serious decline in copper exports unless we discover replacement orebodies, and fast.

Furthermore, not one of today’s profitable copper mines in B. C. could warrant a construction decision at prices realized over the past few years — even Highland Valley Copper. It means we need either better orebodies or, an assurance of sustainable better prices.

Zinc? Since 1981 reserves have declined by 24% — nearly a quarter of what we had is gone — mined out or deleted from reserves. About the same applies for lead.

Does this matter? Canada does not have to remain as one of the two most important zinc-producing countries in the world, along with Australia. Perhaps we can do other things.

But it matters to the people who work in our zinc or lead smelting and refining communities like Trail, Flin Flon, Timmins, Valleyfield and Bathurst.

At Trail, our output in 1987 was about 91% from Canadian concentrates. That 91% supported people in Canadian mining communities from the Northwest Territories to British Columbia. The remaining 8%-plus was from smelting imported concentrate, mostly from the U.S.

By 1998 we will be relying upon imported concentrates for more than 90% of our output, with Canadian mine content down sharply from 91% to 8%. That is a dramatic change.

When the 80-year-old Sullivan mine closes, the proportion of Canadian feed will decline further, unless there are new Canadian discoveries made in the meantime.

Still, Trail as a smelter and refinery is in pretty good shape, because our new Red Dog zinc mine in Alaska will replace that Canadian mine production. We will probably reinvest most of the profits in Canada, and may find a Red Dog here.

But the impact on our balance of trade will not be as positive. We will have to pay a world price for the concentrate we bring in from Red Dog, process it for a competitive custom smelting charge, and then find an export market for the metal.

The jobs that used to be at Pine Point and Kimberley, where the mining was carried out, will be in Alaska, along with all of the beneficial spinoffs and taxes.

We in Canada will be the service company, taking in washing and ironing. We will add value, but the real value created is at the mine, and that is in Alaska.

The difference between supplying the trail smelter from Red Dog and an equivalent mine or mines in Canada is a total of about $225 million annually to our balance of trade. It will be a difference of some $11 billion over the life of the mine, in current dollars. It means close to $50 million a year less in tax revenues to Canadian governments.

Today’s challenge is not productivity, although that will always be an important goal.

It is exploration. We have got to arrest that decline curve in reserve life, for Canadian copper, nickel, lead and zinc.

Otherwise, our prospects for net export trade in the future will continue to diminish.

What then are the prospects for future mineral exports?

As in most business, the prospects will be good if we have a product that people want to buy. That is simple but true.

They will want to buy it if we are competitive in terms of price and quality — and this is where the push for better productivity comes in.

But the other half of the equation is that we must have the product itself, to begin with. That is why we have to begin paying more attention to our dwindling reserve base.

We need more exploration, and more effective exploration, particularly for metals other than gold.

I believe our resource endowment continues to be good, and that with effective exploration we can replace our reserves. The number of gold deposits discovered in the last few years illustrates how effective focussed exploration can be.

As an industry and as a nation we now need to try to refocus on the other metals. That will be easier said than done, because the glamour is still in gold, and the junior companies depend upon glamour to raise capital.

Re-focussing will require some imaginative thinking.

The bottom line is that we do have to start paying more attention to that dwindling reserve base — in many metals — if our industry is to continue making the important contribution to our export trade that it has in the past.

It is a problem but, like most problems, it is one we can resolve if we reco gnize it, and put our collective minds to it.