Teck’s Lindsay sees bright future for the careful

VANCOUVER — Donald Lindsay, president and CEO of Teck Resources (TCK-T, TCK-N), is a great storyteller. As he speaks his divergent tales weave together seamlessly and most listeners are left believing every word spoken.

So it was that many at Lindsay’s keynote talk at Roundup in Vancouver were left believing that strong demand for commodities in China and India bodes well for long-term metal prices, that political stability is one of the most important aspects of every major mining investment and that as Teck celebrates its one-hundredth anniversary, the diversified major will keep pouring money into exploration and development to sustain a pipeline of projects, despite digging deeper every year for every ounce and pound of production.

“The theme of this year’s Roundup is ‘Digging deeper: Resources for life,’” Lindsay noted. “It’s a theme that is incredibly relevant for the industry today. As we all know, exploration is not getting any easier. Every year it is harder to find new deposits. We are literally being forced to dig deeper: deeper into the earth, deeper into remote areas and deeper into challenging mining environments.”

The result, he said, are deposits that are increasingly complex and difficult to develop. Technical challenges, lack of infrastructure, political instability and a multitude of other hurdles mean projects take longer to permit and cost more to build with each passing year.

“The copper industry serves as a great example,” he said. “Despite strong copper prices over the last number of years, the industry as a whole has struggled to increase mine production. In fact, in 2011, despite US$4 copper for most of the year, total global mined copper was up only 3% despite billions and billions of dollars of investment.”

The good news is that demand will stay strong, which means those investments will have to continue. For mining companies, though, the hardest part will be deciding where to spend those investment dollars, in a world rife with political risk.

He stressed that political risk is not limited to frontier-type countries such as Mongolia, but is also a factor in seemingly stable jurisdictions like B.C. Of course, most of Teck’s operations are in B.C., where a provincial election looms.

“We need a stable, competitive investment climate in order to have the confidence to explore for, develop and commit the major investments needed to move these projects forward,” Lindsay said. “I’m just going to say that one more time, given that we have an election coming up: we need a stable, competitive investment climate in order to commit the major investments needed to move our projects forward.”

While a change of government in B.C. could be challenging for the province’s miners and explorers, it would pale in comparison to some of the political curveballs thrown at mining companies in more exotic locales. Lindsay suggested that miners are increasingly concluding those curveballs make such jurisdictions simply not worth their potential rewards.

He told of a meeting he’d attended the previous week between the CEOs of 10 major mining companies and the leaders of Guinea, Peru, Mongolia and Zimbabwe.

“Those leaders were there with the expectation that the ten mining companies were desperate to invest in their countries, because after all, they are incredibly resource-rich,” Lindsay said. “And so they were a bit surprised when one of the CEOs . . . got up and just went on a rant about: ‘Why would we ever invest in these countries? They change the rules on us all the time. As soon as we put money in they just confiscate it, they don’t provide any infrastructure . . .’ he just went on and on.”

Lindsay said he thought it was getting a bit awkward, since they were meeting with presidents and prime ministers. But he noticed that several of the other CEOs were beginning to encourage this ranter and cheer him on.

“Finally, the leader from Guinea said: ‘Well, what are we supposed to do?’ And I kind of feel for them, because their people have an expectation that just can’t be met, and these mining CEOs, many of them have paid a heavy price for investments that didn’t work out. It’s a lesson that’s really important to learn, and not just in those countries, but everywhere you operate.”

Lindsay pointed to the downturn in oilsands investment after Alberta increased taxes there, the Australian prime minister who lost his job when he tried increasing resource taxes, and to recent happenings in Chile and Peru related to resource revenues, emphasizing that political risk is hugely important for every mining investment, no matter where.

He said it’s vital to stay up to date with the changing political landscape. Countries evolve and risks ebb and flow. No one would have dreamt of investing in Colombia 20 years ago, for example, and Lindsay suggested that 20 years from now, Mongolia might evolve into the next Chile of the mining world, creating extraordinary wealth for its citizens.

Once companies decide where they are comfortable investing, they should dive in, Lindsay said, because he’s convinced long-term metal demand is robust. For that, the industry should thank China and India.

“We at Teck keep a really close relationship with China and that’s for one reason,” Lindsay said. “It’s that no matter where we are investing, whether it’s here in B.C. or in Chile, where we’re building two large copper projects, that money may be going into B.C. or Chile, but really it’s an investment in China. Unless we had good confidence in China we wouldn’t be making the investment.”

But Lindsay does have confidence in China, and he rattled off numbers to show why.

The Chinese government recently announced its twelfth Five Year Plan, which includes some mind-boggling objectives. One of those is to build 200,000 km of transmission lines, which is enough to more than replace every power line in Canada.

The Chinese also plan to build 36 million low-income housing units. In all of Canada, there are only about 12 million homes. And the numbers are equally staggering for roads, pipelines and railways.

“If I’ve learned anything about China, it is that if they set an objective in their Five Year Plan, they will achieve it,” Lindsay said.

He noted that China’s economy is expected to grow 7% to 8% this year. While that’s not the double-digit growth rates of a few years ago, he said slightly slower growth from a larger economy generates just as much business as faster growth from a smaller economy.

“What is often forgotten is that today’s growth rate of 6% to 7% is actually larger, in absolute terms, than the 10% to 12% growth we had six years ago,” he said. “Sometimes I think Wall Street doesn’t know how to do math. At Teck we don’t care about the percent, we care about tonnes — and I can assure the demand for tonnes is still there.”

China is providing the biggest part of that demand today, but Lindsay said the mining industry has to look ahead to the next market that will drive demand for mineral products: India.

“India is experiencing unprecedented urbanization and a rapidly growing middle class. There’s room for strong gross domestic product growth, and they make some pronouncements about things they are going to build that are really quite extraordinary,” Lindsay said. “If those numbers are close to correct, the amount of coking coal they are going to need is also quite extraordinary, and I should be investing $4 billion to $5 billion right here in B.C. right now.”

China and India are examples of how the world needs mining products and will continue to need them for the foreseeabl
e future, even if global economic woes have made for a few rocky years.

“It’s important that, as an industry, we can’t be guided by the short-term up and downs — we have to take a longer-term approach,” Lindsay said. “It’s the long-term trends that underpin our growth and drive today’s decisions, and these long-term trends I’m absolutely convinced remain in place.”

Finally, demand will be robust, but Lindsay cautioned that the mining sector cannot focus solely on that. Public perception is increasingly important, he noted, which means the industry needs to help the public understand the vital role that mining plays in our society.

“The metals we produce are fundamental to producing a better quality of life for people around the world, but sometimes people forget about that,” he said. “We need to do a better job of reminding them. We need to remind them of the connection between their smartphone and the copper that is mined at Highland Valley. We need to remind them of the importance of the zinc mined at Trail in keeping their cars from rusting, and how the coal that’s mined in B.C. is used to make steel that’s used in everything from hospitals to rapid transit.”

“We need to remind people that mining is essential to our modern world, because every single thing in life comes from one of two sources, and if you can’t grow it, you have to mine it.”